A STUDY OF INSOLVENCY AND BANKRUPTCY CODE AND ITS IMPACT ON CORPORATES OF INDIA
Pankaj Kumar
Research Scholar, Devi AhilyaVishyavidhliya, Indore Dr. Kamlesh Bhandari
Professor, PNB Gujrati College, Indore
Abstract - Globally, every year businesses being insolvent and closure results in the loss of billions of dollars in company net worth, employment, and capital getting shelved every year. Investors and financial institutions have a greater cost of capital and a higher risk perception due to ineffective debt collection and insufficient procedures for the business exit. The situation gets even worse due to Ineffective debt recovery mechanisms around the globe for the business to exit from the debt trap. This creates a higher cost of capital and a heightened perception of risk among investors and financial institutions.Many viable enterprises in financial difficulties are unable to continue as going concerns because of legal and regulatory frameworks that prohibit corporate restructuring. Following the recent global financial crisis, governments all over the world have been focusing more on improving their credit environments, including enhancing their commercial insolvency regimes. In this regard, various Indian laws were enforced in the recent past but they all failed due to certain limitations. A new law Insolvency and Bankruptcy Code 2016 came into existence which replace all the earlier laws and was found to be quite successful. This paper tries to analyze the historical development of the insolvency codes and brief development towards the Indian IBC 2016. The outcome of the study suggests the reasons for the success of this law as against any earlier existing laws in the country.
Keywords: Bankruptcy & Insolvency Code, OECD, Indian Bankruptcy Code 2016.
1 INTRODUCTION
Bankruptcy laws are integral to any capitalist system. They form the basis for an orderly dissolution or reorganization of various forms of businesses from proprietorship, partnership to limited liability companies. They serve as a foundation for the orderly dissolution or restructuring of a number of company structures, notably sole proprietorships, partnerships, and limited liability companies. As such bankruptcy laws make it easier to re-allocate capital that has been blocked up in a failed enterprise. There are apparent distributional effects in any bankruptcy procedure since bankruptcy laws must reconcile the competing interests of different stakeholders, including banks, suppliers, employees, operational creditors, bondholders, and the government. As a result, bankruptcy laws are case sensative and the rules are subject to political and economic pressures.. An accurate history of the evolution of bankruptcy laws over time could not be traced. However, Hishikar et al. (2019) identified in their research work about the laws on debt recovery or bankruptcy had a history of 2000 years of evolution in India.
The earliest insolvency legislation was traced in sections 23 & 24 of the „Government of India Act, 1800‟, which conversed insolvency jurisdiction to be settled through the Supreme Court. In 1828 Statute 9 was considered as the beginning of the insolvency legislation in India. This Act provisioned the relief for an insolvent (debtors) was provided under the Presidency-estate. A step forward the new Insolvency law came into existence named as the „Indian Insolvency Act, 1848‟. Another law came into existence in 1909 as
„Presidency-towns Insolvency Act, 1909‟. But, all of these acts were commissioned and governed under British rule. By the time the British left in 1947, the procedures for insolvency and bankruptcy were firmly beached in common law traditions. at that time India followed the socialist pattern andall production and distribution were owned by the State. As a planned economy excludes most trading risks, insolvency would not be considered a legal problem the concept of bankruptcy was generally ignored. As a result, personal bankruptcy laws remained substantially unchanged.The two major laws came into existence during this period as the Industrial Development and Regulation Act (IDRA), 1951, and the Indian Companies Act, 1956. But, under both the laws, all concerns related to insolvency and bankruptcy were assigned to the high courts. Das, et al. (2020) identified
the huge delays in the settlement over it and identified the need for a new suitable mechanism.
During the post reforms period,theirCommercial banks and firms need well- functioning legal, regulatory, and institutional frameworks to address non-performing loans and facilitate business. The government formed the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) to rapidity the recovery process. Under this Act, Debts Recovery Tribunals (DRTs) were also formed however, they were burdened with a large number of pending cases the government introduced another law named the
„Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act‟, 2002 (SARFAESI Act, 2002). The SARFAESI Act was provided for the creation of asset reconstruction companies in India. RBI in 2001 introduced the Corporate Debt Restructuring (CDR) mechanism for the restructuring of debt without the essentials for an asset quality if the restructuring plan met the required conditions. The Corporate Debt Restructuring (CDR) mechanism worked well initially but in further years, it was less effective for their effective resolution. Hence, in May 2013, the RBI withdrew the act effective from 1 April 2015.
Again, there a need arises for the development of a systematic approach to debt resolution and insolvency to strengthen the investors‟ confidence which is helpful towards the economic growth of not only a corporate identity but also towards the development of the nations. In 2014, the Bankruptcy Legislative Reforms Committee, led by T. K.
Viswanathan, proposed the Insolvency and Bankruptcy Code (IBC). This code come into existence in 2017 constituted as the Insolvency and Bankruptcy Code (Act) 2016.
Chart: Development of the Debt Settlement mechanism.
Source: Mishra (2019), IJEDR Volume 7, Issue 3, ISSN: 2321-9939 1.1 The Rationale of the Study
Despite the existence of the various pre-existing laws but they all failed to fulfill the requirements towards the settlement of the debts. The purpose for the development of this paper is to examine the main provisions of The Insolvency and Bankruptcy Code, 2016, and to determine the objectives and features so that how it becomes the most successful act amongst all the laws related towards debt recovery and its settlement. This paper highlights the perspectives of several stakeholders, various challenges faced, and the numerous advantages of implementing the reform in India.
1.2 Objective of the Study
The study has been undertaken towards the following broad objective:
To study the extricate features and regulatory framework of the Insolvency and Bankruptcy Code, 2016.
2 METHODOLOGY
The existing research is a part of Doctrinal Research including a review of the earlier insolvency and bankruptcy laws that existed in India before the initiation of the Insolvency and Bankruptcy Code (IBC) 2016. The present study is Empirical. The research design is an exploratory design and a descriptive approach is used to the existing study. The data have
been collected from various sources like governmentgazettes, books, magazinesarticles, journals and official websites.
2.1 Objectives of the Insolvency and Bankruptcy Code 2016
The sole purpose of the code is to provide a platform to reorganise and resolve insolvency in a timely manner in order to maximise the value of their assets, promote entrepreneurship, increase credit availability, and maintain a balance of interests among various stakeholders.(source IBC Act, 2016).
As per the preamble to the Insolvency Code, 2016 the characterization of the Act is as under:
a. Consolidation of the existing laws and amend those laws related to reorganization and insolvency resolution of corporate entities, partnership firms and individuals,
b. In a time, bound manner (in a given time frame), c. Towards the maximizationof assets value of persons d. To promote entrepreneurship and
e. Provides the availability of credit,
f. Finally, to balance the interests of all the stakeholders.
The objectives identified under IBC Code 2016 are as follows:
The first and foremost objective of the code is „resolution‟.
The second objective is reorganization,
The third objective is the maximization of the value of assets of the firm
The fourth objective is promoting entrepreneurship, availability of credit and
The fifth objective is balancing the interests of stakeholders.
2.2 Key Features of the IBC Code 2016:
There are the following key features of the code
Comprehensive Law: The insolvency code is a comprehensive law that governs and controls the process of insolvency and bankruptcy for all types of entities, including corporates, partnerships firms, limited liability companies (LLP), and body individuals.
Single law: The code has evolved from many laws addressing debt recovery, insolvency, and liquidation to a single platform for all debt recovery and insolvency relief.
Low time resolution: The code has a low time resolution and establishes defined time frames for the company and individual insolvency resolution. The process must be completed within a time frame of 180 days. If required a 90-day extension is permissible. A provision for fast-track resolution of corporate insolvency within 90 days is also included for a faster process. Failing to do the assets of the borrowers can be sold out to repay the debts.
Single window clearance Policy: The law has been drafted to provide single window clearance to the applicants, though it can receive the appropriate relief from the same authority, as opposed to the previous position of law, in which if the company is unable to revive, the procedure for winding up and liquidation must be initiated under separate law and governed by separate authorities.
Process clarity: The code establishes a clear procedure for dealing with insolvency and bankruptcy. The code's framework is quite detailed, and the entire insolvency resolution process must be completed within 180 days.
According to the code, there's only asingle chain of authority. It even prohibits civil courts from interfering with an application pending before the adjudicating authority, lowering the number of lawsuits. The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for people, while the National Company Law Tribunal (NCLT) would adjudicate insolvency resolution for firms.
Prioritization of workmen's and employees' interests: The code also safeguards the interests of workers and employees. During liquidation, it eliminates dues payable to workers under the provident fund, pension fund, and gratuity fund from the debtor's assets.
New Regulatory Body: This code establishes a new regulatory body, the "Insolvency and Bankruptcy Board of India," to regulate professionals, agencies, and information utilities involved in the resolution of insolvencies of corporations, partnership organisations, and individuals. The board has already been formed and is in the process of becoming operational.
Encourage entrepreneurship: The code encourages entrepreneurship in India because of its revitalization system and quick settlement procedure.
3 INSOLVENCY AND BANKRUPTCY REGULATORY FRAMEWORK, 2016
The Code distinguishes between the administrative and judicial aspects of insolvency and bankruptcy proceedings.The Code is thus beneficial legislation that seeks to revive the distressed company and mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters and/or those who are in management. The Code's framework safeguards creditors' interests in the liquidation process by prioritising payments to secured creditors over payments to crown debts. However, it is the majority of creditors' to choose, through negotiations with the prospective resolution applicant, how and in what way the corporate resolution process will take place, including the distribution of funds, during the resolution process..1
The Code has been divided into five parts comprising 255 sections and 11 schedules (as shown in figure 2).
Figure 2 IBC 2016 Structure
Source: Srijan Anant and Aayushi Mishra, “A Study of Insolvency and Bankruptcy Code and Its Impact on Macro Environment of India”, International Journal of Engineering Development and Research, Volume 7, Issue 3 | ISSN: 2321-9939, pp.28-35.
The bankruptcy resolution procedure gives lenders a collective mechanism to deal with the corporate debtor's overall distressed assets. A brief description of the “The Corporate Insolvency Resolution Process “are as follows:
i. The corporate insolvency resolution process may be initiated by applying NCLT:
An application to NCLT may be filled by the followings:
By a financial creditor, either by itself or jointly with another financial creditor,
An operational creditor means other than a financial creditor or a person who owes an operational debt.
By the corporate debtor himself, that is by the company itself.
1 Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta &Ors. [Civil Appeal No. 8766- 67/2019 and other petitions].
ii. The occurrence of Default:
Default refers to the non-payment of a debt when the entire or a portion of an installment has become due and the debtor has failed to repay it. The debtor's minimum default amount is Rs 1 lakh (IBBI 2018).
iii. Stepsafter Admission of Application to NCLT:
3.1 Declaration a moratorium period-
The grant of a moratorium, during which creditor action is stopped while the bankruptcy court considers the potential of rehabilitation, is one of the most fundamental components of bankruptcy law. All types of suits and proceeding against corporate debtors or any action to recover the security interest is prohibited after filing the claim.
As the Companies Act, 2013's chapter on Sick Companies makes no provision for an automatic moratorium. The grant of a moratorium, during which creditor action is halted while the bankruptcy court considers the potential of rehabilitation, is one of the most fundamental components of bankruptcy law, then it authorizes the NCLT to grant a moratorium of up to 120 days.
The Indian law serves almost like an automatic moratorium as underinternational bankruptcy laws. The moratorium will remain in effect until the settlement process is to becompleted in 80 days. However, if the creditors' committee decides to approve the entity's liquidation in the meanwhile, the moratorium will be lifted. The moratorium before liquidation is explicitly applicable to the enforcement of security interests under the SARFAESI Act. A moratorium also applies if the adjudicating body has issued a liquidation order.
3.2 Appointment of an InterimInsolvency Professional (IP)-
Interim Insolvency Professional (IP), takes over the management and powers of the corporate debtor's board of directors, collects all information relating to the corporate debtor's assets, finances, and operations to determine its financial position, and compiles all creditors' claims and forms a Committee of Creditors ("COC"). Following the specified procedure, the Committee of Creditors either resolves to nominate the interim IP as the Insolvency Professional or replaces the interim IP by electing a new Insolvency Professional and the final appointment of Insolvency Professional will be as the process' liquidator.
The Insolvency Professional will subsequently take over the corporate debtor's management and assets and will be able to execute the broad powers allowed to it under the Code. It will generate an information memorandum for the corporate debtor, which the resolution applicant will use to draft a resolution plan.
The resolution proposal will be scrutinizedby Insolvency Professionalbefore being presented to the Committee of Creditors. The plan approved by the Committee of Creditors will be submitted to the adjudicating authority for approval, and it is only when the adjudicating authority gives it a final nod that the resolution plan becomes binding on all stakeholders and the corporate debtor's insolvency resolution process begins. If the plan is rejected by the adjudicating authority, the corporate debtor's liquidation process would begin.
Timeline for the process: As per figure 3, Resolution Professional (RPs) is appointed, after the adjudicating body accepts an applicationDuring this time, a Resolution Professional (RP) is assigned to oversee the entire corporate bankruptcy resolution process as well as manage the corporate debtor.Any person who presents a resolution plan to the resolution professional is referred to as a resolution applicant, and after receiving the resolution plan, the Resolution Professional is presented to the creditors' committee for approval.
Following the passage of a resolution, the creditors' committee must vote on the restructuring process, which could include a revised repayment plan for the company or the liquidation of the company's assets. The debtor's assets will be liquidated to settle the debt if no decision is made during the resolution procedure. The resolution plan will be given to NCLT for final approval, and if approved, it will be implemented.
Figure 3 Timeline for the process of IBC 2016 3.3 Outcomes of the IBC Code 2016
The impact of the IBC has been increased by the notification of provisions linked to the beginning of insolvency of personal guarantors to corporate debtors.
The other challenges to the effective resolution of companies under IBC include: (a) the resolution applicant's breach of the resolution plan after NCLT approval, (b) the lack of cross-border insolvency regulations and rules, (c) the lack of group insolvency regulations and rules, (d) post-closure litigation by operational creditors such as tax authorities or unsuccessful bidders, and (e) conflicting NCLT judgments from different benches.
In spite, all the various amendments were notified as
Amendments to Insolvency Code were made vide „Insolvency and Bankruptcy (Amendment) Act, 2020‟w.r.e.f. 28-12-2019.
The Insolvency and Bankruptcy Code (2ndAmendment) Act, 2020.
4 CONCLUSION
The study begins with an objective to identify the distinct laws applicable towards the settlement of bankruptcy and insolvency. The records were traced around 2000 years but, real development came only in British rule. Since independence, the few laws like Indian Companies Act, 1956, Sock Industrial Companies Act, 1985, SRFAESI Act, 2002 and the new Indian Companies Act 2013 had provisions related to the settlement of the Insolvency proceedings. In spite, they all failed to fulfilled to requirements towards the faster settlement and to provide equal judgment towards the creditors and debtors. The study revealed the huge success of „The Insolvency and Bankruptcy Code (2016)‟ and sill more to come shortly. A widened study is required towards it.
BIBLIOGRAPHY
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