This article has been written by Manu Sharma, 9th semester of law from Amity University Raipur.
Abstract
The Indian Bankruptcy Code, 2016 (IBC) is a significant legal reform that has improved India’s bankruptcy and insolvency structure. The IBC aims to encourage corporate restructuring, improve creditor recoveries, and expedite the process. It has been a significant legislative change in India, improving its economic identity and international recognition. The IBC has a positive effect on the economy through increased foreign direct investment, mergers and acquisitions, and improved business rankings. It unifies and modifies laws related to insolvency resolution, allowing lenders, financial institutions, businesses, and professionals to serve as resolution specialists. The IBC aims to provide a smooth exit path for investors and a rescue mechanism for troubled entities.
The Insolvency and Bankruptcy Code (IBC) in India has undergone several revisions to address the changing needs of the corporate environment. The main goals have been to improve creditor recovery, streamline the procedure, and solve issues encountered by different parties. The most recent amendment was the IBC (Amendment) Ordinance, 2020, which went into effect on June 5, 2020. Other significant changes include the Fast Track Corporate Insolvency Resolution Process for micro, small, and medium-sized businesses (MSMEs), enabling faster resolution of insolvency cases involving small companies, and the implementation of a pre-pack insolvency resolution process. The 2019 amendment extended the resolution process’s deadline to 330 days, allowing for a one-time extension of the CIRP period up to 90 days and time spent in court proceedings. However, the amendment ignored the possibility of forced liquidation if the CIRP process is not completed within this timeframe. The IBC has been criticized for its lack of flexibility in time frames and for not considering the criteria for determining the CIRP process’s delays. Because of which several amendments were needed, and some major amendments were done in year 2020 after COVID 19.
Since its establishment, the law has required multiple revisions due to the difficulties facing India’s industrial sector So, this article explores the main IBC revisions and how they have affected India’s corporate bankruptcy laws.
Key word: Corporate Bankruptcy, corporate governance, insolvency, foreign indirect investment etc
INTRODUCTION
An important legal reform that has solidified India’s place in the international legal system and strengthened its economic identity is the Bankruptcy Code, 2016 (IBC). The Indian Bankruptcy Code (IBC), which was enacted in 2016, integrates and improves the country’s current bankruptcy and insolvency structure. The prior, laborious, and frequently ineffective corporate bankruptcy system in India was significantly altered by the Insolvency and Bankruptcy Code (IBC) of 2016. The IBC sought to encourage corporate restructuring, improve creditor recoveries, and expedite the procedure.
A nation’s legal environment is crucial to its economic growth, and a robust and well-functioning legal system improves a nation’s standing internationally. IBC has emerged as the second most significant legislative change in India, following the Goods and Services Tax. IBC improves India’s economic identity and recognition internationally in addition to fortifying its legal authority. As a result of increasing foreign direct investment (FDI), mergers and acquisitions (M&A) activity, and an improvement in the ease of doing business rankings, the code has a favourable effect on the economy and beyond.
One of India’s most important economic reforms, the Insolvency and Bankruptcy Code of 2016 is an essential instrument for reducing credit risks. It unifies and modifies the nation’s laws pertaining to the insolvency resolution procedure. Lenders, financial institutions, businesses, and professionals are all significantly impacted by the IBC, which gives them the chance to serve as resolution specialists. This bankruptcy law seeks to provide a smooth exit path for investors, an effective winding up process for insolvent firms, and a rescue mechanism for troubled entities.
In a time when longevity and sustainability are desired qualities, it is taboo to think a corporation losing its existence. India’s Insolvency & Bankruptcy Code (2016) was operationalized to facilitate start-ups, give loss-making firms a way to wind up, and provide investors with a structured exit. It was expected to be a revolutionary legal system. However, after eight years, things are looking up. since its establishment, the law has required multiple revisions due to the difficulties facing India’s industrial sector.
EXIGENCY OF THE ACT
Before the IBC India’s corporate bankruptcy regulations were disjointed and complicated prior to the IBC. The procedure was frequently drawn out, which caused major delays in the resolution of business crises. This hindered the general health of the economy and led to low recovery rates for creditors. Additionally, the absence of a cohesive framework opened the door for dishonest tactics like giving some creditors preferential treatment. Important Aspects of the IBC A thorough structure for handling corporate insolvency was provided by the IBC. It created the time-bound Insolvency Resolution Process (IRP), which aims to revive viable firms. A resolution professional is appointed as part of the IRP and collaborates with the company’s creditors to create a resolution strategy. The business is liquidated if a workable settlement plan cannot be reached. The idea of Information Utilities (IUs), which gather and distribute data regarding the financial health of businesses, was also introduced by the IBC. This promotes early identification of financial difficulty and aids creditors in making well-informed decisions.
The IBC gave stakeholders a clear road map by introducing a single, time-bound approach for insolvency resolution. To maximize the value of their assets, corporate entities, partnership businesses, and individuals must reorganize and resolve their insolvency within a certain timeframe. This is the main objective of the Insolvency and Bankruptcy Code, 2015.
Insolvency proceedings gained efficiency and skill with the creation of the Insolvency and Bankruptcy Board of India (IBBI). While the IBBI is the regulatory organization in charge of regulating the IBC’s implementation, the Ld. NCLT serves as the adjudicating authority, guaranteeing impartial and open resolution procedures. The procedure will be carried out in the most orderly way possible if a committed individual known as a “Resolution Professional” is appointed.
ANALYSIS OF THE CODE
- Purpose and objective of code
It is a well-known reality that modern society encourages businesses to use debt. Since debt is necessary to finance expenditures and investments, many businesses cannot operate without it. If the corporate debtor has the financial capacity to service and repay the obligation, taking on debt is acceptable. However, if the corporate debtor is unable to pay back the debt by the due date, there is a good chance that creditors may incur significant losses. Additionally, through the Corporate Insolvency Resolution Process (“CIRP”) or the defaulting debtor’s liquidation, the Code grants the creditor the opportunity to recoup the outstanding balance.
IBC was founded with a broader mission and the goal of finding more efficient solutions to problems. Provisions and their execution. The purpose of this Act is to alter and combine legislation that deal with restructuring and insolvency resolution. In the event of bankruptcy, liquidation, voluntary liquidation, or insolvency procedures, it applies to corporations, partnership firms, limited liability partnerships, corporate persons, and individuals. The following is the Code’s purpose:
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship. availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto” [1]
Thus, it is evident that the IBC’s main goal is not just to get the money back to the creditor but also to keep it alive and continue to operate by shielding the corporate debtor from “corporate death” under its own control through liquidation.
- case study of the rescue acquisition of UltraTech Cements[2]
It is important to remember that the Code was put into effect because of “zombie companies” and significant debt. It’s worth noting, though, that many promoters tried to handle their financial issues outside the Code’s purview to increase their value—ironically, this is one of the Code’s main goals. In addition, the rate of recovery under the Code is likewise remarkably low. Just 120 of the 2,162 cases under the Insolvency and Bankruptcy Code had been resolved as of June 30, 2019. In a same vein, just 42.8% of the ₹21.08 trillion worth of claims that were admitted under the IBC procedure out of the ₹2.53 trillion total were recovered.
A total of $23 billion was spent on seven big, distressed asset deals. To stay out of bankruptcy, several businesses also turned to asset sales, slump sales, mergers, etc. The regulatory agency surprisingly ignored these practices. These behaviours caused a lot of competitive concerns, which made them problematic. These techniques will be clarified by examining the Indian cement business. In the Indian cement business, consolidation has become a daily need. It is anticipated that the bankruptcy law’s implementation will alter the state of the industry in this area.
as well as the bankruptcy code. Even if the rate of this consolidation has increased recently, it was brought on by some players’ massive debt accumulation rather than operational issues. The speed of consolidation has only escalated in the previous few years since they were placed under the IBC’s jurisdiction, even though many participants realized in 2015 that having a lot of debt is counterproductive. The Aditya Birla Group’s UltraTech Cements created news in 2017 when it declared that it would pay Rs 16,189 crore to acquire JCCL’s cement factory. Loans totalling over Rs 12,000 crore that were on JCCL’s books were transferred to UltraTech as part of the agreement. Both sides benefited from this deal, which allowed UltraTech to enter Gujarat and assisted JCCL in paying off some of their debt of Rs 55,000 crore.
- The Binani Case[3]
The situation of Binani Cements, which saw many highs and lows, turned out to be a test case for the code’s implementation. The promoters of Binani Cement attempted an out-of-court settlement from the NCLT, which was not an option at the time, after the IRP approved Dalmia Bharat’s bid based on the preliminary bids. UltraTech Cement, which was competing for the acquisition, gave Binani a letter of assurance promising to buy the assets for a significantly higher amount. It’s interesting to notice that the adjudicating authorities did not oppose this out-of-court settlement. The adjudicating committee granted UltraTech’s request to purchase Binani Cements in a historic finding, concluding that the Maximizing the value of the stressed asset sale should be the goal of the insolvency resolution procedure. By accepting UltraTech’s proposal, this ruling paved the road for litigation and gave defaulting corporations more options to find more effective ways to get out of the previously strict process. In addition to its previous acquisitions, UltraTech gained a greater market share and competitive edge in Western India with the purchase of Binani Cements. Prior to the IBC era, the Competition Commission of India would have been aware of UltraTech’s acquisition. However, because of the 180+90-time frame (the situation before to the 2019 change), this transaction proceeded nearly flawlessly.
OVERVIEW OF THE SIGNIFICANT AMENDMENTS TO THE IBC
Since it was put into effect, the IBC has undergone several revisions that have been made to meet the changing needs of the Indian corporate environment. The main goals of these revisions have been to improve creditor recovery, streamline the procedure, and solve issues that different parties have encountered.
- Timelines and Procedures: To expedite the IRP and liquidation processes, amendments have been proposed. This has improved creditor recoveries and shortened the time needed to address corporate crisis.
- Eligibility Criteria: To guarantee that only legitimate cases of corporate distress are submitted under the IBC, the eligibility requirements for starting insolvency proceedings have been updated. This has lessened the load on the courts and stopped pointless petitions.
- Resolution Professional Role: The resolution professional’s duties and authority have been broadened to allow them to take more efficient action to save failing businesses.
- Cross-Border Insolvency: Changes have been made to make it simpler for foreign creditors to take part in the resolution process of Indian enterprises by facilitating cross-border insolvency proceedings.
Analysis of Specific Amendments
To create a legal framework for corporate insolvency, the Insolvency and Bankruptcy Code, 2016 (henceforth referred to as the “Code” or “IBC”) was enacted. The Code has since undergone five amendments, the most recent of which was the IBC (Amendment) Ordinance, 2020, which went into effect on June 5, 2020. But there were some other amendments were made which are important. Mentioning them in brief :
The Fast Track Corporate Insolvency Resolution Process for micro, small, and medium-sized businesses (MSMEs) is one of the most important changes to the IBC. This procedure lessens the financial strain on MSMEs by enabling a speedier resolution of insolvency cases involving small companies. The implementation of a pre-pack insolvency resolution process has been another significant change. This enables the business and its creditors to come to an agreement on a negotiated resolution plan prior to hiring a resolution specialist. This can lower the expenses related to insolvency proceedings and speed up the resolution process.
- 2019 amendment
Two clauses were added to Section 12(3) of the Code by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Amendment Act), extending the resolution process’s deadline to 330 days. This 330-day period consists of (a) the standard 180-day CIRP period, (b) any one-time extension of the CIRP period up to 90 days that the adjudicating authority may give, and (c) the time spent in court proceedings pertaining to the corporate debtor’s CIRP. Both the time spent in court proceedings and the time allotted by the adjudicating authority will be included in the 330-day timeframe. Liquidation will be the outcome if the CIRP procedure is not finished within this time frame, which is not a feasible alternative for the stakeholders involved.
in accordance with the investigation’s schedule set by the Competition Commission. By establishing this non-derivative timeline, the government sought to preserve asset value, which would be diminished if the CIRP process were extended. However, it has blatantly ignored the fact that failure to comply with this timeline would force the corporate debtor into forced liquidation, which could be just as harmful to its interests. This matter was brought up in the Essar Steels case.30 The CIRP must be finished within 330 days, according to the ruling in this case. However, the tribunal may extend this deadline if there are unresolved procedures before the tribunal or the CIRP is ineffective. Despite the Essar Steels’ Although the ruling allowed for some flexibility in the time frames, it ignored two important questions:
(1) what criteria must be met in order to persuade the tribunal that the CIRP process’s delays are self-evident.
(2) whether or not they may be reduced limitations on the number of extensions that can be given more than 330 days. The goal of the 2019 amendment might not be accomplished without a limit.
Therefore, it is evident from several significant IBC instances, including Swiss Ribbon, Essar Steel, Binani Cements, and others, that safeguarding creditors’ interests is one of the primary goals of IBC implementation. It’s worth noting, nevertheless, that the insolvency legislation has completely changed during the current COVID-19 pandemic.
- 2020 Amendment
The COVID-19 pandemic’s effects on corporations have led to the implementation of this amendment. To shield the financially troubled corporations from the financial quagmire that resulted from this extraordinary circumstance, the Ordinance added Sections 10A and 66(3) to the Code.
- Insertion of section 10
For corporate defaults occurring on or after March 25, 2020, Section 10A of the Code selectively suspends the application of Sections 7, 9, and 10 of the Insolvency and Bankruptcy Code (IBC). According to the clause, a corporate default that took place prior to March 25, 2020, is exempt from this section, and no application for the start of the Corporate Insolvency Resolution Process (CIRP) may be submitted for defaults that occur during this time frame. However, because the change does not specify the date for calculating the period of six months or one year after March 25, 2020, it creates uncertainty about how this provision would be applied.
With the intention of initiating the IBC, the After six months, a default that begins on March 25, 2020, will not be regarded as a continuing wrong. It was decided in the Vashdeo R. Bhojwani vs. Abhyudaya Cooperative Bank Ltd.[4], case that a bank’s defaulted obligation would not be regarded as a continuing wrong. It was noted that in situations when a debt recovery certificate results in default, the duty to pay and the violation of that obligation are crystallized on the day of default; hence, the cause of action cannot be considered to be ongoing throughout that time of non-payment.
- Section 66 (Amendment)
Section 66 of the Code is amended by Section 3 of the Ordinance. In order to hold a director or partner accountable for contributing assets to the corporate debtor, Section 66 addresses fraudulent or wrongful trading by a corporate debtor and mandates that the resolution professional submit an application during the corporate debtor’s CIRP. Section 66(3) has been added to the Code as a result of the Ordinance. For corporate debtors whose CIRP has been stopped for the allotted term under Section 10A, Subsection 3 stipulates that the resolution professional is not permitted to submit any applications under Section 66(2).
This amendment’s primary implication would be that a corporate debtor’s directors or partners might avoid the consequences of the company’s dishonest trade. Additionally, since Section 10A will shield them, this change provides corporate debtors who plan to engage in fraudulent activities during the specified time frame with the opportunity. Therefore, by adding sub-section 3, the resolution professional’s authority is diminished from that of a CIRP custodian to that of a mere observer of frauds. This change offers the directors and partners access to conduct fraudulent activities and avoids their liabilities.
The government wanted to bring Section 66(2) into compliance with Section 10A of the Code and grant an exception to it because of the COVID-19 scenario. For the actual exemption time, the modification has prohibited the filing of applications pertaining to defaults. Section 66 is not transactional by nature; rather, it is predicated on how the entire business is conducted generally. Therefore, it’s unclear if the Section 66 change applies to a particular transaction as an exemption to Section 66(2) or if it applies to the entire firm.
- Applicability of amendments
The application of Section 10A is a crucial component of this Ordinance. According to Section 10A of the amendment, there is uncertainty about the date that will be used to calculate the six-month term. The adjudicating authority is now responsible for handling this interpretation, adding to the courts’ workload. Since it will differ from case to case, the steps the courts take in pursuit of this unclear period may likewise become a source of contention. As a result, it is not obvious if the revision is applicable in the future, in the past, or forever.
CONCLUSION
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 has left us with more questions rather than answers. Since this Ordinance, the definitions of protection, compliance, and defaults have gotten even more ambiguous. The government’s efforts to raise awareness of the pandemic’s effects are greatly appreciated and a positive start. However, a poorly drafted Ordinance has resulted in severe implications for the corporates. Insolvency proceedings cannot be filed indefinitely, thus corporate debtors will need to find another way to restructure their debt. It is still unclear whether those debts will be regarded as protected under section 10A’s proviso or outside of it even after they have been restructured its scope. As a result of this Ordinance, the Adjudication Authority and the courts will have to spend valuable time determining the application, time frame, default amount, etc. for each case. As a result, this adds to the workload for the courts and the corporate insolvency resolution procedure.
[1] Id. at 9
[2] Ultra Tech Nathdwara Cement Ltd vs Union Of India on 7 April, 2020
[3] Binani Cement Limited (BCL) vs Bank Of Baroda & Anr9 (2018) SCC On-line NCLAT 521 (India).
[4] Vashdeo R. Bhojwani vs. Abhyudaya Cooperative Bank Ltd., Civil Appeal No. 11020 Of 2018
