This article has been written by Shivank Verma of Hidayatullah National Law University, Raipur. The article discusses some of the loopholes in the provisions of the Insolvency and Bankruptcy Code, 2016 and their possible impact on the Code’s implementation.
It has been published by Rachit Garg.
Table of Contents
Introduction
The Insolvency and Bankruptcy Code was enacted by Parliament in 2016 to consolidate and amend the laws relating to the reorganization and insolvency resolution of companies. The Code marks a major shift in the approach of the insolvency laws from merely being a debt recovery procedure for creditors to a regime aimed at lifting corporate persons from the state of insolvency, thus balancing the interests of all the stakeholders. The Code also serves the important function of streamlining and compiling the procedure for insolvency and liquidation, which was earlier scattered across various legislations like SICA, SARFAESI and Companies Act, 2013.
Grey areas in Insolvency
For the most part, the IBC has successfully served as an important instrument for achieving the objectives mentioned in its preamble. However, in the course of its operation, certain grey areas have indeed come into the picture, the answers to which are not necessarily discernible from the text of the Code.
Status of Home Buyers
The question of whether home buyers are financial creditors constitutes one of the prominent questions in the IBC regime. This was brought up first in Nikhil Mehta and Sons v. AMR Infrastructure (2017), wherein the NCLAT reversed the ruling of the NCLT that had upheld that the Home Buyers would not constitute ‘Financial Creditors’ as rather having the element of TVM, it appears to be a simple agreement of sale and purchase of a piece of property. The NCLAT held that NCLT failed to appreciate the nature of the transaction in that case, wherein the home buyers were assured “monthly committed returns,” which has the commercial effect of borrowing.
The Parliament of India then enacted the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which inserted an explanation to Section 5(8)(f) of the Code to state that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of borrowing. This amendment was affirmed by the Supreme Court in Pioneer Urban Land and Infrastructure Limited and Anr. v. Union of India (2019). Though this does seem to settle the dispute about the status of Home Buyers, in the author’s opinion, it has been done so at the cost of stretching the definition of financial debt. In doing so, instead of examining whether the amount advanced by a home buyer has a time value, the emphasis has been laid more on the necessity of including home buyers in the Committee of Creditors owing to their significance in real estate projects.
It may be noted that in Nikhil Mehta’s case, the NCLAT gave due regard to the nature of the transaction in the question rather than the fact that the amount raised was from the Home Buyers with respect to a real estate project. In the situation where the returns assured to the allottees have no time value of money, such as in a case where there is a one time repayment of the debt by the corporate debtor.
Debt of a secured creditor
Though Section 238 of the Code gives an overriding effect to its provisions over other laws in cases where there is an inconsistency. However, this section comes into the picture only in case of an overt conflict of the Code with other laws and not necessarily in their applications. Consider a scenario where a secured creditor has managed to take possession of the assets of the corporate debtor under the SARFAESI Act.
In this case, the financial creditor might as well sell the assets of the debtor and get a part of his debt satisfied and still proceed to initiate CIRP under the Code for the remaining part of the unsatisfied debt. So even though the IBC was meant to be a complete code in itself for debt and insolvency resolution, it is still open for the financial creditor to take recourse to other laws for its own advantage before invoking the provisions of the Code. One way to discourage this practice is to make such financial creditors ineligible for initiating insolvency proceedings. In fact, a similar provision is already present in the Code in the form of Section 53. This section lays down the priority of different classes of creditors in the distribution of assets of the corporate debtor during liquidation. Here, a secured creditor who has relinquished its security interest is given priority over a secured creditor who is left with unpaid debt even after the enforcement of his security interest, thereby discouraging the secured creditor from enforcing his security.
Extension in the timeline for the submission of the revised Resolution Plan
Under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Resolution Professional has the power, with the approval of the Committee of Creditors to extend the timeline for the submission of the resolution plan. However, the said regulation makes no specific reference with respect to the submission of the revised plan.
Therefore, in the case where a party has submitted a resolution plan but failed to submit the revised plan within the time limit, it is unclear whether the RP can allow the extension of time in such cases. On one hand, the RP is duty-bound to place before the CoC all the factors that it can to allow it to make a prudent decision. Thus, the extension of the timeline for the revised plan seems reasonable.
However, it is unclear whether such an extension can be given to specific resolution applicants or if it has to be provided to all of them. In cases where this is done only for a single resolution applicant, it would be unfair to other resolution applicants who might have submitted the revised plan within the originally specified time. It might also exacerbate the problem of compliance with the maximum time limit of the CIRP; the Code provides a non-derogable upper limit of only 330 days of the CIRP, and thus, the extension of the timeline for the submission of the revised plan might push the corporate debtor into liquidation in cases where this statutory deadline fails to be complied due to this extension.
Whether a Resolution Plan can propose liquidation of the corporate debtor
Under the Code, liquidation is only meant as a last resort for the recovery of debts in cases where the insolvency resolution of the corporate debtor fails for reasons specified in Section 33(1).
The object of the Code is aimed primarily at insolvency resolution and to ensure that corporate person is a going concern, inasmuch that the definition of the insolvency resolution plan under the Code is a ‘plan proposed by resolution applicant for insolvency resolution of the corporate debtor ‘as a going concern.’
Though Regulation 37 of the IBBI (CIRP) Regulations describes the contents of the resolution plan, it does not answer whether the plan can provide for the liquidation of the debtor or part of its business. A cursory look at the definition might suggest that any plan that provides for liquidation may be inconsistent with the idea of a resolution plan. Moreover, the provisions relating to liquidation are applicable only upon the failure of the liquidation and not during the CIRP.
However, liquidation where only one part of the business of the corporate debtor is being liquidated and not the entire corporate entity might be allowed since the Regulations do describe that the plan may provide for the sale of the assets of the corporate debtor or even a restructuring of the company or an amendment of its constitutional documents. In fact, in Industrial Services v. Burn Standard Company and Anr. (2018), the National Company Law Appellate Tribunal has indeed drawn a distinction between liquidation and closure of the corporate debtor in Para 29. Thus, while closure results in the end of the company, the liquidation of part of the business of the corporate debtor may not beget the same result.
Conclusion
As illustrated in the above situations, certain gaps have crept into the IBC regime, including its regulations, which in the course of the operation of the Code are bound to create confusion in certain situations as described above. This article has suggested some ways to resolve the loopholes mentioned above. Resort to rules of interpretation might be temporarily used by the adjudicating authorities to fill in these and the other loopholes; however, a more reliable solution would be for the legislature to examine these loopholes and correct them. This will go a long way toward making the operation of this Code seamless, as was envisaged in its enactment.
References
- https://bharatchugh.in/2020/05/30/a-to-z-of-ibc-a-beginners-guide-to-the-insolvency-and-bankruptcy-code/
- https://bharatchugh.in/2020/06/08/a-to-z-of-the-insolvency-and-bankruptcy-code-a-beginners-guide-part-ii/
- https://www.livemint.com/Industry/X3wAbf9I3Um8xTDUdbeHaL/A-year-later-the-Insolvency-and-Bankruptcy-Code-is-still-ev.html
- https://www.ibbi.gov.in/uploads/publication/190609_UnderstandingtheIBC_Final.pdf
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