This article is written by Vinayek Mehra, Advocate.
In the initial days there were only Presidency Towns Insolvency Acts, 1909 which applied to Kolkata, Chennai and Mumbai and the Provincial Insolvency Act 1920 for the rest of India, for regulating the insolvency laws. These Acts applied to individuals and left out corporations from their purview.
Later, for the purpose of insolvency and bankruptcy laws, various attempts were made by the legislature to formulate and enact laws to effectively deal with the situation of debt recovery. The relevant legislations in this regard are: the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act), Sick Industrial Companies Act, 1985.
Need for creation of Insolvency and Bankruptcy Code, 2016
Till 2016 there were various laws in place that regulated the process of debt recovery. The creditors could approach the courts through a civil suit or through legislations but not limited to the Companies Act, 2013, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act), Sick Industrial Companies Act, 1985. These legislations aimed at providing aid to the creditors in the form of seizure and sale of debtor’s assets and/or restructuring of debt in favour of the creditors. Specialised Tribunals/ adjudicatory bodies were created for dispensing justice under the abovementioned Statutes. However, these legislations failed to give satisfactory results. A major reason for this was the multiplicity of forums within these Statutes for the creditor to approach and this eventually led to unclear and uncertain jurisdictions.
The Insolvency and Bankruptcy Code, 2016 (referred to as “the Code” hereinafter) was set to consolidate the Insolvency laws and provisions that had been in place and act as an umbrella legislation. Thus, the Code set out to remove the multiplicity of forums and provide a clear path to justice. The Code repealed the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and brought out amendments in 11 other laws which including the Companies Act, 2013 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) as well as the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.
The Code attempted to expedite the resolution process for individuals, corporate firms and partnerships to realize more value from the assets of any person and provide balance to the interests of stakeholders. Further, the Code provided for National Company Law Tribunal and the Debt Recovery Tribunal to act as the adjudicating authorities for matters related to resolution of insolvency, bankruptcy and liquidation of corporate person, firm or individual. The Insolvency and Bankruptcy Code established a simpler process for restructuring of debt and laid down a procedure in place to liquidate the failing company’s assets in a manner where the most value can be attained out of them. Thus, one can say that the Code provided for a system where creditors shall take the front seat in the insolvency and bankruptcy procedure.
Insolvency and Bankruptcy Code, 2016 puts forth specialised mechanisms to deal with all the insolvency, bankruptcy and liquidation proceedings against individuals, corporate firms, companies and limited liability partnerships. The Code had, thus, arisen as the amalgamation of all other insolvency and bankruptcy laws and assisted in originating a uniform way to deal with disputes. The Code stipulates that in case of any dispute, a resolution professional shall take control over the assets of the corporate debtor. A balanced approach for recovery and rehabilitation has been taken by the legislature wherein it provides for a maximum time of 180 days for a resolution process to be complete, however, extension of 90 days may be granted depending on the circumstances of the case.
The Insolvency and Bankruptcy Code, 2016 established a system where there shall be two adjudicating authorities: the National Company Law Tribunal and the Debt Recovery Tribunal, namely. The former shall handle the insolvency and bankruptcy cases in addition to dealing with disputes relating to Companies and Limited Liability Partnerships while the latter was to handle the insolvency and bankruptcy proceedings of individuals and partnership firms. In furtherance of the objectives of the Code, it was decided that proceedings may be initiated for insolvency and liquidation of the assets of Corporate debtors under the Code for a default of a minimum amount of Rs. 1 lakh with the proviso that the said amount of default may be amended by the Central Government but shall not more than Rs. 1 crore.
Before I elucidate the various highlights in the Code, it is important to set forth the four pillars for institutional set-up of the Insolvency and Bankruptcy Code, 2016 are:
- IBBI- Insolvency and Bankruptcy Board of India acts as the Regulator which may perform certain legislative, executive and quasi-judicial functions.
- IPAs- Insolvency Professional Agencies: To be recognised as an Insolvency Professional Agency, a company has to be registered under the Companies Act. IPA is responsible for the enrollment and regulation of Insolvency Professionals as per the rules and regulations provided in the Code.
- Insolvency Professional– To be an Insolvency Professional, an individual has to be:
a) Registered with Insolvency and Bankruptcy Board of India.
b) Member of Insolvency Professional Agency.
The main role of an IP is to assess the financial position of the Company, LLP, Partnership or an individual to ensure smooth dissolution process.
Information Utilities: An information utility provides services such as accepting, recording, authentication & verification of the financial information submitted by a person. IUs are there to make the corporate insolvency resolution process more time efficient.
Key provisions of the Code
- Section 5 of the Code provides for various technical terms that may be interpreted in various ways. This provision clarifies that National Company Law Tribunal and Debt Recovery tribunal are to perform the functions of the adjudicating authority. The Code uses the term ‘initiation date’ to refer to the date where an operational creditor or any other creditor makes an application to the adjudicating authorities for initiation of the corporate insolvency resolution process. The Code also defines ‘insolvency commencement date’ as the date of admission of application to the adjudicating authority for initiate the corporate insolvency resolution process.
- Section 7 of the Code discusses the process of initiation of the corporate insolvency resolution process by the financial creditor. It states that the financial creditor may make an application to the Authority to initiate CIRP against a corporate debtor. If after 14 days, the adjudicating authority is of the view that the application has merit, it shall inform the financial creditor along with the corporate debtor within 7 days of the admission of application. If after the period of 14 days, the adjudicating authority is of the view that the application has no merit, it shall inform the financial creditor within 7 days of rejection of application.
- Section 9 states that an application to the authority for initiation of the corporate insolvency resolution process may be made by the operational creditor where the corporate debtor fails to make the payment. The adjudicating authority may within 14 days of receipt of the application either accept or reject the application. It further provides that if the authority rejects the application due to any errors in the same, they may provide the complainant a time of 7 days to rectify such error or mistake. Section 10 (5) of the Code provides for a similar clause where the corporate insolvency resolution process is initiated on the request of the Corporate Debtor himself.
Amendment in the Code in lieu of the “New Normal”
The global pandemic has caused various tremors in the Indian economy. The country-wide lockdown has sent ripples down the Indian businesses. Indian economy has shown a depression of 23.9% in the first quarter of the financial year 2020-21. According to some economists, there has been a job loss of 40 million people who mainly belonged to the unorganised sector of the economy. In March, 2020, Moody’s Investors Service, a credit rating business had revised India growth this year from 5.3% to 2.5%. RBI Governor Shaktikanta Das had provided in May, 2020 that the country shall face negative growth rating the Financial Year 2020-21.
While the country is still trying to adjust to the “new normal”, it was realised by the Government that our laws, especially ones operating in the sphere of commercial businesses also need to be amended. Thus, some changes were brought about in the Insolvency and Bankruptcy Code, 2016 in order to cope with the losses that the country and its economy have suffered. These changes have been formulated with a view to protect the micro, small and medium level enterprises from the shackles of insolvency since the micro, small and medium level enterprises have been the ones who have taken heavy blows due to current ongoing situation and they might not have the resources to get out this pit. The Government had decided to aid these enterprises through various amendments being brought in the Code, such as:
Increase in amount of default
The central government has exercised its power under Section 4 of the IBC, 2016 to increase the minimum amount for default from 1 lakh to 1 crore. This amendment meant that the minimum amount of default any business or individual could afford to commit had been increased to 1 crore rupees. This would protect the micro, small and medium level enterprises from triggering the provision. At first there were certain uncertainties with regard to the increase in the threshold to 1 crore. There had been an uncertainty on whether the amendments brought to the threshold will the prospective or retrospective in nature. The debate had been answered by the Orders of the Kolkata and Chennai NCLT Bench. In the case Foseco India Ltd. vs. Om Boseco Railproducts Ltd., the Kolkata bench held that it was common principle that all legislations and acts are presumed to be prospective in nature unless it explicitly provided under the act that it shall be retrospective in nature. In the case M/s. Arrowline Organic Products Pvt. Ltd. vs. M/s. Rockwell Industries Ltd, the Chennai Bench of the NCLT had also concurred with the view presented by the Kolkata Bench.
The Government has kept in mind the corporate debtors that belonged to the category of micro, small and medium level enterprise, however the government has failed to notice the other side of the coin which are the operational creditors who belonged to the micro, small and medium level. These operational creditors who had debts to recover which were less than 1 crore can no longer avail remedies available to initiation of insolvency proceedings against the corporate debtor. Due to this, these OCs shall be forced to opt for civil remedies.
- Suspension of initiation of proceedings:
The Central Government vide notification dated June 5, 2020 had suspended initiation of any corporate insolvency resolution process proceedings under Section 7, 9 and 10 of the Code for any default occurring after March 25, 2020 for a period of 6 months which could be further extended for a period not more than 12 months. Ministry of Corporate Affairs (MCA) vide a Gazette Notification dated September 24, 2020, extended the six-month long suspension of IBC provisions (Sections 7, 9 and 10) for another three months. The intention of the government behind the extension is to provide extra time to the businesses to recover in this Covid-19 ridden economy.
The proviso of Section 10A provides that no proceedings shall ever be initiated against the corporate debtor for any default for which proceedings have been suspended under Section 10A. This leads to a situation where the creditor, even after the 6 month period which may be extended till 12 months, shall not be allowed to initiate CIRP proceedings against the corporate debtor for the said default if the default had occurred between March 25, 2020 and March 25, 2021. However, the default shall continue to exist even after the end of the specified period of 6 months which may be extended to period of 12 months.
- Bar on filing Suits against Partners and Directors of Corporate Debtor:
The central government, by way of an Ordinance, added sub-section (3) to Section 66 of the Code which prevented filing of suits with respect to any default for which corporate insolvency resolution process can be initiated against the partners and directors of the corporate debtor under sub-section (2) of Section 66. This amendment had been made to create a risk free environment for the partners and directors to steer their enterprise through the pandemic period which had market to be on an all-time low without the risk of having any personal liability if the Company goes into insolvency.
On the flip side of the coin, the current amendment to Section 66 provides for an opportunity to the corporate debtor that may plan to commit corporate fraud during this exempted period as this amendment gives them immunity from any proceedings against them. The main intention of the central government was to provide an exception for sub-section (2) to keep it in conformity with Section 10A of the Code. However, it led to a situation where no application can be filed against the partners and debtors during the exempted period.
While the intention of the Legislature was to protect businesses from the consequences arising out of the lockdown restrictions imposed due to the Covid-19 pandemic, the steps taken by it have resulted in a mixed response of praise and criticism. The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 has provided relief to the corporate debtors in the form of suspension of CIRP proceedings against any default arising after March 25, 2020. However, some believe it may have done more harm than good. The reason behind this thought is mainly the fact that the changes brought in have left behind more ambiguities in comparison to the reliefs.
The Central Government has opened a gateway for corporate frauds to be committed during the suspension period by barring any application for initiation of CIRP proceedings against the partners or directors of the corporate debtors with any personal liability. There also exists ambiguity in the proviso of Section 10A which provides indefinite immunity to corporate debtors from initiation of any CIRP proceedings for any defaults occurred during the suspended period. Now, it is for the Adjudicating Authorities to step in and set certain judicial precedents to establish a clear road to justice in insolvency proceedings.
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