Abstract
In India, the Bankruptcy and Insolvency Code, 2016 is a remarkable development in the field of law. Today, we frequently see companies and businesses go bankrupt and insolvent. This code was introduced for resolving the problems of Insolvency ultimately. This Code works like an umbrella which brought all insolvency laws under it and address all the shortcomings and troubles regarding bankruptcy and insolvency. The very main object of this code is to protect the stakeholder’s interests, increase the importance of assets of corporate debtors, obtain credit and promote entrepreneurship, etc. The National Company Law Tribunal (NCLT) appoints a third “person” i.e., Interim Resolution Professional (IRP) to resolve the insolvency faced by a corporate debtor. NCLT to resolve the problem of the corporate debtor appoints an Interim Resolution Professional (IRP). If NCLT does not appoint an IRP on time then the corporate debtor will face the liquidation process. The Resolution Professional hold a very important role in the Corporate Insolvency Resolution Process (CIRP). The company of the corporate debtor during the process of CIRP went under the moratorium but during this time the supplier (the creditor) continue the supply of essential goods and services. This has been done to maintain the business relationship between both the corporate debtor and the creditor. But there are certain negative consequences of these provisions, which are discussed further in this research paper.
Keywords: Insolvency and Bankruptcy Code (IBC) 2016, Corporate Insolvency Resolution Process Regulations, Resolution Professionals (RP), Section.14(2A), Moratorium, Essential Goods and Services, Corporate Debtors, Creditors.
Introduction
The Insolvency and Bankruptcy Code (IBC) 2016, protects the interest of the corporate debtors over creditors. It is one of India’s most significant statutes which deals with the issue of bankruptcy and insolvency. The Constitution of India in the Seventh Schedule, under Concurrent list (List III), Entry 9 provides the subject of ‘Insolvency and Bankruptcy’. Both Central Government and State have the power to make laws on this issue. This statute on insolvency in India is referred from English law[1]. India’s first insolvency regulations were provided in sections 23 and 24 of the Government of India Act of 1800.[2] The committee was led by Dr JJ. Irani for the first time on 31st May 2005, recommended to the Government of India that there should be a separate statute which solely deals with the Insolvency and Bankruptcy faced by the companies and corporate debtors. The key suggestion made is time-bound proceedings, suspension and moratorium of proceedings, the appointment of administrators, accessibility and applicability, The committee of liquidators and creditors set up of operating agencies, and so on.
The Companies Act, 2013 majorly governs the different tribunals and legislations which deal with all the matters related to insolvency and bankruptcy. In August 2014, the Bankruptcy Legislative Reform Council (BLRC) was constituted by the Ministry of Finance. The council was led by the Chairperson Dr. T.K. Viswanathan, the former secretary general and member of Lok Sabha. In 2015, under the Bill ‘Insolvency and Bankruptcy Code’ the BLRC suggests covering both corporate and personal insolvencies. The same Bill was produced in Lok Sabha and on May 28, 2016, the bill got the President’s approval and was passed by the Lok Sabha.[3] On December 2016, the Insolvency and Bankruptcy Code (Act) came into force.
The Preamble of Insolvency and Bankruptcy Code, 2016, mentions the purpose of the Code is to provide a method for resolving the issue of insolvency for debtors in a particular decided period in order to increase their asset’s value, taking care of all stakeholder’s interest and promote the availability of credit. It is a single statute which rules over and brings changes in other statutes. This code overlaps with other legislation which broadly belongs to the Companies Act, of 2013 such as the Sick Industrial and Companies Act (SICA), Scrutinization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI).
Till 2016, the insolvency laws in India were more favourable for the debtor but several amendments were made to Code since 2016. One of the Amendments made in 2020 which shifts the paradigm to the ‘creditor control system’ from the existing paradigm of the ‘concept of possession of debtor’. The introduction of this controlling system gives leverage to creditor debtors in many ways by providing them with the benefit of prolonging matters for years and making the creditors helpless.
This change and control in the system is in the hands of the corporate debtor and is remarkably supported by the sec. 14(1)(a) of the IBC.[4] Section 14 provides for the procedure of the moratorium, it is defined as the period where termination of essential contracts, recovery, judicial proceedings of transfer of assets or sale of assets, and enforcement of security interest, etc., against the corporate debtor cannot be instituted.[5] This very amendment also brings section 14(2A) which provides that the Insolvency Resolution Process (IRP) and Resolution Professional (RP) play a vital role in preventing and securing the value of corporate debtors as well as managing the operation of corporate debtors during the delivery of goods and services.[6]
Research Methodology
In this research paper, the descriptive research methodology is used and research is done based on secondary sources with the proper analysis of the Insolvency and Bankruptcy Laws, 2016 and exceptions under it. Secondary sources which are used as the source of information are journals, articles, reports, blogs, books, and websites used for research.
Review of Literature
Section 14 of The Insolvency and Bankruptcy Code, 2016 contains a very significant provision of the ‘moratorium period’. No specific definition is provided for the term ‘moratorium period’ in the Code. According to the Oxford Dictionary “moratorium” means suspension of legal remedies and all types of proceedings during financial distraint by law against the debtors.[7] The Supreme Court also observed that “during the moratorium period the obligations of debtor get postponed to pay his creditor.”.[8]
The amendment of 2020 of The Insolvency and Bankruptcy Law, introduces the appending clause (2A).[9] It provides that the supplier (the creditor) during the moratorium period cannot suspend, prohibit or terminate the supply of essential goods and services to the corporate debtor before the declaration of insolvency. CIRP Regulations are governed by the laws of The Insolvency and Bankruptcy Code, 2016. Due to the CIRP Regulations, the termination or suspension of essential goods and services remains at a halt during the moratorium period.[10]
The issue of Insolvency and bankruptcy faced by the corporate debtor is resolved by the process of CIRP. The proceedings of the CIRP begin under the aegis of an operation creditor, a corporate applicant and a moneylender of the corporate debtor of the Code.[11] The meaning of ‘essential goods and services’ is specified in regulation 32 of CIRP, mentioned in section 14(2A). Section 32 lists essential services for water, electricity, telecommunications and information technology.[12]
The amendment of 2020 also provides that Resolution Professionals (RPs) can enlarge the scope of meaning of essential goods and services as per their understanding. So, the commodities of the corporate debtors which are important for operations and are essential for their business can be protected. These supplies of commodities are not directly involved in the production of the outputs produced by the corporate debtors but are essential to some extent for the production of those outputs. Any corporation which is responsible for the supply and management of these essential goods and services cannot suspend, prohibit or terminate the same during the moratorium period until the declaration of insolvency.
The Adjudicating Authority (NCLT) in order to regulate the resolving process of insolvency, appoints the Resolution Professional.[13] The process of insolvency resolution also involves the Interim Resolution Professional (IRP) who regulates necessary steps in order to save the company from liquidation and revive the company. From the commencement of the date of insolvency within 14 days the NCLT appoints IRP before the formation of the Committee of Creditors (COC). It is the COC’s responsibility to take care of the company until the RP is not appointed.
The role of RP while making its decision for any party involved in the resolution process shouldn’t be biased and do not have any conflicts of interest, or undue influence of any kind while CIRP. The responsibility of RP is to control the situation, operate and take care of all the proceedings of the company till no resolution has been found. The RPs have to handle the employees, customers, vendors and promoters. The RPs are bound to keep the company in operation during the CIRP along with the corporate debtor.
It can be confirmed from the above information that the constitution of 1BC, 2016 was not only concerned with the interest of one specific bank but also to take care of all creditors cum stakeholders in the proper functioning of the debtor company. It indicates that along with corporate debtors, the person who has the right to dispose of any assets or interest by virtue of the company is subject to moratorium.[14] In the recent judgement, it is held by the Supreme Court, the declaration of the moratorium u/s. 14 is only applicable to the corporate debtor excluding its directors, promoters, or management.[15]
Critical analysis of Insolvency and Bankruptcy (Amendment) Code,2016 focusing on section 14(2A).
The continuation of the ‘essential’ goods and services during the moratorium period provided under section 14(2A).
It is provided u/s 14(2) of IBC that during the moratorium period, the supply of essential goods and services cannot be suspended, interrupted or terminated. Section 14(2A) was inserted into IBC via amendment of 2020, which makes sure that the benefits of essential goods and services must be received by the corporate debtor without getting terminated, suspended, prohibited or terminated during the time of moratorium. Providing that the IRP and RP protect the supply of essential goods and services in the favour of the corporate debtor.[16] The supply is not protected and preserved in some exceptional cases, during the moratorium period, where the corporate debtor is unable to clear his dues of such supplies or in other specified circumstances.
Further, sub-section 2A authorises the IRP and RP to evaluate accordingly the supply of essential goods and services which are needed to be protected for the operations of the corporate debtor, so the supply of such goods and services can be done during the moratorium period without any suspension, terminations or interruption. These changes were made for the corporate debtor to keep and increase the value of its business. The RPs while identifying the critical supplies should keep in mind certain factors, whether the efficient replacement of supplies is possible, and whether there’s a direct relationship between the corporate debtor and supplies.
There is a huge risk of causing loss to suppliers (creditors) due to the compulsion to supply such goods and services in the moratorium period without any payment or security from the corporate debtor. The Committee is aware of this fact and that’s why it is decided by the Committee that suppliers would get the payment for their supplies during the time of the moratorium period, on the same terms that existed at the time of pre-insolvency and if the corporate debtor failed to make payments of essential goods and services, then suppliers are allowed to suspend, terminate, interrupt these supplies.
Further, the committee gave the liberty under this provision to suppliers that additional circumstances could be identified by the suppliers in order to terminate the supply of essential goods and services. According to this flexibility is provided under the provision for termination, suspension or interruption. Even though this provision seems beneficial for both corporate debtors and creditors, provides flexibility to the suppliers but still, it’s more of the ‘creditor in a control’ system as above mentioned. Since there are certain concerns arise out of this amendment.
- There’s no guaranteed reward or payment.
There’s no guarantee of payment from the corporate debtor side to the supplier for the supplies they get during the period of moratorium. Even though the priority and liberty in the payment of dues are given under section 53 of IBC which arise from the supply of essential goods and services to the corporate debtor, there’s still a possibility that payment of such essential goods and services could get delayed by the corporate debtor until the resolution plan gets approved or the final distribution of liquidation gets approved. There are some cases where the company gets failed in receiving enough value during the liquidation proceedings which led to the failure in full payment to the supplier.[17] This amendment further includes that the ambit of the supplier is dependent upon the discretion of the RP and will be determined by him. This put the suppliers of a company which is undergoing the CIRP process in the dilemma of whether the additional risk is required to bear them which increases the financial uncertainty.
- Insolvency and Bankruptcy (Amendment), Code, 2016 is inconsistent.
Both the regulations CIRP and Insolvency and Bankruptcy Code are silent and do not provide any guidelines on how to evaluate the essential supplies. What if the corporate debtor would find a substitute or alternative supplier for his needs, can the supply be considered critical? The Insolvency Law Committee has provided that RPs have the discretion to determine whether keeping the corporate debtor functional there’s has a direct and substantial nexus with the supplies. However, these criteria were absent from the revised legislation. Due to this, the application of necessary supplies is at the judicial discretion.
This amendment reduces the deciding power of the suppliers of continuing their business transactions with the corporate debtor. This amendment discarded this flexibility and made it favourable for one party i.e., corporate debtors.
- Need for an exception for the continuous supply of essential goods and services.
It is not feasible of continuing the supply of essential goods and services during the moratorium period to the corporate debtor, especially in small businesses. It will economically affect the business of the service provider. The IBC, on the other side, doesn’t make any exceptions to the continuity of the mandatory supply of essential goods and services. Due to such mandatory provisions, the suppliers would be at risk of insolvency. Suppliers do have a last resort of negotiation with RPs regarding the key terms of a contract. But these negotiation proceedings also depend upon the discretion of the RPs and the terms will be decided by the RPs.
Case Laws
In the case of ICIC Bank v. Innoventive Industries[18], the NCLT Mumbai Bench explained the position of provision of supply of essential goods and services as follows “It appears by reading the regulation that the water, electricity, telecommunications and Information Technology services are considered to be essential services during moratorium period to the corporate debtor as long as it is not used for the output production of supplied by the corporate debtor. The supply of water is essential for drinking, and proper sanitization but not for generating electricity. The supply of electricity is bound to limited use such as for lightning purposes, which in the modern world is considered to be essential. If electricity is used for manufacturing purposes and for making personal benefits from it imposing huge lakhs of bills on the industry, it will not be considered as the essential supply of services. Essential services are intended for necessary for the survival of humankind but making personal gains and profits out of it without payment cannot be done by the corporate debtors. And they are liable to make the payment for this personal use of essential goods and services.”
In Uttrakhand Power Corporation Ltd. Vs. M/s. ANG Industries Ltd.[19] NCLAT held that the charges due before the date of the moratorium will not be paid by the Resolution Professional (RPs) or any corporate debtor. The charges are to be paid by the RPs and corporate debtors for only those services which were availed by the corporate debtors during the moratorium period. Every month, the Resolution Professional is responsible for making the payments on behalf of the corporate debtor.
Conclusion and Suggestions
Insolvency and Bankruptcy, Code, 2016 has given a consolidated system to deal with the matters of Insolvency and Bankruptcy. But there are still so e areas where Indian insolvency and bankruptcy law is lacking and need amendments. We can fill those gaps by following the more concrete provisions as provided in US and UK. Such as assurance of payment by an insolvency representative in the form of guarantees or materials.[20] Statutory protection should also be given to the essential suppliers, according to the UNICITRAL legislative guide.[21] It stated that there should be a policy in this field for a variety of considerations such as providing the proceeding expenses including the proceedings for the importance of the and the effect of risk of non-payment on the counter-party. These provisions will make sure that essential suppliers should get paid during the phase of the resolution, regardless of the insolvency of the corporate debtor, and make sure that the essential supplier is safe from financial liability if the corporate debtor faces any loss. Therefore, there’s still a need for a legislative framework which could provide the firm securities to the essential suppliers during the moratorium period just like the corporate debtors. Such amendments will bring uniformity to the law.
Name-Shahela
College- Jamia Hamdard University, Delhi.
[1] Amit Kashyap, Corporate Insolvency Law and Bankruptcy Reforms in the Global Economy 44 (Business Science Reference, December 13, 2018).
[2] Dr Samit Kumar Maity Datta, ‘Insolvency and Bankruptcy code key economic reforms for India’, ISSN 2582 8088, AJMRR, 42, 43, 2023 https://thelawbrigade.com/wp-content/uploads/2023/06/Dr.-Samit-Kumar-Maity-Datta-AJMRR.pdf.
[3] FR. Oswald A. J. Mascarenhas, S. J, Corporate Ethics for Turbulent Markets: The Market Context of Executive Decisions 195 (Emerald Group Publishing, UK, 2018).
[4] The Insolvency and Bankruptcy (Amendment) Code, 2020 § 14(1)(a), No.1, Acts of Parliament, 2020 (India).
[5] The Insolvency and Bankruptcy Code, 2016 § 14, No.31, Acts of Parliament, 2016 (India).
[6] The Insolvency and Bankruptcy (Amendment) Code, 2020 § 14(2A), No.1, Acts of Parliament, 2020 (India).
[7] IBC Laws, https://ibclaw.in/all-about-the-moratorium-under-ibc-including-judicial-pronouncements/?print-posts=print (last visited, JULY 15, 2023).
[8] Shiv Kumar Tulsian and another v. Union of India (1990) 68 Comp. Cas. 720.
[9] Supra note 6.
[10] Nikunj Maheshwari, Essential Goods and Services under the IBC: Greater Discretion to the Resolution Professional, AZB & Partners (July 15, 2023, 5:30 PM) https://www.azbpartners.com/bank/essential-goods-and-services-under-the-ibc-greater-discretion-to-the-resolution-professional/.
[11] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016, § 7,9 and 10.
[12] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016, § 32.
[13] The Insolvency and Bankruptcy Code, 2016 § 22, No.31, Acts of Parliament, 2016 (India).
[14]Muskan Desai, ‘Applicability of Section 14 of IBC to Proceedings in respect of Directions/ Management of Corporate Debtor’, IBC Laws, 1, 2, (2023).
[15] Anjali Rathi and Ors. V. Today Homes & Infrastructure Pvt. Ltd. (2021) SLP(C) 12150/2019.
[16] The Insolvency and Bankruptcy (Amendment) Code, 2020 § 14(2A), No.1, Acts of Parliament, 2020 (India).
[17] Nikunj Maheshwari, supra note 9 at 4.
[18] ICIC Bank v. Innoventive Industries, (1970) 1 SCR 791.
[19] Uttrakhand Power Corporation Ltd. Vs. M/s. ANG Industries Ltd., (2018) SCC Online NCLAT 1054.
[20] Executory Contracts and unexpired leases, 11 U.S.C. §365.
[21] United Nations, UNCITRAL Legislative Guide on Insolvency Law for Micro- and Small Enterprises, 51 (United Nations Publication, 2022).