Oct 19,2020 | 8 min read

Understanding The Insolvency And Bankruptcy Code, 2016

Authors: Rashi Suri (Managing Partner), Nandakishore A. (Legal Intern)

Upscale Legal

The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to resolve all banking issues present in the economy by creating a one-stop solution which resolved insolvencies efficiently and speedily. The era before IBC consisted of scattered laws which proved to be inadequate and inefficient due to its long process. 1The newly enacted law gives special protection to the interest of small investors, thereby making the whole process of doing business less worrisome. The time-bound process which IBC offers, has resolved many major cases over the years and has changed the entire landscape when it comes to debtor-creditor relationship. The insolvency proceedings for companies will be adjudicated by the National Company Law Tribunal (NCLT), and for individuals, it will be by the Debt Recovery Tribunal (DRT). 2

  • PROCEDURE

When a company defaults on making payment to its creditors, either the creditor or the corporate debtor could submit the plea for insolvency before the NCLT to initiate the Corporate Insolvency Resolution Process (CIRP). After the plea is submitted before the Tribunal, it has to either accept the plea or reject it within a maximum period of 14 days. On accepting the plea, the tribunal shall then appoint an Interim Resolution Professional (IRP) who shall be in charge of taking all necessary steps to revive the defaulted company. 3

The IRP is expected to draft a resolution plan within 180 days, during which the existing board members of the defaulted company lose all their powers and also lose their say in the management of the company. He could, however, seek the advice of the said board members for day-day operations. During this period of 180 days, any legal action against the debtor is also prohibited.

A committee which consists of all the financial creditors is also formed to finalise a decision regarding the outstanding debt owed to them. The committee may either decide to change the repayment schedule or to liquidate the assets of the debtor to settle the debt. The debtor’s assets will automatically go into liquidation if no such decision has been taken within the allotted 180 days. Upon going into liquidation, the entire process is administered by the IRP, and the proceeds are distributed in the manner prescribed by law.4.

  • GROUNDS FOR INITIATING INSOLVENCY PROCEEDING

The insolvency process against a corporate debtor could only be initiated if there is a minimum default of Rs 1 lakh. The process could be initiated by the debtor themselves or any of the two classes of creditors, i.e., financial creditors and operational creditors. The application will only be admitted if the creditor manages to show that a requisite default is ascertainable. Moreover, only companies (both private and public) and Limited Liability Partnerships (LLP) can be considered as defaulting corporate debtors, apart from cases of individual insolvency. Also, a specified time period of 330 days is fixed for conducting the entire process in a recent amendment to the code.

  • HOW IS IBC BENEFICIAL FOR COMPANIES?

Along with to help companies under distress, IBC also aims to maximise the value of the company’s assets and balances the interest of the stakeholders. To rescue a company under distress, the Committee of Creditors (CoC) can take or cause a haircut of any amount to any or all of its stakeholders. The competitive and transparent market place, which IBC provides identifies the person best placed to rescue the company out of insolvency. IBC allows for the initiation of the resolution process at the earliest, which helps in safeguarding and maximising the value of the company. Unlike earlier times, IBC only allows liquidation as a last resort upon failure of the resolution process. Liquidation even though it could be beneficial for higher ranking stakeholders, could destroy going concern value.

  • RECENT AMENDMENT

From its inception in 2016, the Code has been amended a total of 5 times so far, with the latest amendment made by way of Ordinance on June 5, 2020. The amendment was a result of the ongoing Coronavirus pandemic and was brought into life as a response to the current economic distress faced throughout our nation. Section 7,9 and 10 of IBC calls for the invocation of insolvency proceedings against defaulting companies and further requires available resolution professionals to take over the management of the said company. But, during this dire situation, when millions of companies are defaulting, the government arrived at the opinion that the above-mentioned sections need to be temporarily suspended to avoid companies being pushed into insolvency during this unprecedented time. Another reasoning which led the government to make this amendment was the difficulty in finding the required number of resolution applicants (any person who submits a resolution plan to the IRP) and resolution professionals for these insolvent companies during this distressing time.5

  • RECENT CASE LAWS

  • In Mr Hemang Phophalia v. The Greater Bombay Co-operative Bank Ltd6, the Bank had applied to Section 7 of IBC to initiate CIRP against Penguin Umbrella Works Private Ltd. It was admitted in the NCLT, Mumbai Bench. The NCLT, in this case, held that a CIRP application is maintainable against those companies struck off by the Registrar of Companies (RoC). It further stated that to initiate CIRP under Section 7 and 9 of IBC, the NCLT has the power to restore the name of the company and all other persons concerned in their respective positions.7

  • In Jet Airways (India) Ltd. v. State Bank of India & Anr8., CIRP proceedings in both India and Netherlands were being conducted simultaneously against Jet Airways. In this case, the NCLT held that the Dutch Trustee holds the same positions as that of the Resolution Professional in India. Thus, after getting a guarantee from the Dutch counterpart that it won’t interfere with the CIRP in India, the NCLT allowed Dutch Trustee to attend the Committee of Creditors (CoC) meetings in India. 9

  • In M/s Embassy Property Developments Pvt Ltd v. State of Karnataka and Ors10., an appeal was made to the Apex Court by the Applicant, CoC and the Corporate Debtor, challenging Karnataka High Court’s interim order which had put a stay on order passed by the NCLT. The Supreme Court in this decision held that NCLT could not be given a status higher than the judicial courts which have the power of judicial review over its administrative action. It further stated that since NCLTs are not even civil courts, it can only hear specific cases which are prescribed under law and cannot take upon matters of public interest.11

CONCLUSION

The Insolvency and Bankruptcy Code shifted the creditor’s focus in case of default from the recovery of debt to the possibility of resolution. It is in the best interest of the company for it to keep itself resolvable as a resolvable company always holds a competitive advantage when compared to non-resolvable companies through reduced cost of debt. The scattered insolvency laws before IBC left creditors uncared for, which resulted in long and expensive processes of insolvency. The exhaustive IBC created a positive change in this area and led to an increase in the investor’s confidence by providing ease of doing business. According to a recent statement by the World Bank, IBC has led to an improvement of the recovery rate of stressed assets by 48% in two years, when compared to 26% in the pre-IBC era.

6 Company Appeal (AT) (Insolvency) No. 765 of 2019.

8 Company Appeal (AT) (Insolvency) No. 707 of 2019.

10 Civil Appeal No. 9170 of 2019.


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ABOUT THE AUTHOR


Rashi Suri

Upscale Legal is the multi-service law firm catering to the needs of various corporate houses, financial departments, government institutions and independent clients by handling their legal issues and concerns. We are a solution-driven law firm and are committed to providing high-quality legal services. Our committed team of lawyers deal with various legal issues and majorly specialize in corporate commercial laws and transaction management.

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