In the recent (landmark) judgment delivered by NCLT Mumbai in the case of Harsh Pinge Vs Hindus...
The insolvency and bankruptcy law is essential to an economy. These laws help in reorganization of the assorted assets of the businesses and also dissolution of these assets. Thus bankruptcy laws form a vital cog in the wheel. However, there are specific challenges in the enforcement of the Insolvency and Bankruptcy Code, 2016, which have been discussed in this article. But first, let’s understand the bankruptcy law.
Bankruptcy law has been there in India for the last 25 years or so. The bankruptcy law started unfolding from the year 1993, but the insolvency and bankruptcy law procedure was established in 1947 in the common law tradition. When India became independent, the development in the insolvency and bankruptcy laws was made on the dispute of the non-public sector.
Earlier various Acts such as the Company’s Act of 1956, the Scrutinization and Reconstruction of Insolvency and Enforcement of Security Interest Act 2002, etc., governed the Companies Insolvency Act. After that, the Insolvency and Bankruptcy Code was introduced in 2016 to put insolvency laws in one frame.
Insolvency refers to a state where the company is not able to raise enough funds to pay off their debts and payments that are incurred by the company in due course of time.
Bankruptcy happens when the court determines insolvency and recognises insolvency by passing orders for its resolution. When the court is certain of the fact that the company is insolvent, it passes the order for the dissolution of proceeds among the creditors for the payment of the dues of the company. One of the significant impediments concerning bankruptcy is that the average time taken for resolution of the bankruptcy cases in India is 4.3 years which is way higher than the time taken in countries like the US and UK.
The Bankruptcy Legislative Reforms Committee under the leadership of TK Viswanathan projected the IBC. The aim of the IBC was to consolidate and amend laws concerning the reorganization and economic resolution of companies and people in a time bound manner for maximization of importance of assets.
In the year 2016, the insolvency law was enacted and notified within the official gazette of India with a view to resolve the insolvency cases in a short period which is undertaken by the insolvency professionals. The separation of business and judicial aspects was its main aim to rectify the mistakes committed by past legislation.
As per the IBC, the adjudicating bodies are the NCLT. Considering that the IBC is the umbrella legislation which entails other insolvency law, it has reduced the significance of previous legislations by covering insolvency, bankruptcy and sick companies’ restructuring.
Insolvency and Bankruptcy Code was introduced in 2016 as a significant legal reform in the Indian economy. It was introduced considering India lacked laws that contributed to the resolution of distressed assets and debt laden corporations. Therefore the court brought all insolvency laws under the ambit of one law- IBC 2016.
This legislation aimed to widen the flexibility of insolvency laws in India. One of the features of this code is that it allows creditors to calculate the feasibility of business and decide the inspiration of the business and then call for the liquidation process or winding down of the business. The code aimed to form a new institutional structure with a regulator, financial condition experts, data utilities and assessment mechanisms that can enhance the formal financial condition resolution method and liquidation.
The Institutional Framework of IBC, 2016, has 4 pillars.
The implementation and operation of the board come under the body Insolvency and Bankruptcy Board of Republic of India. It is created by the IBC as a restrictive yet superior body. The matters with respect to IBC are handled by this board and control, not just the profession but also the processes. The board plays a pivotal role for implying the code which amends laws of conversion of insolvent companies.
The proceedings concerning this code under insolvency law come under the NCLT, which is the adjudicating authority. This authority functions as a forum that undertakes the resolution of the insolvency cases. An appeal under the NCLT can be quashed, or a stay can be initiated against that order. NCLAT is the place where the appeals can be made under NCLT. The appeal against the order of NCLAT can be made in the Supreme Court, which is the highest court of authority.
The IBC provides for a group of professionals called as the insolvency professional, who oversees various aspects of the insolvency resolution. An additional body of corporate called the Insolvency Professional Agencies is incorporated to regulate the work of the Insolvency Professionals. Those practitioners that practice individually are required to be enrolled with the IPAs’ sceptre to control and develop the role of the insolvency professionals.
With the information utilities under the IBC, 2016, gathering and passing the information from creditors to corporate was made possible. Currently, the financial data of creditors can be obtained from the income tax department only.
The information utilities under the IBC, 2016, is aimed at fulfilling the gap of gathering and passing the information from creditors to corporate. Only the Insolvency and Bankruptcy Board of Republic of India has the authority to license Information Utilities and can exercise the power to control them and has the authority to provide access to the information.
Since the enactment of the IBC 2016, there have been numerous changes in the code. The code has been amended 5 times in 5 years period, and many landmark cases have decoded the code, such as the Insolvency and Bankruptcy Code (Second Amendment) Act 2020.
The regulations regulating the code has been amended from time to time. The courts of India have witnessed landmark cases decoding this code bringing up the question of its validity with respect to its grey areas. The execution of the IBC has been troublesome as there have been a lot of changes made to the regulative structure under the IBC. The amendments have been made to facilitate the code.
You are advised to go through the recent and amended variations of the Act, rules and laws to understand the IBC that are indicated on the Insolvency and Bankruptcy Board of India portal, along with the judicial explanation of the code. The insolvency law in India is still evolving, and the regular amendments and interpretation of this law may make it difficult for people to understand it entirely.
The Company Insolvency Resolution Process under IBC extends time bound mechanism, which helps in the recovery of debts for creditors. If a company fails to reimburse the overdue to the creditors, then the creditors can take the matter to the Company Insolvency Resolution Process. A resolution shall be commenced from the Company Insolvency Resolution Process against the company for debt recovery of the creditors.
Here time factor is critical as Section 12 states that the process should be over within the interval of 180 days from the date of admission of such requisition to the CIRP. The time period for which the resolution may be extended depends upon the discretion of the adjudicating authority, but the creditors who made a request for the resolution to the board must have a vote of 66% of the option shared. Even though the resolution has been passed by the CIRP, the period cannot go beyond 90 days.
Along with the extensions provided, the resolution process should be finalised in 130 days anyhow. However, there may be instances where the proceedings may take more time due to certain circumstances, in that case, an extension of 90 days can be given as specified in the code. The National Company Law Tribunal benches allotted to the cases is slightly unbalanced, and the deadline to complete the resolution in 330 days is not easy. It creates a lot of hassle in such instances. Big corporations have many creditors, and they face difficulty.
As per a report presented in the Parliament, there have been more than 10000 cases that remain unsolved in the tribunal, that means before national Company Law Tribunal till 2019 September. Lack of adequate benches of NCLT and the ever increasing number of cases before IBC has killed the swiftness of the process. This can prove to be highly unwanted for India and also erodes the very purpose of fast resolution process.
There is a dearth of resolution professionals. There are 897 recorded insolvency professionals with the board. If a person wishes to become an insolvency expert, he should be an advocate in practice for 15 years or a Company Secretary or a Chartered Accountant, or a Cost Accountant. Further, he should also clear the exam conducted by the IBBI in order for the person to become a diligent insolvency professional, and his credibility cannot be questioned before the board.
In order to know the insolvency and bankruptcy law, we need to understand the judicial interpretations of the court. The judicial interpretation is mainly done by the Supreme Court of India, the High Court and also the National Company Law Tribunal, and it becomes mandatory to be read to know the abstract portions of the code.
As per Section 4 of the Insolvency and Bankruptcy Amendment Act 2019, it is necessary that the Company Insolvency Resolution Process is finished within 330 days from the beginning of the resolution mechanism.
The Hon’ble Supreme Court of India in the case of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta and Others related to the committee of creditors annulled word mandatorily in the code by saying that the time of proceedings hampers the interest of the litigator indirectly.
The Court stated that the time period of the proceeding by the NCLT and NCLAT must be kept in mind, and an extension can be given based on the facts of the case, which can vary from case to case.
In the case of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta and Others, the Supreme Court reinforced the status of the committee of creditors. The court believed that the committee of creditors is a higher authority that decides if a company should go through rehabilitation through resolution method.
The Insolvency and Bankruptcy Code became the lead legislation that brought about the introduction of Insolvency and Bankruptcy law in India. There are certain complexities that are attached to this law therefore, you should go through amendments and judicial pronouncements that will enable you to comprehend the law better.
Read our article:Voluntary Liquidation of a Company under IBC