In the wave of several reforms presented by the govt for the promotion of ‘Ease of Doing Business’ in India, one landmark development within the dynamic world of insolvency and bankruptcy was the introduction of the ‘Insolvency and Bankruptcy Code, 2016’ (‘IBC’ or ‘Code’). Before the enactment of IBC, the insolvency resolution process in India had been puzzling. parallel operation of an extended list of statutes, overshadowing one another made the resolution process sluggish. These statutes, inter-alia, include the Sick Industrial Companies Act 1985, the Recovery of Debt thanks to Banks and Financial Institutions Act 1993, and therefore the Companies Act, 2013.

The disparity between laws and a cramped court system led to an enormous pile-up of non-performing assets and tied-up of cash of banks which accelerated unviability of banks as overwhelming provisioning and uneven caution led to a deceleration in lending especially to the needy segment of the population. Thus, to consolidate the prevailing legal framework for insolvency and bankruptcy within the country, one code was created to define and simplify the method of insolvency resolution. The Code, passed after great deliberation and pursuant to many committee reports, is an attempt at an inclusive reform of a broken framework of the insolvency resolution process. However, since the enactment of the Code, it’s various provisions have time and again been challenged before High Courts and therefore the Supreme Court because it is newborn legislation with its own set of issues and it’s therefore gradually fine-tuned here and there with harsh and broken realities of the firms and economy after issues happen pointing to inadequacy or inadvertency in law. Despite all the challenges, opportunities have also arisen for the country thanks to radical changes introduced by the law and new mechanisms and energy perpetuated within the insolvency and bankruptcy framework in India.

Evolution of Insolvency law in India

The provisions of IBC started becoming applicable particularly, to companies incorporated under the previous companies’ legislation, companies governed by legislative act with few exceptions, LLPs and other body corporates as notified by the Central Government, on December 1, 2016, and despite its share of challenges, the Code has contributed to robust debt market in India as secured and unsecured creditors are accorded higher priority over the govt taxes within the distribution of assets and waterfall mechanism. The insolvency law in India has its start line from English law.

In India, a legal framework to manage insolvency and bankruptcy was first felt within the three Presidency towns of Bombay, Calcutta, and Madras, where British carried on the trade. The Provincial Insolvency Act of 1907, replaced by the Provincial Insolvency Act of 1920, was the primary insolvency law for non-Presidency areas and handling insolvency of people , which can also include proprietors. Further, the Presidency-towns Insolvency Act, 1909 had been enacted to hide the insolvency of people , partnerships, and association of people in Presidency towns.

The Law Commission of India in its report of February 1964 recommended combining the 2 Acts to make one code on insolvency.[1] However, the advice was never implemented. The Presidency-towns Insolvency Act continues to be one among the foremost important laws for the insolvency regime covering individuals. While the insolvency resolution process is well-defined under IBC now, rules for individual bankruptcy are yet to be notified. Although the Presidency-towns Insolvency Act has been repealed under Section 243 (1) of Insolvency and Bankruptcy Code, which reads as follows-

Section 243: Repeal of certain enactments and savings

The Presidency Towns Insolvency Act, 1909 (3 of 1909) and therefore the Provincial Insolvency Act, 1920 (5 of 1920) are hereby repealed.

However, as rules aren’t framed for insolvency of people except personal guarantors to corporate debtors, therefore there are not any notified rules for individual insolvency despite provision of Section 243, when reading with Section 1, has inherent force from the date of commencement of code[2]. As a result, on harmonious interpretation, it are often said until and unless rules are framed, Section 243 is ineffective and individual insolvency laws still subsist. there’s also a limited interplay between SARFAESI and IBC. Under SARFAESI, secured creditors could foreclose, recover by auction of properties etc. their dues however with the implementation of code, it’s often experienced that erring debtor approach adjudicating authority for automatic route of the moratorium, after insolvency commencement date by initiating before the CIRP process under the Code, and as a result take a stay foreclosure, recovery etc. thereby preventing the sooner available remedy under SARFAESI with the secured creditors[3].

Nonetheless, IBC may be a model law, both in theory and style because it incorporates various recommendations of past committees that weren’t taken under consideration earlier.

Key Features of IBC 2016

The Code provides for uniform and specialized forums to manage insolvency proceedings. The aim of bringing such uniformity is to attenuate the uncertainty that arises thanks to the multiplication of proceedings, consequent delay and eventual loss of cash . Further, to enable such consolidation, the Code repealed and replaced several laws that are inconsistent with its provisions. Additionally, the Code has several imperative features in respect of corporate debtors, which are as follows:

Lesser Time for Resolution: Section 12 of the Act provides for a maximum deadline for completion of the insolvency resolution process – 180 days, which can be extended by 90 days. Additionally, the Amendment Act No. 26 of 2019 specified a compulsory limit of 330 days, inclusive of all extensions for completion of the method .

Comprehensive Resolution Law: IBC is an all-inclusive law which envisages and has separate insolvency process for people , companies, and partnership firms. This process are often initiated by both debtors and /or creditors.

Early-detection Devices for Default: The Code, to accomplish its aim has set some early-stage provisions which may be initiated on the primary signs of default. The Adjudicating Authority are often approached, before a celebration becomes insolvent, at the outset of a default.

Interests of workmen and employees: Section 36 of the Code protects the interest of workmen and employees by excluding their dues under the provident fund, pension funds and gratuity from the debtor’s assets.

Adjudicating Authority for Insolvency: The Code provides for the constitution of a replacement regulatory agency namely the Insolvency and Bankruptcy Board of India (hereinafter mentioned as ‘IBBI’). The Adjudicating Authorities established under the Code are the National Company Law Tribunal (hereinafter mentioned as ‘NCLT”) – for Companies and LLPs; Debt Recovery Tribunal (hereinafter mentioned as DRT) – for people and Partnership Firms.

Licensed Insolvency Professionals: the method of insolvency resolution is managed via licensed professionals. Initiation of proceedings: Under the Code, the method of corporate insolvency are often initiated by a financial creditor, an operational creditor or the corporate itself.

Moratorium Period: Section 14 of the Code is one among the foremost striking provisions. During the amount of moratorium, as granted by the Adjudicatory Authority, the actions of the creditors are going to be stayed.

Committee of Creditors (hereinafter mentioned as ‘CoC’): This Committee is liable for deciding important affairs of the corporate . The constitution of a CoC has been envisaged under Section 21 of the Code[4], consistent with which all financial creditors shall be a neighborhood of the CoC.

Cross-border Insolvency: Consistent with Section 3(27) of the Code, Property includes money, goods, actionable claims, land and each description of property situated in India or outside India and each description of interest including present or future or vested or contingent interest arising out of, or accompanying , property.” The Code hereby tries to deal with the difficulty of cross-border insolvency by including property “situated in or outside India” given the multi-jurisdictional spread of assets of huge corporations.

Corporate Insolvency Resolution Process 

The IBC 2016 may be a paradigm shift within the law. The Code has not only helped rich corporates but has also been a sigh of relief for Micro, Small and Medium Enterprises by ensuring faster liquidation process and debt recovery. Section 7 and Section 9 of the Code allow financial and operational creditors, respectively of a defaulting company to file an application for initiation of CIRP before the Adjudicating Authority, the NCLT. Simply stated, a financial creditor might be an individual to whom a business debt is owed or a person to whom such amount is legally assigned or transmitted.[5] For example- banks or other financial institutions; Operational Creditor might be a person to whom an operational debt is owed and includes a person to whom such amount has been legally assigned or transferred for goods or services done by them.[6] For example- vendors and suppliers, employees, government etc.

Until recently, the edge for triggering CIRP under the Act was a minimum default of INR 1 lakh. However, the Central Government through a gazette notification [7] has specified INR I crore because the minimum amount of default for initiation of proceedings under the Code. This increase within the threshold comes within the wake of COVID-19 crisis which has affected MSMEs severely.

Although the Code provides for initiation of the method , it doesn’t directly initiate a liquidation process and promotes resolution over liquidation. However, if a debtor isn’t during a position to repay the debt, the corporate is restructured or liquidated. the appliance made by the financial or operational creditor to the NCLT for initiation of Corporate Insolvency Resolution Process (hereinafter mentioned as ‘CIRP’) has got to accept or rejected within 14 days by NCLT. After the appliance is accepted, the board of directors is suspended and placed under an independent interim resolution professional. The control of management over the affairs of the corporate is, thus, terminated and a moratorium becomes effective. Further, a CoC is made which consists of all financial creditors, within 30 days of acceptance into CIRP after verification of claims. Within 7 days of the formation of CoC, the Committee has got to either appoint the IRP because the Resolution Professional or appoint a replacement Professional for the CIRP process. Lastly, a resolution plan for the corporate has got to be approved within 180 days (can be extended for a period of 90 days) from the commencement of CIRP. On the approval and sanction of such an idea by the NCLT, it becomes binding on the company Debtor. However, if the plan isn’t sanctioned, then the NCLT is obliged to liquidate the assets of the company Debtor and distribute them as per the provisions of Section 53 of the Code.

COVID 19: Relief Measures under IBC

On June 5, 2020, the Ministry of Law and Justice, after various deliberations have finally notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020.[13] This Amendment has inserted a replacement Section 10A titled “Suspension of initiation of the company insolvency resolution process.” The amendment has suspended any fresh CIRP processes to be initiated for defaults arising on or after 25th March 2020 for a period of six months, or such further period as could also be notified, which shall not be quite one year. The COVID-19 pandemic has impacted the business globally, and therefore the nationwide lockdown has disrupted normal activities. Thus, to make sure continuity of business and to guard MSMEs, such a step has been taken by the govt . However, the move has its pre-packed challenges and issues which might need proper implementation. Nevertheless, there are contradictory views within the industry about the suspension of IBC. Only time will tell if the move is within the right direction or not.

Impact of IBC on Indian Economy

Before the arrival of IBC, the entire aim of insolvency law was the alleviation of the insolvency entity. However, this left the creditors uncared for. Further, thanks to the presence of too many laws and adjudicatory bodies, the method was cumbersome and ambiguous. This resulted in long drawn processes of insolvency, which even went on for many years . Once IBC was introduced, like all other significant step, the enactment of the Code was well-advertised. This led to a rise in investor confidence and therefore the aim of simple doing business came closer. a number of the explanations for such positive impacts are the smaller time-frame provided under the Act, maximizing the worth of assets of an insolvent company, more stress on resolution instead of liquidation, etc. this significant step has shifted the facility within the hands of the creditors from the borrowers.

In 2020, India has jumped to the 63rd position in simple Doing Business, as compared to its 130th position in 2017.[14] consistent with a International Bank for Reconstruction and Development statement, IBC has improved the recovery rate of stressed assets to 48% in two years, as compared to 26% in period before IBC was enacted.[15] 2016 has been a crucial year thanks to several vital reforms like Goods and Services Tax and therefore the IBC. These developments have led to a jump in India’s global rank and it’s expected that it’ll ensure immense thrust within the foreign investments and M&A activity in India.

Certainly, IBC has positively impacted the industry and has led to many resolutions and liquidations and thus, has put extra money within the hands of the banks and financial institutions. However, the present situation, with the increase of COVID-19 is an unprecedented one.

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April 2021