By Rashmi Pathak- Government Law College, Mumbai
- ABSTRACT
Different Insolvency laws prevailed in India for different types of entities but failed to bring the desired consequences or result. For example, Sick Industrial Companies Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Companies Act 2013 and others. The Insolvency and Bankruptcy Act, 2016 brought all the insolvency laws under one umbrella and matched the international standards. This paper studies and provides analysis on the legal framework of the code and inline it highlights the impact of Insolvency and Bankruptcy code on ease of doing business in India. The present paper also provides a descriptive explanation on the Corporate Insolvency Resolution Process.
Keywords—IBC 2016, Insolvency, Bankruptcy, Liquidation, Corporate Insolvency Resolution Process, Ease of doing business.
- INTRODUCTION
It is known that if the legal environment of a country is strong then it also fuels the economic development. Legal system should be impactful as well as uncomplicated in nature. It should be reliable to solve the given problem. Insolvency and bankruptcy process before 2016 was done under different acts but the outcome was not appealing, and the legal procedure was hectic.
Insolvency and Bankruptcy Code, 2016 (IBC)was recommended on 31st May 2005, by Dr. JJ Irani Committee to the Government of India and it received assent on 26th May 2016 by the then President Dr. Pranab Mukherjee. It is one of the biggest economic reforms introduced in India. The ‘Insolvency and Bankruptcy Code, 2016’is one of the biggest economic reform after GST. It got economic recognition on global platform economically. Since the code is passed it has improved India’s, ease of doing business ranking, increased and enhanced FDI, M&A deals, made corporate restructuring simple, made winding up and liquidation process smooth. IBC consolidates and amends all the existing framework of insolvency and bankruptcy into a single code. The Insolvency and Bankruptcy Board of India (―IBBI) is the regulatory and supervisory body of the IBC.
- WHAT IS INSOLVENCY?
Insolvency is basically a state of financial distress. The company or the individual can no longer meet their financial obligations to the creditors. Liabilities surpasses the value of the company, or the individual cannot pay back the debt he owes. Insolvency can lead to liquidation.
- WHAT IS BANKRUPTCY?
When a company is unable to honour its financial obligations to its creditors, it files a petition for bankruptcy. The petition can be filed by the creditors or by the company itself. The defaulted amount is settled if not in full from the company’s assets. It is the status of a debtor/defaulter declared by judicial. It is sometimes misunderstood with insolvency, but both the terms have distinct legal significance. Insolvency means the inability to meet debts. Bankruptcy, on the other hand, results when debtor has filed a petition or that creditors have filed a petition against the debtor.
- WHAT IS LIQUIDATION?
When the Liabilities surpasses the value of the assets the company becomes incapable to honour its financial obligations to its creditors and it becomes insolvent. Further the insolvency resolution process is carried out in which corporate restructuring is done. If the restructuring is failed, then the company is liquidated. Liquidation is a process in which the operation of the company is brought to an end. All the assets of the company are redistributed to the creditors or lenders. It is also referred to as winding-up of the business.
- OBJECTIVE OF THE STUDY
- To study and analyse the concept of Insolvency and Bankruptcy Code, 2016
- To descriptively explain the Corporate Insolvency Resolution Process
- To explain the important provisions under Insolvency and Bankruptcy Code, 2016
- To study the impact of Insolvency and Bankruptcy Code, 2016 on ease of doing business in India
- RESEARCH METHODOLOGY
The present study is an analysis of the concept of Insolvency and Bankruptcy Code 2016. This paper highlights the meaning of the different terms of IBC 2016. The study also aimed to provide a clear understanding of the Corporate Insolvency Resolution Process under IBC 2016 major provisions under the act.
- REVIEW OF LITERATURE
Insolvency and Bankruptcy code, 2016 brought revolution in the legal sector of the country. Earlier the law structure for insolvency resolution and bankruptcy was divided across multiple legislations, such as the Sick Industrial Companies (Special Provisions) Act, 1985,, the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Companies Act 2013, and others. IBC merged the above law structure into a unified code. The key feature of this code is to provide easy and fast resolution and maximize the value of the asset of the debtors.
This code helps the defaulting and bankrupt companies either in liquidation of its business or in
suggesting a revival plans through corporate restructuring. According to KPMG (2016) there is a need of uncomplicated infrastructure for the successful implementation of the code. It stated that overall IBC, 2016 is a major step towards the ease of doing business in India and has the potential to bring business practices in India closer to more developed markets over the long term.” EY in 2017 discussed that the code distincts the insolvency and the bankruptcy procedure. The previous is an instant incapability of eierepaying the liabilities that owed by the business and later is when the debtor file for the bankruptcy in the respective court. In 2016 stated that the code consists of a
“Controller, insolvency professionals, information utilities, and adjudicatory mechanisms” and provides assured and mandate period for insolvency resolution process and liquidation i.e. 180 days.
As per Michelle (2005), bankruptcy is the legal procedure by which financially sick companies, firms, individuals, LLPs; get a assured resolution and exit the market after settling the debt of their debtors. The bankruptcy process for firms plays a central role in economics because competition driveshed most inefficient firms out of business, thereby raising the average efficiency level of those remaining.
In 2005, Claessens Stijn & Klapper Leora observed that insolvency structure are complex in nature as they try to balance several objectives which includes protecting the rights of creditors. Rajeswari Sengupta etal. (2015) has examined and studied the corporate Insolvency resolution process in India before IBC era by preparing comparative analysis of insolvency process of three different countries, India, UK and Singapore. The author highlighted that there was no single jurisdiction and comprehensive law in India for insolvency. The presence of multiple law created complexities since parallel procedures were running for the same case. It was difficult to track the status of the cases from the different authorities.
- IMPORTANT PROVISIONS UNDER IBC
Below mentioned are the important provisions of IBC, 2016-
- Financial Creditors: Financial creditor is someone to whom a financial debt is owed which also includes a person to whom such debt is legally assigned. It can be a company, person, LLP (explained under Section 5(7) OF IBC). Debt here must come under the definition of “Financial Debt” as highlighted in Section 5(8) of the IBC.
- Financial Debt: Under Section 5(8) of the IBC, a financial debt is defined as: “a debt together with interest, if any, that is distributed against the consideration for time worth of money and includes:
- money borrowed against interest payment.
- Any money raised through acceptance under an acceptance credit arrangement, or its dematerialized counterpart.
- Any sum raised by a note purchase facility or the issuance of bonds, notes, debentures, loan stock, or a comparable instrument.
- The amount of any liability related to a lease or hire purchase agreement that is deemed a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed.
- Receivables sold or discounted, excluding those sold on a nonrecourse basis.
- Any sum raised through any other transaction, such as a forward sale or purchase agreement, that has the commercial impact of a loan.
- Any counter-indemnity duty relating to a bank or financial institution’s guarantee, indemnity, bond, documented letter of credit, or other instrument.
- The amount of any responsibility relating to any guarantee or indemnification for any of the items listed in sub – clauses (a) – (h) of this clause .”
- Operational Debtors: Operational creditor is someone to whom an operational debt is owed which also includes a person to whom such debt is legally assigned (explained under Section 5(20) OF IBC). Debt here must come under the definition of “Operational Debt” as outlined in section 5(21) of the IBC.
- Operational Debt: Under section 5(21), operational debt “a claim for the provision of goods or services, including employment, or a debt for the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or a local authority.”
- Corporate Debtor: As per Section 3(8), Corporate Debtor means a corporate person who owes a debt to any person. Section 3 (7) defines the Corporate Person as under:”(7) “corporate person” means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;”(Emphasis provided)
- Adjudicating Authority: Adjudicating authority in case of company is National Company Law Tribunal (NCLT) and adjudicating authority in case of individual and LLPs is Debt Recovery Tribunal (DRT).
- Default: Under Section 3(12) of the code, it deals with the definition of the word “Default”, which means that “non-payment of debt when whole or any part or installments of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be”.
- Corporate Insolvency Resolution Process
- Initiation of Corporate Insolvency Resolution Process can be done by:
- Financial creditor (FC) under Section 7.
- An operational creditor (OC) under Section 9, after sending demand notice under section 8 of the code.
- Corporate debtor/Corporate applicant under Section 10 of the Code (voluntarily).
- Procedure:
- In case of Financial Creditor: The financial creditor can initiate the CIRP against the corporate debtor by applying to NCLT under section 7.
- In case of Operational Creditor: IBC has two-step structure for the initiation of insolvency resolution proceedings by an Operational Creditor. An Operational Creditor have to send demand notice for payment under section 8 before filing for the corporate insolvency resolution process. In case the corporate debtor doesn’t pay the defaulted debt or dispute the debt on demand within 10 days then the operational credit can file an application before the NCLT to initiate Insolvency Resolution Process.
- In case of Corporate Debtor: The corporate applicant may file an application for the initiation of insolvency proceedings voluntarily. The applicant must submit all the required documents including the books of account. Additionally, a special resolution must be passed by the shareholders of the corporate debtor, or a resolution must be passed which should be approved by at least three-fourths of the total number of partners for approving the resolution process.
- Steps under Corporate Insolvency Resolution Process:
- Step 1: Application to the NCLT:
- A financial creditor can directly apply before the NCLT for the defaulted amount for initiating CIRP. The operational creditor has to send demand notice first demanding the defaulted amount to the corporate debtor. When the operational creditor does not receive defaulted amount from the corporate debtor after the ten days of delivery of the demand notice he can apply to NCLT for initiating the CIRP. Even the corporate debtor can apply before the NCLT to initiate the insolvency proceedings.
- Step 2: Admission/Rejection of the application by NCLT:
- The NCLT has to either accept or deny the application within 14 days. When the NCLT accepts the application the resolution process starts, and it is known as the insolvency commencement date (section 5(12)).
- Step 3: Moratorium and Public announcement:
- When the NCLT accepts the application moratorium sets in. Under section 14 of IBC, a moratorium means prohibition of all the other legal proceedings against corporate debtor which includes:
- Institution of suits, continuation of pending suits, execution of judgments, restructuring assets, Recovery or enforcement of security interest or any action under the SARFAESI Act, 2002, Recovery of property in possession. And the moratorium will cease to have effect after the resolution process is completed.
- The public announcement of the corporate insolvency resolution process under the order referred to in section 13 and details to be published is mentioned in section 15 of the IBC.
- Step 4: Constitution of the committee
- Interim Resolution Professional (IRP) is appointed. The board of directors are suspended and its management ceases to have any control over the company. Interim resolution professional takes the handover of the company until the end of the CIRP.
- IRP prepares the list of the Committee of Creditors (COC) and submits it to the NCLT (Section 21). NCLT certifies the constitution of the COC. Within 7 days of filing the report a meeting is held among the COC.
- The IRP invites and verifies claims made by the COC which was discussed in the meeting.
- Step 5 – Appointment of the resolution professional
- The COC then appoints a resolution professional (Section 24). He may be the same person as the interim resolution professional, or someone else, depending on the needs of COC.
- Step 6 – Revival or Liquidation
- According to Section 12(1)[2] of the IBC the CIRP has to be finished within the span of 180 days after insolvency commencement date, which is extendable to 90 days.
- Resolution plan needs to be approved by creditors holding 75% of the financial debt and with 66% voting share of the financial creditors.
- Potential investors, creditors, management and other can bring up this resolution plan (called as resolution applicant)
- If the plan is accepted by the NCLT then the corporate debtor undergoes corporate restructuring and revival is possible.
- And if resolution plan is not approved in the prescribed period, the NCLT orders for the liquidation of the corporate debtor (Section 33 to 42 and Sections 52 to 54).
- The COC will appoint a liquidator to sell the assets of the corporate debtor and distribute the assets among the stakeholders. The distribution will be made according to hierarchy mentioned in section 53 of the IBC.
- There are Four Main Stakeholders (Section 53):
- Interim Resolution Professionals (IRP)/ Resolution Professionals (RP).
- Committee of Creditors (COC).
- Resolution Applicant (RA).
- National Company Law Tribunal (NCLT).
Note: It should be noted that according to IBC the purpose of the CIRP is to go with the revival of corporate debtors. Only when the revival plan fails, liquidation is called for.
- Features of Insolvency and Bankruptcy Act, 2016
- Comprehensive in nature: IBC regulates the process of insolvency and bankruptcy of all persons including corporate, partnership, LLP’s, and individuals.
- Single Code: The code has consolidated multiple laws covering the insolvency and bankruptcy process and present singular platform for all the relief’s relating to recovery of debts and insolvency.
- Comparatively faster resolution: It is mandatory to complete the process within 180 days which can be extended up to 90 days. Further, there is a provision for fast track corporate insolvency resolution process within 90 days. If insolvency cannot be resolved, the company then undergoes liquidation process and debt of the creditors are settled by selling the assets and property of the company.
- Hassle free clearance: It has been drafted in such a way that all the legal procedure required for insolvency and bankruptcy and liquidation, in case the company is not able to revive, gets covered under the same law. The applicant gets the appropriate relief at the same authority. Earlier the procedure was hectic because of the complexities created by separate law governed by separate authorities.
- Clear cut process: The code provides for a clear-cut process with respect to the insolvency and bankruptcy. The code is very specific in nature, within 180 days, which is extendable to 90 days, the complete insolvency resolution process must be completed.
- Adjudicating authority: The National Company Law Tribunal (NCLT) adjudicates the insolvency resolution for companies and the Debt Recovery Tribunal (DRT) adjudicates the insolvency resolution for individuals. The civil courts cannot interfere in the matters pending with the adjudicating authority.
- Protects the interest of creditors: The code also protects the interest of creditors and lenders.
- Constitution of IBBI: It provides for constitution of a new regulatory authority “insolvency and bankruptcy board of India” to regulate resolution professionals, agencies and information utilities engaged in the resolution of insolvencies of companies, partnership firms, LLPs, and individuals.
- Conclusion:
Implementation of IBC is a huge step in the legal sector of the country, and it is evolving continuously. Therefore, it becomes important to study the amendments and update us with the same. According to the available data, India ranked 136/189 countries in 2016 and the ranking jumped to 63rd position in 2019. Also, the recovery rate of debt improved after IBC came into force. IBC is comprehensive in nature. It applies to both companies as well as individuals. CIRP under IBC helps creditors to recover their money in a speedier process.
Although IBC is effective to a great extent, however, it is not compliant to the prescribed timelines. The earlier mandate timeframe of 180 days extendable to 90 days was increased to 330 days for resolution. NCLT is overburdened with cases. Only twenty bench members are appointed to deal with such huge amount of application.
- References