INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC)

This article has been written by Bhavya Gautam, a 5th year BBA LLB Student from RNB GLOBAL UNIVERSITY BIKANER (RAJASTHAN)

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) is an Indian bankruptcy law that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha in December 2015. It was passed by the Lok Sabha on 5 May 2016. The Code received the assent of the President of India on 28 May 2016.

Certain provisions of the Act came into force on 5 August and 19 .August 2016. India has enacted a number of laws to punish defaulters such as the Indian Contracts, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, Securitization and Reconstruction of Financial Assets and Recovery of Security Interests Act, 2002, Sick Industrial Companies (Special Provisions Act, 1985 (SICA).The government decided to replace the existing insolvency laws with new stricter laws that would take care of existing defaulters within a time limit. The proposed bankruptcy legislation seeks to solve the problems we currently face in connection with insolvency and liquidation.

The provisions of the Code apply to companies, limited liability entities, firms and natural persons (ie all entities other than financial service providers). Following the approval of the Bankruptcy Code in Parliament for the time-bound resolution of insolvency cases in non-financial firms, the Ministry of Finance published a bill to establish a resolution corporation to deal with similar problems among financial firms. I am quoting Finance Minister Mr. Arun Jaitley. There is a systemic vacuum when it comes to bankruptcy situations in financial firms. This code will provide a specialized mechanism for dealing with bankruptcies of banks, insurance companies and financial sector entities.

This Code, together with the Insolvency and Bankruptcy Act 2015, when enacted, will provide our economy with a comprehensive resolution mechanism, Unquote. The proposed legislation will not only make it easier to do business in India but will also facilitate a better and faster debt recovery mechanism. It is widely believed that this legislation, if implemented in letter and spirit, will change the negative perception of NPAs, recovery and litigation associated with India. The new bankruptcy law will be a useful tool for international lenders and investors from the perspective of PE funds as they continue to grow their investments in India. According to the World Bank’s Ease of Doing Business report, insolvency resolution in India takes more than four years on average. The proposed Insolvency and Bankruptcy Act seeks to reduce the period to less than a year. This will not only improve the ease of doing business in India but also facilitate a better and faster debt recovery mechanism in the country. It is widely believed that this legislation will change the negative perception of recovery and litigation associated with India.

The government has formulated a plan to overhaul existing bankruptcy laws and replace them with one that facilitates stress-free and time-bound business closures. The bill because the report issued in November 2015 by a committee headed by former advocate Mr. T.K. Viswanathan, has undergone various amendments, including those recommended by the Joint Parliamentary Committee in April 2016.

Key issues and analysis

• A time-limited solution to insolvency will require the establishment of several new entities. Also, given the dependency and rate of liquidation of DRTs, their current capacity may be insufficient to take on the next role.
• IPAs regulated by the board of directors will be created to regulate the functioning of IPs. This approach, where regulated entities further regulate professionals, may conflict with the current practice of regulating licensed professionals. The demand for a high value of the performance link may further hinder the creation of IPAs.
• The Code sets out the order of priority for the distribution of assets during liquidation. It is not clear why:
• secured creditors will receive their full amount owed, not up to their security value,
• unsecured creditors have priority over trade creditors, and
• government fees will be paid after unsecured creditors.
• Codex allows creation of multiple IUs. However, it does not state that complete company information will be available through a single query from any IU. This can lead to dispersion of financial information across these IUs
• The Code creates the Insolvency and Bankruptcy Fund. However, it does not specify how the fund will be used

Objectives of the Code:

• Better resolution of conflicts between creditors and debtors
• Draw a line between misconduct and business failure
• Macroeconomic declines in loss to be allocated
• Incorrect behavior is the reason for all defaults made
• Ultimately, it should be the organizers who should be personally and financially responsible for the non-fulfillment of the obligations of the companies under their control.
• Consolidate and amend laws relating to the reorganization and resolution of insolvency of legal entities, partner companies and natural persons.
• Establish deadlines for the enforcement of the law in case of time-bound insolvency resolution (i.e. 180 days).
• Maximize the value of the assets of interested parties.
• To support business •
• Increase the availability of credit.
• Balance all stakeholder interests (including changes). The balance will be made in the order of priority of payment of government contributions.
• To establish the Insolvency and Bankruptcy Council of India as a regulatory body for         insolvency and bankruptcy law.

Moratorium: (section 14)

Literally, a moratorium means a temporary stay or suspension of activity. There is a moratorium on the activities of the Corporate Debtor (CD) during the CIRP. In effect, any action by or against CD is stayed. The crisis resolution specialist is in charge of CD activities and only performs activities related to or necessary for the insolvency process.

According to section 14 of the IBC, a moratorium means the prohibition of the following actions against CDs:

• Initiation of lawsuits, continuation of ongoing lawsuits, enforcement of court decisions
• Transfer/disposal of property
• Enforcement or enforcement of security interest or any action under the SARFAESI Act, 2002
• Restitution of property in possession.

Section 14(4) of the IBC clarifies that the moratorium ceases to apply upon completion of the CIRP, i.e. from the date of approval of the resolution plan or liquidation order. The purpose of the moratorium is to create a quiet period for business reorganization without being disturbed by litigation.

However, during the winding-up period, the CD may commence legal proceedings through the liquidator and/or may continue litigation with the prior consent of the Tribunal.

The correlation of moratorium between Section 14 and Section 33(5), IBC was interpreted in Elecon Engineering Company Limited Vs. Energo Engineering Projects, where the Delhi High Court found that the moratorium under Section 14 applies to CIRP while Section 33 applies to the winding up process and hence they are quite different in application. It was held that by the express language of the IBC, the moratorium also prohibits the continuation of pending litigation, while Section 33(5) of the IBC is only a prohibition against the commencement of new litigation during the liquidation process. This line of reasoning was also followed by the NCLT, Ahmedabad Bench in Bhavarlal Mangilal Jain Vs. Metal Link Alloys Ltd.

In contrast to the above, the Report of the Insolvency Committee (February 2020) presents a different view. The committee stated that the legislative intent was to provide a bar to both the commencement and continuation of suits or other proceedings, but the term “continuation” was omitted as an “inadvertent error.” The Committee pointed out that the winding-up provisions under the Companies Act 2013 also precluded continuation of proceedings during the winding-up. Thus, the general notion of initiation or continuation of legal proceedings by or against the CD during the CIRP or winding up process on account of the continuing moratorium is still unclear but may be accepted on the express order of the tribunal.

Liquidation of a company: (section 59)

One of the most significant features of the code is the granting of a moratorium, during which the creditor’s action will be suspended. This is not automatic and must be granted by an adjudicating body on the recommendation of a problem-solving professional. Liquidation of a company refers to the process of winding down a company’s business operations and distributing its assets to its creditors and shareholders. During liquidation, corporations sell their assets, including property, equipment, and inventory, to convert them into cash to pay off debts. Any remaining proceeds from liquidation sales are usually distributed among the company’s shareholders.

Liquidation usually occurs when a company can no longer pay its debts or continue to operate profitably. Liquidation is often considered a last resort for struggling companies, but it can also be a strategic decision that allows business owners to manage their financial goals and commitments. If you are considering ending your business due to insolvency, retirement or other circumstances

Liquidation assets:

• To the extent that the property held by the debtor belongs to him, it will be part of the liquidation assets. The property will be distributed by the liquidator in a manner preferably established by law. Individual plaintiffs or those who claim to have some special rights to the debtor’s property will be part of the liquidation process. From the property referred to in § 36, paragraph 3, the liquidator creates a property asset, which in relation to the legal debtor is called the liquidation asset.
• The liquidator will hold the liquidation estate as trustee for the benefit of all creditors.
• CIRP COSTS payable by secured creditors who realize their liens in the manner set out in this section shall be deducted from the proceeds of any realization by such secured creditors and remitted to the liquidator for inclusion in the liquidation estate. .

Arbitration body (Section 60)

Adjudicating authorities under the Insolvency and Bankruptcy Code (IBC) 2016 are bodies consisting of judicial and technical members as required appointed by the Central Government to exercise and perform the powers and functions set out in the Code. The IBC 2016 states that there are two types of decision-making bodies:

National Company Law Tribunal (NCLT)

The National Company Law Tribunal (NCLT), constituted under Section 408 of the Companies Act, 2013, is recognized as an adjudicating authority under the Code. The NCLT is a quasi-judicial body responsible for resolving corporate disputes relating to insolvency and winding up of legal entities. The NCLT receives the request for initiation of CIRP and approves or rejects the resolution plan submitted by the CD. If the NCLT rejects the plan, a winding-up order will be issued, after which the CD will be dissolved. The AA has the power under the 2016 IBC to extend the CIRP period on applications made through CD.

The National Company Law Appellate Tribunal (NCLAT) is the appellate authority for appeals taken by the NCLT under the Code. There are several benches across India with specific territorial jurisdiction over the state and some other states.

Debt Recovery Tribunal (DRT)

The Debt Recovery Tribunal (DRT), established under the Banks and Financial Institutions Debt Recovery Act, 1993, is designated as an AA under Section 79 of the IBC, 2016. The DRT recognizes the insolvency of individuals (other than an individual CD guarantor) and partnership firms; however, the provisions of the IBC relating to individuals and partnership firms have not yet been enacted. Therefore, DRT does not exercise jurisdiction as AA under IBC, 2016.

The 2021 Amendment

On 12 August 2021, the Government passed the Insolvency and Bankruptcy Code (Amendment) Act 2021, after promulgating the Insolvency and Bankruptcy Code (Amendment) Order 2021 in April 2021 to introduce a pre-prepared insolvency resolution process (PPIRP), small and medium enterprises (MSMEs) as defined in the Micro, Small and Medium Enterprises Development Act, 2006. This amendment was deemed necessary to help MSMEs overcome the widespread distress caused or exacerbated by the pandemic.

To start a PPIRP, a corporate debtor needs the approval of its members by special resolutions or three-quarters of its partners and the approval of unrelated financial creditors representing 66 percent of the debt (or the approval of operating creditors if there are no unrelated financial creditors)

Once a PPIRP is initiated, a resolution professional nominated by a financial creditor representing at least 10 percent of the debt and approved by unrelated financial creditors representing at least 66 percent of the debt is appointed to manage the process. The corporate debtor must submit a basic resolution plan for approval to the COC, which may approve the basic plan as long as it does not prejudice the claims of operating creditors. If the master resolution plan is not approved by the COC or if it damages the claims of operational creditors, other resolution plans may be invited to compete with the master resolution plan.

The amended IBC also provides for a shorter period of 120 days to complete the PPIRP. The PPIRP allows the MSME to work on a resolution plan while the corporate debtor and its management remain in the company’s possession (ie, a debtor-in-possession model as opposed to a creditor-controlled CIRP model). According to the latest available data, two pre-pack insolvency applications were received by 31 March 2022.It is still too early to decide whether the amendments are working or whether some changes are necessary.