This article is written by Poonam Joshi, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.com. Here she discusses “Use of Insolvency Resolution Process to Evade Debt and Liability- An Analysis”.

Insolvency and Bankruptcy Code(IBC), was introduced in the year 2016 with an aim to consolidate and defragment the laws of insolvency and bankruptcy and to resolve the issues of insolvency of a company. Considerable changes have been made from time to time for the better implementation of IBC Law. Initially, the reason for bringing this law was to cater to the unpaid corporate debtors, creditors whether financial or operational did not have much say in the resolution process. Banks used to ensure that businesses should not get closed. Due to which foreign investors were not very keen to invest in India as there was no ease to do business. However, like every other law, this Code too was not perfect and had many glitches. This code did not consider homeowners as financial creditors in the case of real estate projects. The operational creditors too were not given much consideration. Only financial creditors were provided with the right to be part of the committee of creditors. The prompters of the insolvent company could buy back their own business during the liquidation process. The approval percentage of the committee of creditors who could participate in ISP was not properly defined. Some other issues were also not addressed properly in the Code. Moreover, the code had a very strict nature which did not attract the stakeholders. The government realised the above-mentioned shortcoming of the Code and made certain significant changes in the same to make it more popular, inclusive and acceptable. In the first amendment section, 29A was introduced which took care that defaulters cannot bid for their company’s assets. People were barred from bidding who had control for more than 12 months over non-performing assets and the approval percentage of CoC was 75%. 

In June 2018 the second amendment provided even more changes making the Code more flexible and inclusive. With this amendment Section 12A was introduced which allowed the creditors to withdraw insolvency petition within 30 days of filing it. Home-buyers were made part of financial creditors and could participate in COC. 66% of the committee of creditors (COC) was required to approve the insolvency resolution plan. Financial creditors that are related to the defaulter even though not invested in the company who is in default were allowed to bid. The introduction of section 12A was welcomed by the stakeholders and gave a ray of hope to many companies instilling more confidence. Section 12A of IBC brought in an opportunity to the corporate debtor to settle the issues with the creditors. If the offer given under settlement is approved by the 90% of the CoC the application filed before the NCLT can be withdrawn. This serves a better deal to both the corporate debtor as well as the creditors and works very efficiently removes the whole process of IBC. Section 12A gives another chance to the corporate debtor to retain the control over the company and make good the defaults no matter the application is admitted by the NCLT.

 The introduction of section 29A restricted the promoters from bidding for the assets of the Corporate Debtors as bidding for their own assets at an amount lesser then the assets worth in order to pay back the lenders brought a lot of stress. This situation occurred in the case of Binani Cements, where even though Ultratech Cement offered to pay the lenders more than what was offered by the highest bidder the company could not take the benefit of the same as per the provisions prevailing. This was challenged before the Honorable Supreme Court and the Supreme Court permitted the lenders to consider the promoter’s bid, and withdrawn the application. This approach questioned the sanctity of the CIRP process. 

Further,  restricting a defaulting promoter to submit a resolution plan was based on the benefits derived by the promoters at the expense of the lenders. When promoters are willing to go into a settlement and agree to pay a sum which is quite higher then the highest bid proposed then restricting the lender to come forward and accept the proposal is not justified. If by accepting such an offer of the promoter the lender is in a better position in comparison to the offer made by the highest bidder then section 29A was putting a restriction on the lender and was keeping him deprived of getting a better price which is offered to him by the promoter.  The restrictions of section 29A left the lenders to ponder what and to what extent they can lend and how far their money is safe. In order to safeguard the interest of the lender, the promoters should be given an option to bid for corporate debtors. 

Where the stakeholders were struggling with issues related to section 29A, Section 12A was inserted specifically providing for withdrawal after admission. Prior to the introduction of this section, the Supreme Court had to use its plenary powers under Article 142 of the Constitution to permit withdrawal after the admission of the resolution process. 

In the case of Lokhandwala Kataria Construction Private Limited v. Nisus Finance And Investment Managers LLP the question raised before the honorable Supreme Court that whether under Rule8, the NCLAT could exercise its inherent power as envisaged under Rule 11 to allow a compromise. To which the honorable Court observed that NCLAT does not have any such power and invoked its discretionary power under Article 142of the Constitution of India. This piecemeal approach of the Honourable Supreme Court would indirectly amount to the refusal of the claim of the creditors. The whole purpose of bringing in the  Code got diluted making it merely a tool for recovery of debt by the financial creditor. As a result of this case, the creditors who will file the plea will get preferential treatment and the other creditors would be in a thick soup. To curb this practice it was mandatory to bring amendment in the Code.

In the case of Satyanarayan Malu v. SBM Paper Mills Ltd., NCLT Mumbai the resolution plan was allowed to be withdrawn at the stage when the resolution plan was accepted by the CoC and was pending approval of the NCLT. The Bench took into account the offer of a one-time settlement (OTS) made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.

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In a span of few months from the introduction of Section 12A, which allows withdrawal of insolvency proceedings against a debtor if at least 90 per cent of the committee of creditors (CoC) agrees, more than  80 cases of insolvency have been withdrawn using this provision when not even 100 cases have been resolved ever since the introduction of IBC Code in 2016.  

With the introduction of section 12A the case which was in the discussion of experts was that of Sterling Biotech Ltd. In this case, the CoC agreed to a one-time settlement of the outstanding loan by taking a 65 per cent haircut and agreed to withdraw the insolvency proceedings. The withdrawal of the insolvency proceedings raised an alarm and National Company Law Tribunal (NCLT) showed its concern before the government with regard to the manner in which the withdrawal was made. The government immediately responded that such unethical practice shall not be accepted. And an amendment in the Act was proposed that if 90 per cent of the creditors agree then the insolvency proceedings can be withdrawn.

In another instance recently, the highest bidder of Essar Steel cleared off all its dues to be eligible as a resolution applicant under Section 29A, as per the instructions of the apex court. Thereafter, the promoters of Essar Steel offered the lenders a settlement offer which was approximately 25% higher than the amount being offered by the H1 bidder. The promoters were barred from offering a competing bid due to Section 29A of the IBC. The promoters of Essar Steel sought withdrawal of the CIRP under the newly introduced Section 12A. The lenders of Essar Steel offered to proceed with the H1 bidder, thereby rejecting the offer of the promoters to withdraw the CIRP process under Section 12A of the IBC.

According to industry experts, a system of the auction would bring more desirable results. The wilful defaulter should not be treated at par with the genuine defaulter, there has to be a mechanism wherein the genuine defaulters should be given a wider scope. The promoters being the founders are more equipped with the nitty-gritty of the business, hence to point out the gaps they should be made part of the assessment process.  Only relying upon the CoC whose member does not have any exposure to the business of the company and totally eliminating the promoters from the process of assessment will hamper the entire process. The promoters should be given a say in the COC and allowed to put forward their proposal. However, Withdrawal of insolvency proceedings should not be allowed after a certain point.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.