Creditors Protection and The Insolvency and Bankruptcy Code, 2016

A Step Forward and Concerns

Posted by Legalopedia on January 24, 2022
India has often been chided for having fallen behind in terms of the development of its corporate economy by failing to keep up with global trends. In line with the vision of India's prime minister Narendra Modi, various initiatives have been undertaken so as to improve the international image of India's corporate economy by introducing ground-breaking legislation that will go a long way in paving the path for economic growth and development in the country. 1

Thus, the reason why The Insolvency and Bankruptcy Code, 2016(subsequently referred to as IBC) is of sufficient interest to the legal community. IBC is a legislation that centralizes as well as amends the existing insolvency, resolution and bankruptcy laws for corporations, partnership firms, as well as individual people in a time-bound way. However, the terms insolvency and bankruptcy are often used interchangeably, there is a subtle distinction. While the former involves to a scenario in which enterprises or individual people are unable to meet their financial obligations at the moment, the latter refers to the phenomenon in which a court of law issues a dissolution order. This research paper aims to firstly examine why is Insolvency and Bankruptcy Code is a step forward towards the goal of creditor protection and finally the concerns that ought to be addressed in the code.

RESEARCH QUESTIONS

  1. Why is the Insolvency and Bankruptcy Code important to creditor protection?
  2. What is the scope and framework of The Insolvency and Bankruptcy Code, 2016?
  3. Explaining Corporate Insolvency Resolution Process.
  4. What are the Concerns that ought to be addressed in the legislation?

RESEARCH METHODOLOGY

The paper would present doctrinal research with an analytical bent. However, in some sections of the study, the researcher has attempted to use a descriptive approach. It is a kind of library-based research that focuses on secondary data. Secondary data is made up of a variety of books, publications, scholarly articles, as well as court decisions.

  1. Importance of the Insolvency and Bankruptcy Code of 2016 to Creditor Protection.

    2. Bankruptcy and Insolvency falls under the the 9th entry of the concurrent list of our constitution giving power to both state and centre to legislate on this regard. Following this several acts such as the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (RDDBFI), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were enacted for debt recovery from companies through specialised processes. Whereas other legislations such as Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 were enacted to deal with individual debts through courts. The multiplicity of legislations led to inefficiency, confusion and delay in creditor protection process.

    The major problems for the existing mechanism for solving insolvency and bankruptcy issues were a multiplicity of laws, overlapping jurisdictions and limited links between the existing statutes 2

    With an increasing levels of Non Performing Assets (NPA’s) due to various factors the prior acts were lacking teeth to recover or regulate such assets. Therefore the Government through the Insolvency and Bankruptcy Code of 2016 intended to aid the development of a healthy the Indian Corporate Economy particularly in reference to Debt Resolution sector.

    This is by far the most important single piece of legislation that was lacking from India's statute books, considering the very large number of non-performing assets (NPAs) that the Indian banking system is currently saddled with 3

    The primary purpose of the code was to

    • Centralise and thereby provide a well structured single resort legislation that addresses and provides debt resolution mechanisms in a time bound manner in place of the pre-existing Multi layered complex legislations.
    • Thereby to improve the trust deficit among creditors which in turn improve the credit circulation in the economy.

    Therefore, making the code primary to creditor protection in India.

  2. Framework of the Insolvency Bankruptcy Code
    3.

    The Code ensures creditor protection by shifting its position from debtor in possession to creditor in possession. The code centralises the legislations by firstly by allowing all types of creditors – secured, unsecured, and operational creditors to file petition with the appropriate Adjudicating Authority for initiating debt resolution process on any kind of Debtors such as corporates, firms or individuals.

    Similarly, framework ensures creditor protection while keeping with credit circulation by, either rescuing failed businesses (so that the creditors are eventually paid from future incomes) or by releasing resources from failed businesses back into the economy, by realising the assets of the business to pay the creditors.4 The code does this through 4 pillars –

    1. Regulator/Insolvency and Bankruptcy Board of India (IBBI) – regulates all affairs related to insolvency and bankruptcy like making model-laws for insolvency agencies, setting IP eligibility requirements etc.
    2. Adjudicator – National Company Law Tribunal(NCLT), National Company Law Appellate Tribunal(NCLAT), Debt Recovery Tribunal (DRT) – adjudicates all the issues under Insolvency and bankruptcy code within its territorial jurisdiction.
    3. Information Utilities (IU) – works to level out the information imbalance between the parties involved in the debt resolution process (such as CIRP) and ensures transparency. Access to this resources are provided to the insolvency professionals, secured and unsecured creditors and various stakeholders in the insolvency resolution process, as to enable the entire unit of stakeholders to make decisions on the basis of valid and true information.
    4. Insolvency Professionals (IP) –

      5. The insolvency professional takes care of the administrative functions of the corporate debtor once the adjudicatory authority admits the application for the Corporate Insolvency Resolution Process (CIRP); that is, it manages the affairs of the company after the promoters and the management handover control to the committee of creditors 5

      Thus they can be understood as ground level soldiers who take over the corporate debtors institution to access the debt, financial position of the debtor, creditors, asset value etc and comes up with resolution plans within 180 days (which can be extended to 270 days on exceptional cases). These plan ought to be executed by the Committee of Creditors (CoC).

  3. Corporate Insolvency Resolution Process - CIRP
    4.

    • On application by any Financial or Operational Creditor to the NCLT, the tribunal can accept or reject the application. But this acceptance or rejection ought to be done by appointing an insolvency professional within 14 days of the application.
    • On acceptance, an immediate moratorium or stay is levied on all the contractual and legal proceedings of the Corporate Debtor
    • The Insolvency Professional assembles all the financial creditors to form the Committee of Creditors(CoC). The consent is the CoC is mandated to execute the resolution plan. This committee decides on whether to liquidate or revive the debtor company.
    • A resolution plan is to be prepared by the IP within 180 days and is submitted to the adjudicator. This plan is to be reviewed by the CoC to decide which process is to be adopted.
    • On the CoC arriving at a decision the plan is executed accordingly and if the CoC couldn’t reach a decision the corporate debtor inevitably moves towards liquidation.

  4. Concerns 6
    5.
    • Discrimination between different classes of creditors

      • As mentioned above only the financial creditors are allowed by law to be a part of Committee of Creditors . This provision is counteractive and explicitly against the principles of natural justice as the CoC possesses the discretionary power in deciding the the resolution process of the debt in which a stakeholder such as operative creditors is not included. The reasoning behind the law seems to presume operational creditors to have minor stakes in comparison to the financial creditors and is presumed to be rigid in relation to restructuring and rehabilitation of the debt. Both of which might not be true in all the cases wherein leaving the operational creditors in a helpless situation.

      Though in exceptional cases such as in Bank of Baroda vs Binani cements theApex court had accommodated large scale operational creditors such as Binani cements into the CoC, this ought to be officially recognized under the legislation through an amendment and not be imposed as a judicial pronouncement to a claim.

    • Uncodified Excessive Discretionary power to the Committee of Creditors
      •

      The Committee of Creditors are provided extensive discretionary powers over deciding between the liquidation or revival of the concern. The law doesn’t even mandate the notification or publication of the reasoning behind the choice which might be counter efficient in some scenarios.

      In the absence of any specific guidelines with respect to the manner in which decision-making will take place, it is likely that the committee of creditors will assume considerable powers over the corporate debtor, which may not be in the public interest 9

CONCLUSION

Therefore, it can be clearly seen from the discussions above and the sources cited that insolvency and bankruptcy code is a milestone in building a healthy Indian corporate environment. But it being at a nascent stage is to interpret and amended to overcome its shortcomings.

1 Thakar, Mahesh and Jyptmala Thakar 2016. 'Insolvency and Bankruptcy Code, 2016'. Chartered Secretary 46 (9): 37–45

2 Narayanan, M.S. 1994a. 'Industrial Sickness: Review of BIFR's Role, 1994'. Economic and Political Weekly 29 (7): 362–376.Narayanan, M.S. 1994b. Industrial Sickness in India: The Role of BIFR. Delhi: Konark

3 Jain, Deepak 2017. 'The Insolvency and Bankruptcy Code, 2016 – An Analysis and Opportunities for Professionals under the Code'. Chartered Secretary 47 (3): 38–42

4 Gupta A, “Insolvency and Bankruptcy Code, 2016: A Paradigm Shift within Insolvency Laws in India” (The Copenhagen Journal of Asian Studies) accessed September 17, 2021

5 Eshawar, S. 2016, 'Information Utilities – Provider of Level Playing Field in Insolvency and Bankruptcy Process'. Chartered Secretary 46 (9): 71

6 Ibid

7 S.21 of Insolvency and Bankruptcy Code, 2016.

8 (2014)8SCC 319

9 Chaudhary, Vineet and Alka Kapoor 2016. 'Corporate Insolvency Resolution Process – Brief Analysis and Challenges'. Chartered Secretary 46 (9): 50–55