This article is written by Aditi Kumari who is pursuing a Certificate Course in Insolvency and Bankruptcy Code from Lawsikho.

Introduction

As per the reports of World Bank, in terms of ‘resolving insolvency’ the ranking of India in 2019 has moved up to 52nd position from 108th.  The credit of this development has been attributed to the Insolvency and Bankruptcy Code, 2016. Also from that, the recovery rate under the nascent statute is 42.5% for previous year, while the rate under SAFAESI and DRTs are 14.5% and 3.5% respectively.

The object of the IBC Code is to consolidate laws pertaining to reorganisation and insolvency resolution, as well as timely resolution and value maximization. The aim of recovery, however, is not mentioned along with other objects, but in the current scenario it is mostly presumed to be a recovery mechanism.  Apart from the recovery aspect, the data regarding the insolvency resolution show that there is still a lot to be achieved by the statute. There have been 3774 applications for the purpose of insolvency resolution and out of that only 1604 cases have been resolved. It is further dispiriting to mention that the rate of cases ending in a liquation is as much as 58.9% out of all the resolved cases (see here). On the basis of the information mentioned above, it is pertinent to see that, “why was IBC enacted in the first place?” Has it been able to fulfill the objectives provided under the code?” and “what is the present scenario of resolution under it?”

Prior to IBC

Prior to the enactment of the IBC, there were multifarious statutes including the aspects of debt or insolvency resolution. 

• Sick Industrial Companies (special provision) Act, 1985 (“SICA”)

SICA came into being to observe sick and potentially sick companies, and take remedial actions for the revival or closure of unviable companies. Under the provisions of SICA the debtor company itself made the application to the adjudicating body under SICA i.e. Board of Industrial & Financial Reconstruction (B.I.F.R.). This created an anomaly as the control over the decision of filing an application and the assets of the company during the proceedings under the act are in hand of the sick company. Hence, it was widely misused by the companies (see here).

• The Companies (Second Amendment), Act 2002

Pursuant to the Companies (Second Amendment) Act, 2002, the tribunal named as National Company Law Tribunal (NCLT) was formed, which was to further exercise the powers of BIFR? Though such changes were never enforced and it took 12 years for the functioning of NCLT to start. 

In U.P and Uttarakhand vs. Allahabad Bank and others (reported in 2013 4 SCC 381) it was held that RDDBFI Act has precedence over the Companies Act, 1956. The Companies Court has no jurisdiction to set aside the order of Recovery Officer under the RDDBFI Act. 

• Recovery of Debts due to Banks and financial institutions Act, 1993 (“RDDBFI Act”)

The RDDBFI Act was enacted to deal with the issue of humongous amount of NPAs pertaining to banks and financial institutes. Tribunals established under the Act have the power to adjudicate as a quasi-judicial body.  The basic features of the Act are penal provisions against the defendants and sale of the movable and immovable property of the defendant. 

In Transcore v. UOI [(2008) 1SCC 125(73) SCL (11)135], it was held that the RDDBFI Act and the SARFAESI Act have complementary jurisdiction. However, in Kingfisher Airlines Limited Vs. State Bank of India (2) (2015) 130 SCL 378(52) 523(Karn HC DB), it was held that SAFFAESI Act has an upper hand while dealing with matters of winding up of companies. Therefore, it can be observed that the RDDBFI act had intersected jurisdiction with the Companies Act, 1956 and the SARFAESI Act. 

Also, the average time taken to resolve a debt under the Act was approximately 2 – 4 years, which defeats the purpose of the resolution process 

Jeevan Diesels and Electricals v. HSBC 2014 SCC OnLine Cal 19409

In this matter, the power of the banks or financial institutions to refer the company for winding up under the Companies Act has been discussed in detail. Herein a winding up order was passed against the appellate company, which was opposed on the contention that, according to Section 17 of the Recovery of Debts due to Bank and Financial Institution Act, 1993 (RDB Act) the Company court has no jurisdiction to entertain winding up proceedings applied by a bank or financial institution. The appellate company relied on the judgment of Allahabad Bank  v. Canara Bank (2008) 4 SCC 406, where in it was held that RDB Act,1993 overrides the winding up provisions of the Companies Act. 

However in the judgment, it was concluded that a Debt Recovery Tribunal does not have jurisdiction to wind up a company and the object of the RDB At is that of recovery, hence it cannot be contended in from of company court that a petition of winding up of a company should not be heard for a company which has lost its commercial solvency. 

• The Securitization and Reconstruction of Financial Assets and enforcement of the Security Interest Act, 2002 (SARFAESI Act)

SARFAESI Act was enacted to recover securitised loans with particularly different means, like auctioning private and commercial properties of the defaulters. RBI is the regulatory body for the purpose of the act.  The SARFAESI Act in practice works in an inquisitorial system where the creditors have power over the securitised assets as well as the management of the business where there is a lot of discretion in the hands of creditors unlike the SICA Act and RDDBFI Act.  

However, the major drawbacks under the Act are the low recovery rates and clash of jurisdiction with other statutes. 

Why IBC enacted?

As discussed above, the erstwhile structure presents a highly fragmented system for the purpose of bankruptcy process (see here). The RDDBFI Act, the SICA Act and the SARFAESI Act were observed to be in an authority tussle on the question of “which act has precedence over the other?” The reasons behind this are multiple statutes giving rise to various intersecting rights and liabilities as well as multiple fora for the purpose of adjudication which may or may not have the legal expertise in insolvency and bankruptcy. In Swarup Packaging v. State Bank of India (2004)53 SCL394(ALL HC DB) it was held that the DRT is a general act while SARFAESI is and special act, hence the SARFAESI Act will prevail over the DRT Act.  In Kingfisher Airlines Limited v. State Bank of India [(2) (2015) 130 SCL 378(52) 523(Karn HC DB)]: it was held that the tribunals under the Companies Act would not have jurisdiction to precede the proceedings of SARFAESI Act when the order for winding up or appointing provisional liquidator has not been made in company petition.

The fragmented statutes, clash of jurisdiction and extra-ordinary timelines gave rise to the need of a consolidated and sound bankruptcy law, as the strengthening the already existent laws would not have been cost or time efficient.  The goals that were sought to be achieved by the new law are:

• Improved handling of the conflicts between the creditors and debtors.
• Low loss of time.
•  Avoiding destruction of value.
• Drawing a line between malfeasance and business failure.

Oswal Foods Limited case

In this matter M/S Oswal Food Ltd (see here) was wound up through an ex-pate order. The director of the company filed a recall application against the order of the High court. While the application for recall was still pending in the High Court, the company made reference to the BIFR (Board of Industrial & Financial Reconstruction) under Section 15/16 of the Sick Industrial Companies (Special Provisions) Act (SICA) which was still pending.

Pursuant to the rejection of the appeal, a Special Leave Petition was filed before the Apex Court praying that the Official Liquidator be directed to return the possession of the assets and the documents of the applicant Company, which he had obtained after an ex parte order of winding up. 

It was contended by the applicant, relying upon the judgment of M/s Madura Coats Limited Vs. Modi Rubber Limited 2016(7) Supreme Court Cases 603, that as soon as a reference was made under section 15 and section 16 of the Sick Industrial Companies (Special Provisions) Act (SICA), the petition before the company court stands redundant. However, it was claimed by counsel for the Official Liquidator, refuting the submissions made by applicant, that SICA was repealed with effect from 01.12.2016. Also, it was provided under Section 4(b) of Sick Industrial Companies ( Special Provisions), Repeal Act, 2003, provided the timeline of 180 days to initiate the pending proceedings in front to be filed under Insolvency and Bankruptcy Code, 2016. 

The court held that since the applicant company did not approach the NCLT (under IBC) within 180 days, the winding up order abovementioned holds valid. The rationale given for this judgment was that, it is the clear intention of the legislation to repeal the SICA act without any exception. 

The case stands as one of the example of how the new insolvency regime has taken over the matters of insolvency and bankruptcy altogether. 

Conclusion 

The Code definitely brought immense changes to the insolvency and bankruptcy regime of India. It has resulted in better discipline among borrowers, doubling of recovery amount and lowering of NPAs in the country. The power has moved from the hands of the borrowers to the creditors.  Apart from the discussed hits, there some misses attributed to the new regime, for example, ever going cumbersome litigation which breaches the now declaratory 330 days’ timeline of the insolvency proceedings. This delay pertains to the lack of judicial and administrative infrastructure. 

IBC has seen multiple amendments in a short period of time, doing away the anomalies of delays, deciding the powers of COC and ascertaining distribution of proceeds between secured and unsecured creditors. Comparing the regime to that of the USA, ours is still in the nascent form, it should be noted that US insolvency reform took 10 years to reach stability.

Apart from the discussed imperatives, covid pandemic has also brought, temporary but major, changes in the working to the code through ordinances and notifications (see here and here). Sections 7, 8 and 9 are suspended for a period of 6 months starting from 25th March. Also, the threshold for application to insolvency has been increased to Rupees 1 Crore from Rupees 1 Lakh, which is going to affect the interests of operational creditors as well as the homebuyers. It is certain that in future, the regime has to go through many legislative and judicial reforms but the aspects for which many professionals are looking forward to are: individual insolvency admissibility (which is yet to be notified), the threshold for insolvency application in the post-pandemic period and cross border insolvency.

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