In 2016, according to the World Bank’s Ease of Doing Business Report, out of 189 countries, India stood at 136. Prior to the commencement of the Insolvency and Bankruptcy Code, 2016, the legislative framework in India dealing with the insolvency and restructuring procedures of corporate entities, partnership firms, and individuals was very complex and fragmented across multiple legislations like the Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, etc. There were as many as 13 enactments that dealt with insolvency and bankruptcy but not a single collective law that dealt with insolvency and bankruptcy problems in India. This existing framework was inadequate, ineffective, and resulted in undue delay in resolution on account of multiple enactments and conflict of judgments by various courts. The average winding up of business ventures took 4 years.
The Asset Quality Reviews of RBI reported a high percentage of NPAs, which prompted the government to form an Expert Committee, which in its report recommended IBC in 2015. Those were the days when Indian media was buzzing with reports and debates revolving around the Kingfisher case, thus giving more significance to IBC.
Features of Insolvency & Bankruptcy Code 2016 (IBC)
It basically provides a Corporate Insolvency Resolution Process (CIRP). IBC, which came into effect in 2016, seeks to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of the value of assets of such persons. This Code not only helps Liquide firms if they are non-viable but also recommends restructure plans if the firm is viable. The Code outlines separate insolvency resolution processes for individuals, private companies, and partnership firms. The process of resolution can be initiated by both creditors and debtors. The resolution process for the companies needs to be completed within 180 days, which may be extended up to 90 days.
The Code created a robust administration structure for monitoring the bankruptcy procedure, which has the following components:
- IPs or Insolvency Professionals manage the insolvency procedure and are a part of professional insolvency agencies. They also furnish information about the performing assets of a firm.
- Information Utilities or IUs collect, collate and disseminate financial information.
- The adjudicating authority is also a pillar of IBC, which has jurisdiction for or against the debtor.
- NCLT or National Company Law Tribunal has jurisdiction over companies, and DRT or Debt Recovery Tribunal has jurisdiction over individuals and partnership firms. NCLAT & DRAT are appellate authorities.
The Code established an Insolvency and Bankruptcy Board of India to oversee all insolvency-related proceedings. It has 10 members.
ADVANTAGES/ POSITIVES OF THE CODE
It created a fear amongst the defaulters to pay the pending debts due to their reluctance in getting added in the insolvent cases of NCLT, which might make them lose their management. The Code created a coherent and speedy process for early identification of financial distress among the firms. Since bad loans erode the capital of the banking sector, this Code empowered banks to identify such assets and take action against them. 21 PSU banks had combined gross NPAs of Rs 7.3 lakh crore at the end of the September 2017 quarter. It supports the development of the credit market, and it encourages entrepreneurship. It would improve ease of doing business and facilitate more investment leading to higher economic growth, development of the credit market. The creditor will no longer have to run after the debtor to get his loans back. The creditors will not become victims of red tape, and promoters will directly become accountable for any financial lapses. Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to get a fresh start. Another major step is that debtors fleeing the country or residing outside the country, like Vijay Mallya, can also be brought to book and forced to face the trial under the Insolvency Act. The Code has redressed the balance of power between creditors and debtors.
INSOLVENCY & BANKRUPTCY (AMENDMENT) ACT- 2018
It mainly affected the real estate and financial sectors. The amendment revolves around giving special benefits to the MSME sector as it’s a major contributor to India’s GDP. The ordinance provides ineligibility criteria for resolution applicants regarding NPAs, and guarantors will not be applicable to people applying for resolution of MSMEs. A special committee was also established to look after the facilitation of this sector and ensure its smooth functioning. Sector 2 of IBC was amended to include guarantors and entry separate from individuals. Another important addition was categorizing home buyers as financial creditors who were now eligible to initiate resolution.
INSOLVENCY & BANKRUPTCY (AMENDMENT) ACT- 2020
In light of the Covid crisis, the World Bank identified 2 key challenges for an insolvency framework- preventing firms from prematurely being pushed into solvency & increasing the number of firms that will not survive the crisis without insolvency resolution. In India, the threshold of default for initiation for insolvency procedure was increased from 1 lakh to 1 crore rupees. The amendment ordinance suspended the initiation of insolvency proceedings for six months, beginning from March 25, 2020. It was later extended by three months from September 25, 2020.
ISSUES OR CONCERNS
- The complete suspension of insolvency proceedings may take away a distressed firm’s opportunity to take a recourse or structural reform under IBC 2016.
- For some firms, delayed insolvency might further deepen their financial pressure.
- How can all the defaults be considered in the same manner as there is a possibility of defaults in firms due to reasons other than covid like diversion of funds etc.? Whether a default is due to covid or not is subject to interpretation which might lead to disputes.
- The immunity of suspension of insolvency proceedings was not extended to the personal guarantors. So the question arises of whether the guarantor is held liable in such a scenario or not.
- The ordinance stated it’s difficult to find an adequate number of insolvency professionals during the pandemic; however other outcomes like debt restructuring can be focussed upon, which doesn’t require a resolution professional. Similar steps were taken in the UK.
- Voluntary and timely initiation of insolvency proceedings by the corporate debtor could maximize benefits for both parties. Such efforts were seen in countries like Spain and Germany.
INSOLVENCY & BANKRUPTCY (AMENDMENT) ACT- 2021
The pre-packaged Insolvency Resolution Process (PIRP) was introduced for MSMEs. PPIRP can be filed if the default is at least 10 lakh rupees. A PIRP can be filed only by debtors. If the committee of creditors doesn’t approve the resolution plan, PIRP will be terminated, and the debtor’s assets will be liquidated.
The approval of the resolution plan by a committee of creditors before the formal proceedings makes it more efficient.
SOME OTHER DRAWBACKS
- Delays have been a big bane for IBC. Almost 79% of cases are beyond the 270-day time frame.
- The delays can be exploited by the defaulters
- There is a lack of manpower in NCLT and other agencies.
In the recent judgment passed by the Supreme Court, it was held that an interest-free loan given to finance business operations of a corporate body fell under the definition of ‘financial debt’ under the Insolvency and Bankruptcy Code, 2016 (IBC). Both the NCLT and NCLAT held that a creditor who has given an interest-free loan was not a financial creditor. The reason given by them was that the loan was given against the consideration for the time value of money, and the same was not established by the present creditor. At the outset, the apex court analyzed the definition of financial debt under the IBC.
“Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) defines ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The mention of the words “…debt with interest, “if any” ought to be interpreted in a manner wherein the usage of “if any” indicated that debt need not be mandatorily employed with interest.
Criticism for the same came forth. The inclusion of interest-free loan lenders as financial creditors reveals a loophole in favor of corporate debtors who might influence the Committee of Creditors (CoC) by making known parties pump such loans into their debt system in order to block genuine institutional lenders from recovering their legitimate dues, by tilting the votes in the CoC meetings. The risk of this is especially high when corporate debtors prematurely since a decline in the financial situation of the company.
Some experts are talking about the pre-pack mechanism as a viable solution to deal with debt resolutions outside IBC during the suspension period. 35 A pre-pack mechanism can be defined as “an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process”. 36 This mechanism can reduce the time taken by the resolution plan, it will save costs, and also minimise the burden on the tribunal.37 However, a pre-pack regime is based on confidentiality about resolution plans and increased control in the hands of the promoter. Therefore, the effectiveness of pre-packs can be compromised by concerns of a lack of transparency. In order to avoid this, the Committee of Creditors and adjudicating authorities must be empowered to maintain oversight to ensure that there is no overvaluation of assets or fraudulent conduct.
Clarity on allowing comprehensive corporate restructuring schemes such as mergers, demergers, amalgamations and so on as part of the resolution plan. Greater emphasis must be given on the need for time bound disposal at application stage;.A deadline for completion of CIRP within an overall limit of 330 days needs to be set including litigation and other judicial processes. A specific provision which states that the financial creditors who have not voted in favour of the resolution plan and operational creditors shall receive at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with section 53 of the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with section 53 of the Code, whichever is higher. This will have retrospective effect where the resolution plan has not attained finality or has been appealed against. There shall be an inclusion of commercial consideration in the manner of distribution proposed in the resolution plan, within the powers of the Committee of Creditors. A clarity must be there that the plan shall be binding on the all stakeholders including the Central Government, any State Government or local authority to whom a debt in respect of the payment of the dues may be owed; The changes are expected to lead to timely admission of applications and timely completion of the Corporate Insolvency Resolution Process, greater clarity on permissibility of corporate restructuring schemes, manner of distribution of amounts amongst financial and operational creditors, clarity on rights and duties of authorized representatives of voters and applicability of the resolution plan on all statutory authorities. The amendments are expected to address the issue of sanctity of timelines for completion of the entire corporate insolvency resolution process and also maximize the outcomes envisioned in the Code.
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