This article is written by M.S.Bushra Tungekar from the University of Mumbai Law Academy. The author in this article examines the development of the Insolvency and Bankruptcy Code, 2016 through judicial interpretations

Introduction

India prior to the introduction of the Insolvency and Bankruptcy Code, had a complex structure of laws in place dealing with corporate insolvency. Corporate insolvency has multiple legislations governing, it consisted of the Companies Act 1956, the Sick Industrial Companies Act of 1985, Recovery of Debts Due to Banks and Financial Institutions Act of 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and many more. The inefficiency of the system required the laws governing corporate insolvency to be brought under one roof of the Insolvency and Bankruptcy Code of 2016. 

Objectives of IBC

• The Code aimed at establishing time-bound processes and searching for a resolution to help save the companies from going bankrupt. The consolidation of laws governing insolvency had become a necessity due to the piling up of cases and delays in debt resolutions. 
• The Insolvency and Bankruptcy Code claims to facilitate the ease of doing business in India due to its easy, quick, and time-bound resolution process. 
• Individuals, as well as organizations, can apply for insolvency under the Code. It’s called corporate insolvency in the case of an organization and bankruptcy in the case of an individual. Not only that the creditors and the debtor can initiate the recovery proceedings against each other under the Act.
• IBC intends to protect the interest of all the stakeholders in the company and to help revive the company in a time-bound manner.

Why is it difficult to interpret IBC

It’s been 4 years since the Insolvency and Bankruptcy Code has been introduced. In these 4 years, it has seen many ups and downs. The Code has been amended 5 times and there are various judicial pronouncements interpreting the Code, the latest one being the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 (with effect from June 5, 2020).

The rules and regulations governing have been amended from time to time. The Supreme Court and the high courts have pronounced landmark cases interpreting the clauses of the Code, questioning its constitutional validity, and settling grey areas in the Code.It is a challenge to implement the Insolvency and Bankruptcy Code effectively. There have been dozens of changes made to the regulatory framework under the Insolvency and Bankruptcy Code. These amendments and ordinances are passed so as to facilitate the smooth functioning of the processes.

In order to completely understand the Insolvency and bankruptcy code, one can study the latest and amended versions of the Act, orders, circulars, allied rules, and regulations, which are posted on the website of IBBI (Insolvency and Bankruptcy Board of India). Along with the judicial interpretations of the code.It is safe to say that the Insolvency law in India is yet developing, it is still a bit raw. The constant changes in the evolving law make it difficult to interpret and understand.  

Major shortcomings of Insolvency and Bankruptcy Code 

Time limit 

1. IBC provides for a time-bound mechanism for creditors to recover their debts. It is known as the Corporate Insolvency Resolution Process (CIRP). When a company defaults in paying its debts to the creditor, the creditor can apply to CIRP to initiate a recovery action.
2. Corporate Insolvency Resolution Process is a time-bound process under the Code. Wherein Section 12 of the Code mandates the process to be completed within 180 days from the date of admission of such application.
3. The period for completion of such a process may be extended by the adjudicating authority only if at the meeting of creditors a resolution is passed having a vote of 66% of the voting share. In spite of the resolution, the period to complete the Corporate Insolvency Resolution Process shall not be extended beyond 90 days.
4. The process however has to be compulsorily completed with 330 days including the extensions granted. The Section further provides for an extension of 90 days for proceedings that go beyond 330 days due to unavoidable delays. 
5. The proportion of NCLT benches to the high number of cases are imbalanced and to add that the time limit of 330 days to complete CRIP is proving to be very difficult. For companies having a large number of creditors, will have hindrances in the smooth functioning of the creditor’s committee.  

Lack of sufficient infrastructure 

According to the Minister of State for Finance and Corporate Affairs Anurag Singh Thakur in a written reply to the Rajya Sabha, there were 10,860 cases pending before the NCLT as of September 2019. The lack of sufficient NCLT benches and the quantity by which the cases under IBC are rising. The increasing pendency of the cases will defeat the purpose of the quick resolution process.

Resolution professionals 

At present, there are only 897 registered insolvency professionals. In order to be an insolvency professional one must either be a Chartered Accountant, or a Company Secretary, or Cost Accountant or an Advocate with 10 years of experience or a graduate with 15 years of experience. One must also pass the insolvency examination conducted by the IBBI.

Therefore, a resolution professional may not have experience in handling or managing a company. Due to the lack of need for minimum experience in handling and managing a company, one might question the ability of the resolution professional.

Judicial interpretations of Insolvency and Bankruptcy Code of 2016

The judicial interpretations are critical for understanding especially the evolving law of insolvency and bankruptcy. The interpretations of the code by the national company law tribunal, the supreme court, and the high courts give clarity to several procedural and conceptual concerns. 

We shall now try and understand Insolvency and bankruptcy with the help of various judicial pronouncements and landmark judgments. We shall study how the courts have interpreted the provisions of the Insolvency and Bankruptcy Code, so as to eliminate the issues and challenges.

Timeline 

According to Section 4 of the Insolvency and Bankruptcy  Amendment Act of 2019, CRIP was “mandatorily” to be completed within 330 days from the commencement of the resolution process the 330 days time limit would also include the extension of time granted and the time spent in the legal proceedings. Failing to complete the process within the said time limit would lead to the corporate debtor being referred for liquidation.

 The hon’ble supreme court in the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors, CIVIL APPEAL NO. 8766-67 OF 2019, struck down the word “mandatorily” stating that the time taken during the legal proceeding should not affect the interest of the litigant.

The court further clarified that the resolution process must be completed within 330 days however the facts of the case in mind and the time occupied in the legal proceedings, the NCLT, or the NCLAT can grant a further extension of time ( in exceptional cases).

Committee of creditors 

In the landmark case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors, 2019, the supreme court strengthened the role of the Committee of creditors. The Hon’ble court held that the committee of creditors (CoC) is the principal authority in deciding whether to rehabilitate the corporate debtor or not by the way of accepting the resolution plan.

The resolution must be approved by a minimum vote of 66% of the voting shares. While approving the resolution plan the CoC takes into account the viability and feasibility of the resolution plan. Therefore CoC has the power to suggest alterations and modifications in the resolution plan. 

Role of a resolution professional 

The applicant must submit a resolution plan on receipt of such plan, the resolution professional shall examine the plan in accordance with Section 30(2). After which according to Section 30(3) the plan is to be presented to CoC for its approval.

Once the resolution plan is approved by the CoC, the plan is then forwarded to the adjudicating authority by the resolution professional.

In the case of Arcelormittal India Private Limited Vs. Satish Kumar Gupta & Others [(2019) 2 SCC 1] the Supreme court analyzed the role of a resolution professional AND held that the role of a resolution professional is to inspect all the resolution plans submitted to him by different applicants, before submitting the plans to the CoC. He is not to make any decision and his opinion regarding contravention of law is to be put before the committee of creditors. A resolution professional does not have the power to decide whether the resolution plan is violative of any provision.

Thus, the role of a resolution professional is to examine the resolution plan, conduct the necessary due diligence, ensure that the plan is complete and report it to the CoC irrespective of whether the plan is in contravention or not.

Financial and operational creditors 

In the case of Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India & Others [(2019) 4 SCC 17], it was contended that the distinction made between the financial creditor and operational creditor was violative of Article 14 of the Constitution. Furthermore, the issue of exclusion of the operational creditors from the committee of creditors was also raised before the Hon’ble supreme court.

The supreme court with the help of the Insolvency Law Committee (ILC), and the BLRC Report, made a clear distinction between financial creditors and operational creditors. The court held there is an intelligible difference between them. The most significant difference between them is the involvement of financial creditors in assessing the viability of the corporate debtor.

As for the issue of discriminatory treatment of operational creditors on the committee of creditors, the court held that the primary responsibility of the committee of creditors is to evaluate the viability and feasibility of any resolution plan. Financial creditors are banks and financial institutions, they are well equipped to conduct the required detailed study of the market to evaluate the viability and feasibility of the resolution plan. Whereas on the other hand, operational creditors are only concerned with recovering the money paid for provided goods and services. Therefore they may not be well equipped to assess the viability and feasibility of the resolution plan. The Supreme Court, therefore, held that neither the operational creditors were not being discriminated against on the committee of creditors nor was it violative of Article 14.

Eligibility of bidders 29A

Section 29 A of the Insolvency and bankruptcy code provides for several disqualifications for any person submitting a resolution plan acting jointly with any other person or in concert.

The hon’ble supreme court in the case of Arcelormittal India Private Limited Vs. Satish Kumar Gupta & Others [(2019) 2 SCC 1] resolved the issues around the interpretation of the ineligibility of resolution applicants to submit resolution plans.

The Supreme Court, in this case, held the following points:

The disqualification of a person from submitting a resolution plan under Section 29A (c) is attracted when the plan is submitted and not before that. It can be however removed under Section 29A(c) if the person submitting the plan pays all the dues along with the charges and interest related to said non-performing asset before submitting the plan.

The court further placed reliance on SEBI Takeover Code and judicial precedents for interpreting the phrases “persons acting in concert or jointly”.

Furthermore in the case of Swiss Ribbons Pvt. Ltd. & Another vs. Union of India & Others [(2019) 4 SCC 17] constitutional validity of Section 29A (j) read with the definition of related parties was questioned. Wherein the Supreme court upheld the constitutional validity of the section. 

The court was of the opinion that after examining the definition of the related party under Section 5(24A) the person acting jointly or in concert must be related to the business activity of the resolution applicant. Therefore, the “relative” mentioned in the definition must be related or connect to the business activity of the resolution applicant. In absence of such a connection, a person cannot be disqualified under Section 29A(j) of the Code.

Conclusion 

Insolvency and Bankruptcy Code is umbrella legislation that is critical for the development of insolvency laws in India. It promises time-bound and efficient mechanisms for debt recovery. The Corporate Insolvency Resolution Process is a creditor controlled model for the resolution of insolvency. The creditors have been given the power to take important decisions concerning the resolution process. There have been amendments and landmark judicial pronouncements in order to make the Insolvency and Bankruptcy Code more efficient and effective. 

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