IBC, 2016 vs Insolvency Law of Transvaal, South Africa of 1906

IBC vs Insolvency law of South Africa of 1906

I had adjourned writing this treasure from history for want of time. Recollected to share. The satyagraha in South Africa (Transvaal) had reached its 2nd phase. The 2nd phase led to burning of 2000 certificates of residency of Indians in Johannesburg. Seth Kachhalia a famous trader was to take over as Chairman of that movement from one Yusuf Mian. Most of his Creditors were English and Europeans. General Smuts instigated them to seek their dues back from Mr. Kachhalia at once. The Creditors followed suit. Gandhi tried to exemplify the financial solvency of Mr. Kachhalia by showing his Balance Sheet. But Creditors were adamant for immediate cash payments. Immediate cash payments were not possible without recovery of Debtors and selling of stock. Mr. Kachhalia offered to secure stock & debtors to Creditors which were sufficient to pay the entire dues of Creditors. Creditors remained unflinching on pressure from General Smuts. The matter went to insolvency court, Mr. Kachhalia was declared insolvent, liquidation proceeding commenced against Mr. Kachhalia, however, the entire dues of the Creditors was paid by realising cash from sell of stock and assets and Debtors of Mr. Kachhalia.

Now, come to era of Companies Act and IBC. Under Companies Act default in payment triggered the winding up process leading to liquidation. That was not for revival of the defaulting entity.

Under, IBC default triggers resolution of insolvency and not winding up process leading to liquidation inasmuch as under IBC the resolution process can be initiated by any Creditor or the Corporate Debtor including Workmen on default and not on liabilities exceeding the assets i.e., negative net worth criterion under SICA, 1985 which was available only to sick companies.

Now, come to the sin of IBC & Courts by reason of lack of clarity and understanding on jurisdiction and incompetent members of Tribunals and also the Supreme Court. The default triggers resolution of insolvency which leads to issue of moratorium which in most cases are leading to demise of companies than its revival in contrast to object of IBC inasmuch there is conglomeration of all claims of Creditors without any inquiry into the capacity of the company to pay to all its creditors by sale of stock, recovery of Debtors and sale of surplus assets of the company. There is no direction for recovery of Debtors and sale of stock nor the CoC takes any initiative in this regard with RP looking only for his unjust enrichment by sale of stock, assets, short term borrowings and seeking CIRP expenses from Creditors.

The whole process is a reverse pyramid of the object of law which has become a menace by the result of connivance of RPs and members of tribunals grossly prejudicial to the health of economy!