INTRODUCTION TO THE INSOLVENCY AND BANKRUPTCY CODE, 2016

The pace of development of the Indian insolvency law has been recorded slow and incremental before the enactment of the Insolvency and Bankruptcy Code, 2016 “code or IBC” as the framework for insolvency remained ineffective and fragmented for decades. The Bankruptcy Law Reforms Committee (BLRC) was set up by the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of Shri T.K. Viswanathan. The BLRC was charged to oversee the design and drafting of a new legal framework for resolving matters of Insolvency and Bankruptcy in India. Thus, the need for one codified legation was endorsed to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals and the provisions in all existing law to be replaced by this code.

In the absenteeism of a current insolvency law, the non-performing assets of the Indian banks started accruing. Over the course of time, the Government put in place various incremental mechanisms for cleaning the banking system from the menace of NPAs.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was passed in 2002 to enable setting up of asset reconstruction and securitisation companies, and to allow enforcement of security interest without intervention of court. The recovery petitions are filed by banks in Debt Recovery Tribunals established under the Recovery of Debts Due to Banks and Financial Institutions Act in 1993.

This is the rationale for the enactment of IBC in India since 2016 repealing SICA (Sick Industrial Companies Act). Apart from providing for the resolution or corporate entities, voluntary liquidation, the newly enacted IBC provided for a framework for bankruptcy of natural persons. However, the provisions concerning personal insolvency have not been notified and the old laws continue to operate.

OBJECTIVE

The objective of the Code is to combine and improve the laws relating to restructuring and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. Further, to balance the interests of all the stakeholders by maximizing the value of the assets.
The code has also alerted the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund.

The Hon’ble Supreme Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. observed that the preamble of the code does not refer to the liquidation, which is only availed as a last resort if no resolution plans are submitted or passed.

IMPLEMENTATION

The significant feature of the IBC is a four-pillar institutional framework comprising:

1. The judicial adjudicating authority, being National Company Law Tribunal (‘NCLT’)

2. The regulator, being Insolvency and Bankruptcy Board of India (‘IBBI’), monitoring insolvency professionals and insolvency professional agencies (‘IPA’);

3. The insolvency professionals, independent officers, play a key role in the efficient working of the process under the code;

4. The information utilities (‘IU’) to electronically store documents and terms of lending.

The process of insolvency and bankruptcy are required to be managed by the licensed Insolvency professional registered with an IPA. Individuals seeking registration as Insolvency Professionals are required to be enrolled with an IPA.

There are three statutory IPA registered by IBBI namely −the Institute of Chartered Accountants of India,

The Institute of Companies Secretaries of India and the Institute of Cost Accountants of India.

Professionals with the requisite eligibility criteria, as prescribed under the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, (“IP Regulation”) were allowed to be registered as Insolvency Professionals with the IBBI from the date of submission of the requisite application and fees with the Board.

Since the enactment of the provisions of CIRP, 3312 no. of CIRPs have commenced by the end of December 2019 out of which, 246 cases have been closed on appeal or review or settled; 135 cases have been withdrawn; 780 cases have ended in liquidation and 190 cases have ended in approval of resolution plans.

OVERRIDING EFFECT

The legislature has included within the IBC, Section 238 which is a non-obstante clause indicating that the IBC shall have the power to override other laws, to the extent they are inconsistent with the provisions of the IBC. The effectiveness of this provision in the IBC, however, is being tested by courts against various statutes.

The Supreme Court in the matter of M/S Innoventive Industries Ltd. v. ICICI Bank & Anr, while adjudicating on a matter involving the applicability of Parliamentary Law and State Law over the same subject matter has held that non-obstante clause of the Parliamentary enactment will also prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act (State Law).

CORPORATE INSOLVENCY RESOLUTION PROCESS (‘CIRP’)

The application for initiation of the CIRP can be filed on the minimum amount of default of INR One Lakh by the financial creditor, operational creditor or corporate itself before NCLT. The NCLT admit the application and initiates a CIRP against the company (‘corporate debtor’). The NCLT by admission order declares a moratorium which will be in place till the completion of the CIRP.

An interim resolution professional (‘IRP’) appointed has to take charge of the corporate debtor. The power of the board of directors of a corporate debtor and its management powers stands suspended and will be vested with IRP. The Committee of Creditors (‘CoC’) has to appoint Resolution Professional (‘RP’) who has to conduct the entire CIRP with the assistance and advice of CoC which mainly comprising of unrelated financial creditors. It is the duty of the RP to protect and preserve the assets and to the keep the business of the corporate debtor as the going concern. The RP is granted 180 days to find a resolution, which can be extended by 90 days.

However, according to recent amendment second proviso of section 12 of the code has been inserted, which is to be read with the order of the Hon’ble Supreme Court in the Essar case, wherein the CIRP shall be completed within a period of 330 days from the CIRP commencement date, including any extension of the CIRP period and the time taken in legal proceedings in relation to such CIRP of the corporate debtor.

The resolution process is in the hands of the majority of the CoC members. They may approve a resolution plan by a vote of not less than 66% of the voting share after considering the feasibility and viability and other requirements as prescribed under the code & applicable regulations.

Therefore, participation of creditor in the CIRP is considered to the most important features of any insolvency framework in order to manage the Insolvency Resolution Process effectively in India.

If the RP fails to find a resolution for the corporate debtor within the stipulated timeline or if the CoC does not approve the resolution plan by a vote of not less than 66% of the voting share, the corporate debtor is liquidated.

LIQUIDATION

After the adjudicating authority passes an order under section 33 of the Code, the debtor goes into liquidation, the resolution professional who was appointed for the CIRP shall act as the liquidator for the purposes of liquidation, subject to submission of a written consent to the Adjudicatory Authority, unless replaced.

Priority of Distribution

Section 53 of the Code has established an ordered of priority among creditors, which will determine the sequence in which outstanding debts will be repaid, which is as follows:
• IRP and liquidation costs;
• Dues of Workmen (for 24 months) and secured dues (if the security has been relinquished);
• Dues of Employees (for 12 months);
• Unsecured financial creditors;
• Government dues & unpaid dues to secured creditor, if the security has been realized;
• Remaining debts and dues (mainly include, unsecured operational debts);
• Preference shareholders;
• Equity shareholders.

The secured creditor may either choose to opt out enforce their security interest to recover debts owed to them; or may relinquish their security interest to the liquidator to participate in the liquidation process. One of the key unique features of the Code is that low priority has been accorded to government dues where they paid after secured creditors, unsecured financial creditors, employees and workmen along with the unpaid dues to secured creditor.

CONCLUSION

The enactment of the IBC, one of the major financial reforms for the country in decades, brought about a robust, modern and sophisticated insolvency framework which seeks to achieve a resolution of debtors in a time-bound manner.

The objective of IBC aims at consolidating all existing insolvency related laws existing at that time has brought about a revolutionary change in the insolvency framework in India. It has also introduced a gigantic paradigm shift for Indian market from the ‘Debtor in possession’ to a ‘Creditor in control’ regime.

The Supreme Court, NCLTs and NCLATS have time and again reiterated that the objective of the code is resolution and maximization of value of assets of the Corporate Debtor.