The Insolvency and Bankruptcy Code, 2016 (“IBC”) was promulgated with the objective of reorganization and insolvency resolution of corporate persons, partnership firms and individuals for maximization of value of assets of such entities. Since its inception, IBC has had a massive impact in considerably reducing the nonperforming assets (“NPAs”) in the Indian banking sector and improved the overall ease of doing business in the country
Prior to 2016, insolvency and restructuring were governed by a myriad of legislations including Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993.
A key factor in the IBC’s rapid jurisprudence has been the immense contribution of Justice Rohinton Fali Nariman. The first landmark judgment he pronounced on IBC was Innoventive Industries Ltd. vs ICICI Bank CA No. 8337 – 8338 of 2017 which held that no appeal could be maintained by the petitioner companies themselves considering that director was suspended management of the company. The complexities of IBC were further discussed in one of India’s largest insolvency resolution processes, that of Arcelor Mittal – Arcelor Mittal India Private Ltd. vs Satish Kumar Gupta & Ors.
Among the many aspects of IBC and to ensure that the Code is truly in consonance with the objective of creating an entrepreneur-friendly legal framework, the Indian judiciary constantly addressed issues of nature of the Committee of Creditors (CoC), limited the scope of interference of NCLTs and clarified the reposed faith in the CoC for the formulation of resolution plans.
Over the years, there have been honest attempts at fast-tacking CIRP under the Code, limiting the time for formulation of the resolution plan and taking stringent measures against non-implementation of approved resolution plans.
A key hindrance faced by the Code in its initial phase of development was the backdoor entry of promoters/directors in regaining control of the company as a resolution applicant. The legislature, by way of the 2018 Amendment Act, inserted Section 29A setting out a list of entities/individuals ineligible to become a resolution application. The amendment, while notified on 18 January 2017 was made effective retrospectively from the date of the Ordinance dated 23 November 2017.
What came next were worrisome promoters/directors’ clothes as they were no longer eligible to pursue an attempt to regain control of their companies under CIRP. Consequently, the validity of the Code was questioned in Swiss Ribbons Pvt. Ltd. & Anr. vs Union of India & Ors. Writ Petition No. 99 of 2018 challenged the constitutional validity of inter alia the retrospective effect of Section 29A on the grounds that the vested rights of erstwhile promoters were impaired. The Supreme Court, while applying harmonious construction to the Section with the Objective of the Act, upheld the validity of Section 29A, stating that the resolution procedure protects and prioritizes the interests of the corporate debtor and is not merely a medium for the recoveries of the creditors.
The judgment while upholding ineligibility of defaulters under Section 29A ensured that “the defaulter’s paradise is lost and, in its place, the economy’s rightful position has been regained.
The Code has also seen its modifications during the pandemic with the Insolvency and Bankruptcy (Amendment) Ordinance 2020. The Ordinance indeed ensured that medium and small size enterprises drastically hit by the economic hardships of the pandemic did not find themselves benign drawn into a CIRP proceeding.
The Ordinance amended the Code by (a) including Section 10A that forbids a corporate debtor from filing an application for the initiation of the corporate insolvency resolution process (“CIRP”) for any default arising after March 25, 2020, for six months or for such additional period, not to exceed one year from March 25,2020, as may be informed in this behalf (“Specified Period”) and (b) prohibited corporate debtor’s director or partner from being sued for wrongful trading in connection with a default within this Specified Period.
The Code has been a game-changer in ensuring faster insolvency proceedings and an important aspect of it has been the constitution of a strong independent regulator – The Insolvency and Bankruptcy Board of India (“IBBI”). Over the years, the board ensured stringent measures are taken to establish roles and responsibilities of Insolvency Professionals (“IP”), Information Professional Utilities (“IPU”), Liquidators and Liquidation Regulation to streamline the proceedings under the Code.
In April 2022, the Board amended the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. As per the amendment, the commencement of liquidation for the corporate persons (other than an Indian company) is to be calculated from the date of receipt of approval from creditors.
The Central Government by way of the IBC (Second Amendment) Ordinance, 2018 introduced Section 240A to the IBC which now permits promoters of MSMEs also to submit a resolution plan and to ensure recovery of their enterprises.
This has been an interesting take away of the Code as the amendments seeks to aid MSMEs in taking control over their enterprises, thereby safeguarding their interests. One of the crucial contributors to the Indian economy has been the Micro, Small and Medium Enterprises (“MSME”). In the year 2018-19, the MSME sector accounted for 30.27 % of the overall share of GDP.1 Recognizing this growing importance of safeguarding the MSME, the amendment has been seen as a welcome step. The Central Government had further also incorporated provision in the Code that allowed it to limit application of certain provisions of the Code on the MSME sector.
Another aspect to be observed is that NCLT envisaged under the IBC cannot be used as an alternative remedy for recovery of debts by enterprises. In Anshul Vashishtha vs. Jauhind Steel Traders and Anr (Company Appeal (AT) Insolvency No.656 of 2020), the NCLAT has categorically stated that IBC is not intended to be substitute to a recovery forum. Therefore, whenever a real dispute exists, the IBC provisions cannot be invoked. Section 65 of IBC also provides for penalties for fraudulent or malicious initiation of proceedings. Therefore, a key aspect in initiating CIRP proceedings by MSME against a corporate debtor is assessing the validity of such applications under the act. Such complexities can further delay the resolution process.
The next phase of IBC seeks to create a framework for cross-border insolvency. The government in the union budget of 2022 seeks to replicate the model of United Nations Commission of International Trade Law Model Law on Cross-Border Insolvency. The adoption of model law would aim to enable participation of foreign representatives as well as grant of relief to such foreign parties.
The proposed amendments also aim at reducing the time taken to complete CIRP by mandating banks and financial institutions to rely on records with the information utility registered with IBBI. Additionally, under the proposed amendments, NCLTs would have a fixed time period of thirty (30) days to approve or reject resolution plans. The government also seeks to establish Centre for Processing Accelerated Corporate Exit to facilitate quick voluntary liquidation.
The Code has indeed come a long way in creating an environment that facilitates rapid business and eases trade within the country. A key contributor to this has been the constant role played by the NCLTs and NCLAT in interpreting the Code to ensure the maximum effective and practical approach to the constant trials and tribulations of the corporate legal framework in the country.
The next phase of the Code seems promising and, if implemented with its true spirit, would indeed be an immense contributor to making India a place of choice for trade and business. But, until then, there is no denying that the piece of legislation will continue to be of importance for the young Indian entrepreneurial market in the years to come.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
