A Critical Examination Of The Insolvency And Bankruptcy Code - Going Back In Time
Author: LawSphereX
Category: Corporate & Insolvency
Published:
Updated:
A CRITICAL EXAMINATION OF THE INSOLVENCY AND
BANKRUPTCY CODE: GOING BACK IN TIME
Mr. Gaurav Bharti, Assistant Professor, School of Law, IFTM University, Moradabad Mr. Anuprash Rajat, Assistant Professor, School of Law, IFTM University, Moradabad
ABSTRACT
The Insolvency and Bankruptcy Code was passed in 2016 with the goal of establishing a single bankruptcy and insolvency law, thereby consolidating the previous framework. It should be mentioned that safeguarding creditors' interests is one of the Code's main goals. By moving away from the debtorin-possession model, which was common in the previous regime, and towards one where both creditors and debtors operate within a framework of equity and fairness to all stakeholders in order to preserve the value of the Company, the Code attempted to address the various "illnesses" suffered by the insolvency laws in the previous regime. The Code is still being worked on, though, and was far from flawless. Additionally, the government has turned its attention to safeguarding economic interests in the wake of the COVID-19 pandemic.
Despite appearing to have been enacted to shield businesses and promoters from no-fault liabilities brought on by the COVID-
19 epidemic, the Insolvency and Bankruptcy Code (Amendment) Ordinance,
2020 seems to have more issues than solutions because of its ambiguities.
Actually, it appears that the new ordinance signals a return to the previous paradigm, which was bad for the creditors' interests. Thus, the purpose of this essay is to discuss and evaluate the problems and uncertainties with particular reference to the 2020 Ordinance. Keywords: Company, Insolvency, Bankruptcy, Corporate Debtor, Winding up
Introduction: The Black's Law Dictionary defines insolvency as the inability to make debt payments. The utilisation of credit by businesses is crucial in today's business world. However, the creditors bear a significant amount of risk during this procedure. In fact, if this credit cycle is broken, the whole economy might stall. As a result, insolvency law aims to safeguard creditors' rights in the event that corporate debtors ("Company") default. Actually, replacing this free-for-all system with one in which creditors' rights and remedies are suspended and a procedure is put in place for the orderly collection and realisation of the debtor's assets as well as their equitable distribution in accordance with creditor claims is one of the main goals of insolvency law. Corporate failures are not exempt from insolvency legislation.
Only those who can effectively compete with one another will survive since business life entails taking chances and handling crises frequently. Actually, a lot of sick businesses might. According to the neo-capitalist idea, some businesses would undoubtedly go out of business if there was effective competition in the market. It is reasonable to assume that modern businesses operate mostly according to the "survival of the fittest" theory. A company may fail for a variety of reasons, including inadequate financial controls, poor management, and unfavourable market conditions. Therefore, insolvency laws aim to address a company's failure by reorganising the company to address those problems.
Evolution of Code The Insolvency and Bankruptcy Code ("Code") was passed in 2016 with the goal of combining and amending the laws pertaining to the timely reorganisation and insolvency resolution of individuals, partnership firms, and corporate persons in order to maximise the value of the assets of the company that faces bankruptcy ("Corporate Debtor"). Making doing business in India easier was one of the main goals behind the Code's enactment. To put it bluntly, the laws regulating the winding up process were as ill-conceived as the corporations themselves before the Code was passed. 1 Because the previous government was more combative and skewed toward the debtors. This impression stems from the fact that, during the prior administration, the debtor maintained managerial authority over the business throughout the insolvency process.
By transferring company control to a resolution specialist, the Code attempts to
1 Bharat Chugh & Avaya Hari Singh, A to Z of the Insolvency and Bankruptcy Code,
https://www.livelaw.in/columns/a-to-z-of-the-insolvency-and-bankruptcy-code-a-beginners-guide-157569
address this problem. Actually, the numerous laws under the previous administration caused the insolvency proceedings to be extremely disjointed. During the insolvency processes, there was also a great deal of ambiguity surrounding the powers of the debtors and creditors because these powers were granted under numerous different laws. The Sick Industrial Companies Act,
1985 ("SICA"), the Recovery of Debt Due to Banks and Financial Institutions, 1993
("RDDBFI"), the Companies Act, 2013, and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI") when it went into effect were among the laws pertaining to the insolvency process from the previous regime that were combined and codified in the Code. Therefore, in an attempt to address the problem of the abundance of laws on the subject, the Code attempted to combine all of these different laws into a single unified code. To preserve the value of the company, the Code essentially moves away from the debtor-in-possession model and toward one in which creditors and debtors both function within a framework of equality and fairness to all stakeholders.
2 Summarizing its observations of the Code, the Supreme Court of India ruled in the Swiss Ribbons case3 that: “The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, 'trial' having led to repeated errors, ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster.
”4 As a result, it can be seen from Justice Norman's remarks that the "debtor's paradise" has been lost since the Code was passed and all decisions pertaining to a business going through bankruptcy proceedings are now handled by the Committee of Creditors ("CoC") and the Insolvency Resolution Professionals ("IRP"). 5 Objectives of the Code: It is a well-accepted fact that modern culture makes it easier for businesses to use credit. Since debt satisfies the requirement to finance investments and expenses, many organizations
2 Sameer Sharma, How Do We Ensure India’s Insolvency and Bankruptcy Code Keeps Working Well?,
https://thewire.in/banking/india-ibc-solvency-bankruptcy
3 Swiss Ribbons Pvt. Ltd. V. Union of India (2019) SCC Online SC 73.
4 Supra
5 Supra
actually cannot operate without taking on debt. 6 As long as the corporate debtor has the financial capacity to service and repay the obligation, taking on debt is acceptable. 7 However, if the corporate debtor is unable to make the loan payments by the due date, there is a good risk that the creditors would suffer significantly. Additionally, the Code gives the creditor the ability to recoup the money through the liquidation of a defaulting debtor or the Corporate Insolvency Resolution Process ("CIRP").
The objective of the code is as follows:- “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”8 Speedy Resolution Process:- In addition to streamlining and accelerating the insolvency proceedings, the Code seeks to reform and consolidate the current insolvency legislation.
Before the IBC was passed, there were a number of dispersed laws pertaining to bankruptcy and insolvency that caused excessive delays and insufficient and inefficient results. In actuality, before the IBC was passed, the average time to resolve an insolvency in India was 4. 3 years (as of 2015), compared to one year in the UK and 1. 5 years in the US. 17 With the passage of the IBC, the legislature attempted to address these errors by streamlining and expediting the winding up/liquidation procedure. One of the main goals of the IBC. 18 is the prompt settlement and preservation of the value in the underlying assets. The Code has consistently been promoted as a law that aims to expedite the insolvency process. Section 12 of the Code, which stipulates that the insolvency process must be finished in 180+90 days, rejects this goal of a rapid resolution process.
The Bankruptcy Law Reforms Committee provides the rationale for this objective of speedy resolution as: “For two reasons, speed is crucial to the bankruptcy code's operation. First, important decisions cannot be made without complete clarity of ownership and control, even though the
6 Rao Pramod, Critique of the insolvency & Bankruptcy 2016,
http://www.insolindia.com/uploads_insol/resources/files/critique-of-ibc-by-pramod-rao-1040.pdf
7 Supra
8 The report of the Bankruptcy Law Reforms Committee, 2015,
https://ibbi.gov.in/BLRCReportVol1_04112015.pdf
"calm period" can aid in keeping an organisation afloat. The company will likely atrophy and fail in the absence of strong leadership. The likelihood that liquidation will be the only solution increases with the length of the wait. Second, because many assets experience a high economic rate of depreciation, the liquidation value tends to decrease over time. From the perspective of creditors, selling the company as a going concern usually results in a good realisation. Therefore, value is destroyed when delays lead to liquidation. Furthermore, delays result in a lesser realisation even in liquidation. Delays therefore destroy value. Therefore, the main goal of attaining a high recovery rate is to locate and address the causes of delay.
”9 Using the case study of UltraTech Cements' rescue acquisitions, an examination of the Code It should be mentioned that the Code was enacted as a result of the "Zombie" Companies and significant debt. It's important to note, though, that many promoters attempted to work out their financial issues outside the purview of the Code in an attempt to increase their worth, which is ironically one of the main goals of the code. In addition, the recovery rates under the Code are very low as well. As of June 30, 2019, just 120 out of 2,162 cases under the Insolvency and Bankruptcy Code had been resolved. Similarly, just 42. 8% of the ₹1. 08 trillion claims that were admitted under the IBC procedure out of the ₹2. 53 trillion claims were recovered. 10 However, there were seven significant distressed asset acquisitions totalling $23 billion11 between January 2015 and April 2019.
Many businesses also underwent asset sales, mergers, and slump sales in an effort to stay solvent. Surprisingly, it appeared that the regulating agency had ignored thesepractices. These behaviours caused a lot of competitive concerns, which made them problematic. These techniques would be better understood by an examination of the Indian cement industry. Since the Insolvency and Bankruptcy Code was passed, consolidation has been the norm in the Indian cement business, which was predicted to alter the sector's pecking order. Despite the fact that this consolidation has increased recently, some players' massive debt accumulation was the primary cause, not operational issues. The pace of consolidation only picked up speed
9 supra note 1
10 Vivek Kaul, Why IBC success in recovering bad loans https://www.livemint.com/industry/banking/why-ibcsuccess-in-recovering-bad-loans-is-middling 1565551101789.html,
11 Ridhima Saxena, Distressed asset acquisitions, consolidation behind large M&A transactions,
https://www.livemint.com/companies/news/distressed-deals-consolidation-driving-large-m-a-deals-in-indiabain-co 1569482593936.html
in the last few years once they were placed under the IBC's jurisdiction, even though many of the participants realised in 2015 that having a lot of debt was counterproductive. 12 The pace of consolidation only picked up speed in the last few years once they were placed under the IBC's jurisdiction, even though many of the participants realised in 2015 that having a lot of debt was counterproductive. When UltraTech Cements, controlled by the Aditya Birla group, announced in 2017 that it would buy JCCL's cement facilities for Rs. 16,189 crores, it grabbed headlines. As part of the agreement, JCCL's loans of about Rs. 12,000 crores were transferred to UltraTech. 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 crores.
13 The Binani Case Nevertheless, the Binani Cements case, which had undergone numerous changes, turned out to be a test case for the Code's application. In this instance, UltraTech Cement, which has been bidding for an acquisition, gave Binani a letter of comfort with a promise to buy the assets at a significantly higher price after the Dalmia Bharat bid was accepted by the IRP based on the primary bids. This prompted the promoters of Binani Cement to seek an out-of- settlement from NCLT, which was not an option at the time. 14 Interestingly, there was little opposition to this out-of-court settlement from the adjudicating authorities. In a historic ruling, the adjudicating authority that accepted UltraTech's bid to purchase Binani Cements decided that the goal of the bankruptcy resolution procedure should be to maximise the value of the distressed assets sold at auction.
15 By allowing UltraTech's proposal, this ruling paved the road for litigation and gave the defaulting corporations fresh opportunities to discover better solutions to an otherwise onerous process. In addition to its previous acquisitions, UltraTech gained a significant market share and competitive edge in western India16 with the purchase of Binani Cements. In the days before the IBC, the Competition Commission of India would have taken notice of UltraTech's acquisition. However, because of the 180+90 time limit (pre-2019 amendment instance), this transaction essentially went without a hitch. 12 Bankruptcy Law - A game changer, https://indiancementreview. com/special-report/Bankruptcy-Law---Agame changer/111698
13 Supra.
14 supra
15 Binani Industries Ltd. v. Bank of Baroda (2018) SCC OnLine NCLAT 521 (India).
16 Thomas & Vyas, NCLAT nod to UltraTech’s Binani Cement bid sets precedent,
https://www.livemint.com/Companies/3jejXNs2MOCmiailsJDtsL/NCLAT-approves-UltraTechs-Rs-7900-crore offer-for-Binani-Ce.html>
The 2019 Amendment Two clauses were added to section 12(3) of the Code by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Amendment Act), raising the deadline for the resolution process to 330 days. This 330-day period comprises (a) the standard 180-day CIRP period, (b) any onetime extensions up to 90 days of the CIRP period granted by the adjudicating authority, and (c) the time spent on legal processes pertaining to the Corporate Debtor's CIRP. 17 This 330-day term would include any extensions given by the adjudication authority as well as the time spent in court proceedings. Failure to finish the CIRP procedure within this time frame would result in liquidation, which would be an impractical choice for all parties concerned.
Since the 330day time restriction complied with the Competition Commission's inquiry timeline, this change aimed to close any gaps in the regulatory time frame, particularly with regard to the Competition Commission of India. Failure to finish the CIRP procedure within this time frame would result in liquidation, which would be an impractical choice for all parties concerned. Since the 330-day time restriction complied with the Competition Commission's inquiry timeline, this change aimed to close any gaps in the regulatory time frame, particularly with regard to the Competition Commission of India.
By establishing this non-derivable time limit, the government blatantly ignored the fact that failure to comply would force the corporate debtor into liquidation, which could be just as harmful to his interests, even though their goal was to preserve asset value, which would decline if the CIRP process drags on for an extended length of time. This matter was brought up in the Essar Steels case. 18 In this instance, it was decided that the CIRP must be finished within 330 days, but the adjudicating authority may extend this time frame if the action's pending status or the adjudicating authority's inefficiency are the reasons for the short time frame.
19 Two important issues were not addressed by the Essar Steels decision, despite the fact that it added some flexibility to the time frame: (1) the standard that must be met in order to persuade the tribunal that they are to blame for the CIRP process's delay; and (2) whether they 17 Insolvency and Bankruptcy Board of India Notification CIRP-13011/1/2019-IBBI dated 11 November 2019 https://ibbi. gov. in/uploads/whatsnew/1f4d5f48bbc0d66b4b53ce6cb8220d08. pdf 18 Committee of Creditors of Essar Steel India Limited Through Authorized Signatory v. Satish Kumar Gupta (2019) SCC OnLine SC 1478 (India).
19 supra
can serve as a cap on the number of extensions that can be granted beyond the 330-day limit. The goal of the 2019 amendment might not be achieved in the absence of a restriction. Therefore, it is evident from a number of significant IBC instances, like Swiss Ribbon, Essar Steel, Binani Cements, etc. , that safeguarding the interests of creditors is one of the primary goals underlying the IBC's implementation. It's worth noting, meanwhile, that the insolvency law appears to have completely changed during the current COVID-19 pandemic. Suspension of the IBC Proceedings: New problems and difficulties with Indian insolvency rules have surfaced in the context of COVID-19, some of which are unlikely to be resolved by the legal system. Through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020,20 sections 10A and 66(3) were added to the Code in June 2020.
This 2020 ordinance is more of a relief package for COVID-19. Its main goal is to help corporate debtors who have been directly impacted by the COVID-19 outbreak, which has caused company activities to be disrupted nationwide. Section 10A, which will remain in force for the next six months and may be extended by up to a year, clearly states that creditors cannot force any corporation to appear in court or go through insolvency proceedings. Sections 7, 9, and 10 of the Code are superseded by this provision. Financial creditors who start an insolvency action are covered in Section 7, and operational creditors who start an action are covered in Section 9. 35 A corporation that is in default may petition the National corporation Law Tribunal (NCLT) under Section 10 to be declared insolvent.
As a result, the code would stop new insolvency proceedings and remove all debts connected to COVID-19 from the term of "default. " Additionally, it is concerning that the 2020 ordinance exempts corporate debtors from the wrongful trading prohibitions. The revised section 66(3) of the Code prohibits resolution experts from bringing wrongful trading claims against directors of businesses in which the IBC procedure is halted. 21 20 Anant Merathia & Poornima Devi, IBC Amendment Ordinance 2020: No fresh insolvency for default after lockdown declaration, https://www. newindianexpress. com/business/2020/jun/08/ibc-amendment-ordinance-
2020 no-fresh-insolvency-for-default-after-lockdown-declaration-2153907.
21 G.P. Madaan & Aditya Madaan, IBC Amendment Ordinance 2020 : Ambiguities leave more questions than
answers, https://www.livelaw.in/columns/ibc-amendment-ordinance-2020-ambiguities-leave-more-questionsthan answers-157916
Conclusion: On the surface, it would appear that the Code aims to address problems like the former regime's predominance of the debtor-in-possession model. Nonetheless, given current legal developments, it appears that the law is returning to its older model. Current efforts to "protect the interests of the company" are ignoring the Code's primary goal, which was to safeguard the interests of the creditors. Even though the 2020 Ordinance appears to have been issued to shield businesses and promoters from accountability for no fault resulting from the COVID-19 epidemic, the legislation's ambiguities seem to cause more problems than they solve.
Smallscale vendors, MSMEs, and individual creditors—who typically fall under the category of operational creditors, particularly those whose credit is less than one crore rupees—must be protected from being defrauded or having their interests harmed by the ordinance. The legislative branch needs to make sure that Section 10A isn't used as a means of restoring the defaulter's paradise that the enacting code originally aimed to establish. Legislators and adjudicating authorities must also be aware that the Ordinance's implementation could potentially lead to numerous lawsuits due to its provisions, which include a default exemption period and a ban on resolution professionals filing applications for fraudulent or wrongful trading, among other things.