IBC

PART - A

I.            Statement of Objectives

The Insolvency and Bankruptcy Code, 2016 received Presidential assent on May 28, 2016, however, only certain provisions of the Code only on November – December 2016.

A brief Statement of objectives:

“There is no single law in India that deals with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. These statutes provide for creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is handled by the High Courts. Individual bankruptcy and insolvency is dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is dealt with by the Courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective and results in undue delays in resolution, therefore, the proposed legislation. 2. The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development. 3. The Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Code also seeks to provide for establishment of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the Board is established, the Central Government shall exercise all powers of the Board or designate any financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. Information Utilities would collect, collate, authenticate and disseminate financial information to facilitate such proceedings. The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India for the purposes specified in the Code. 4. The Code seeks to provide for amendments in the Indian Partnership Act, 1932, the Central Excise Act, 1944, Customs Act, 1962, Income-Tax Act, 1961, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Finance Act, 1994, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Payment and Settlement Systems Act, 2007, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013. 5. The Code seeks to achieve the above objectives.”

II.    Brief Introduction

1.        Corporate sickness is not unique to India; it is a global phenomenon existing in many developed and developing countries. Most important is that great amount of funds of Indian financial institutions and banks have been tied up in defaulting accounts and one estimate was that it would grow annually at over 10%, doubling every seven years. In United Kingdom, it was estimated that an average of over 10,000 units fail each year. One in every five listed firms turned sick. During 1967-1976, one out of four companies listed on the U.S stock exchanges turned sick. The incidence of industrial sickness in India is alarming, as the total number of sick units in India was as high as 1,71,376 on 31.3.2003.

2.        The manpower involved in these sick units was as high as 24,73,229 on 31.12.2004, this number being higher than total industrial workforce in various developed countries, namely, Austria, Denmark, Australia, Switzerland, Sweden and New Zealand and in one underdeveloped country, namely, Sri Lanka.

3.        There was an imminent need for a complete over haul.

Existing Mechanisms

1.          Companies Act, 1956

2.          Companies Act, 2013

3.          The Recovery of Debt due to Banks and Financial Institutions Act, 1993

4.          SARFAESI Act, 2002

5.          SICA

6.          The Presidency Towns Insolvency Act, 1909

7.          The Provincial Insolvency Act, 1920

8.          CDR/ SDR/ S4A

9.          ARC

4.        Enactment of the Code

The Insolvency and Bankruptcy Code, 2016 (for the sake of brevity, the Code) is enacted to groom the laws relating to reorganizing financial debts and recognizing the resolution of the manifestation of bad debts of corporate persons, including companies, individuals, partnerships, etc.

Its salient features include:

? Maximization of value for assets of the debtors

? Interest of shareholders

? Establishment of the Insolvency and Bankruptcy Board of India and other agencies

? Regulation of debts starting from one lakh rupees

? Envisages fast track resolution

The crux of reform in the area of corporate distress, as reflected in the RDDB Act and the SARFAESI Act has been on lubricating the speedy recovery by Banks, Financial Institutions (FI) and other classes if secured Creditors. The major feature being the speedy mechanism set by the Legislature, by stipulating time bound processes in every stage of the resolution.

5.        The Code finally gives way to a stringent priority of claims also:

The Code stipulates the following resolution mechanism:

a)         Section 7 / 8 & 9 / 10 : Filing of the claim (within its limitation) with the incorporated National Company Law Tribunal (NCLT) of competent jurisdiction, along with all its requisites, including forms and information available with the Information Utility (IU).

b)         Following the principles of Natural Justice, the procedure is followed before the NCLT, thereafter under section 7 (4) of the Code, orders are passed for the appointment of the Interim Resolution professional (IRP) for the ‘interim’ management of the ‘debtor’.

c)          The shield of ‘Moratorium’ is imposed upon the debtor entity under section 14 of the Code, wherein, pending proceedings against the said debtor are prohibited from its continuance.

d)         The IRP is put through a vote for his/ her continuance as one by the creditors. The IRP transforms into the Resolution Professional (RP) for the Corporate Insolvency Resolution process, the CIRP.

e)          The Code provides for a period of 180 days under section 12 of the Code, with a further extension of 90 days after taking in the resolution of 75% of the creditors, for effecting a resolution of the debtor. Please note, the debtor remains as a going concern and is the prime responsibility of the IRP to maintain so.

f)           However, the RP maybe replaced at any time, per the requisite resolution by the Committee of Creditors (CoC) under section 27 of the Code.

g)         If the resolution plan fails or fails to bring up one, the debtor entity is put under liquidation, now, again under the management of the RP, who may/ may not continue as one, depending upon the CoC.

As per the Halsbury’s Laws of England, the bankruptcy proceedings have been termed to be the proceeding wherein the debtor obtains protection from suits by the persons to whom he has incurred debts or liabilities, subject to certain exceptions. Although, the same is longer a crime, it once involved a change in the status and would carry quasi-penal consequences.

Diagram representation with the corresponding days elapsed

6.     Resolution under the Code

The Code was most recently passed in both the Rajya Sabha and the Lok Sabha. This Bill was first introduced in December, 2015 with a purpose to create a unified framework for resolving insolvency and bankruptcy in India.

According to the World Bank report, the average time to resolve insolvency is 3-4 years in India, compared to 0.8 in Singapore, 1.5 in US and 1 in London.

As of 2017, India ranks 130th in the index for Ease of doing Business in India as per the records of World Bank.

However, India ranks a lowly 136th in the global index in resolving insolvency. While the recovery rate in India is 26%, the other developed countries have staggering 73% in an average 1.7 years.

7.        On the other hand, the failure of the Corporate Debt Restructuring in India was at a mind boggling 43% in the year 2016. Since its inception in the year 2001, the CDR Cell has merely approved 530 cases, of which 228 failed in its implementation stage, leading to massive failure.

8.        The 33 Debt Recovery Tribunals in India houses over 43,000 cases, quantified at over 1.43 Lakhs Crores of bad debts till August 13, 2013. The monstrous pendency is primarily due to the insufficiency of the number of Tribunals (DRT), followed by the lack of judicial training to the recovery officers, the inconsistency procedures followed by the Presiding Officers (the Judges of the DRT). While the recommended time period for its adjudication is 6 months, whereas, proceedings take on an average 4-5 years.

9.        In the cases of Strategic Debt Restructuring (SDR), wherein, Banks have been invoking the same in a hurry, the problem commences from the very beginning, i.e. from the documentation itself, wherein, the conversion from debt to equity has no provision in the documents executed between the lender and the borrower. The time frame provided for the conversion (210 days) gets delayed due to the obstructions caused by the Board of the debtor in getting the requisite approvals, resolutions, etc. In cases, winding up petitions were filed along side SDR to thwart the efforts of the Banks in realizing their amounts. While there are no unified law/ legal framework, the SDR was not only harassive, but was also a tool to buy time.

10.     While the archaic procedure of BIFR, birth out of the SICA Act, involved the revival of the companies being intricately linked with the attitude of the promoters, the said procedure was a massive failure. Not only was the process lengthy and oblong due to the malafides of the debtor entities, the same was actually used to buy moratorium and prevent any other action being taken against the said Company. Thereafter the Company would reside under the guise of moratorium for years, leading to the eventual death of the debt and mounting a himalayan pressure upon the Banks and other FI’s.  

Diagram representation of the bleak progress in BIFR reference

11.     The Code provides for time bound reliefs. The NCLT, a creation by the Companies Act, 2013 is the Adjudication Authority, undertaking the hearing and approving of resolutions and Insolvency petitions by corporate persons, while the DRT has been charged for partnerships and individuals. That more than 5000 orders have been passed by the NCLT, NCLAT and the Hon’ble Supreme Court of India relating to the Code, shaping and re-shaping the law, for better times. 

PART - B

1.        NCLT

a.  The National Company Law Tribunal has its presence in the following cities and has the corresponding jurisdictions:

                                         i.   New Delhi (Principle Bench) – UT of Delhi

                                       ii.   Mumbai – Maharashtra and Goa

                                      iii.   Kolkata – West Bengal, Bihar, Jharkhand, UT of Andaman and Nicobar Islands

                                      iv.   Chennai – Tamil Nadu and UT of Puducherry

                                       v.   Bangalore – Karnataka

                                      vi.   Ahmedabad – Gujarat, UT of Dadra and Nagar Haveli and UT of Daman and Diu

                                    vii.   Hyderabad – Andhra Pradesh

                                   viii.   Cuttuck – Orissa and Chhatishgarh

                                      ix.   Chandigarh – Himachal Pradesh, J&K, Punjab, UT of Chandigarh and Haryana

                                       x.   Allahabad – Uttar Pradesh and Uttarakhand

                                      xi.   Guwahati – Arunachal Pradesh, Assam, Manipur, Mizoram, Meghalaya, Nagaland, Sikkim and Tripura

                                    xii.   Jaipur – Rajasthan

                                   xiii.   Kochi – Kerala and UT of Lakhswadeep

b.  The NCLT’s are guided by the NCLT Rules, 2016, which contain Parts, provisions and Forms for application with the Tribunal.

2.        NCLAT

a.  The NCLAT has its Bench in New Delhi, and has a Former SCI Judge as the Presiding Judge.

b.  The procedure of the NCLAT is guided by the NCLAT Rules, 2016.

c.  Appeals under section 61(2) of the Code, 2016 are made with the NCLAT, impugning the orders of the Adjudicating Authority.

3.        Supreme Court of India

a.  The Supreme Court of India shall take up Appeals, impugning orders from the NCLAT.

b.  There have been many judgments passed by the SCI, which are slowly shaping the topography of the Code.

4.        High Courts

The High Courts have now been empowered to pronounce its decision on matters that encompass disputes of major public issues, most notedly the matter concerning Rolta Industries, by the Bombay High Court, on the importance of NCLT Rules 2016 and its practical application by the Tribunals. 

PART - C

1.        Debt

Liability or obligation in respect of a claim, which is due from any person and includes a financial debt and operational debt.

2.        Default

Non Payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case maybe.

3.        Notice and Service

At the time of the Admission of the Application for the initiation of the CIRP of the Debtor, the Tribunal first must be satisfied of the requirements of the Application in terms of the Code, thereafter, issues Notice, either vide private service or a Court issued Notice, a direction that the Respondent party attends the hearing proceedings. The Advocate is thereafter required to produce an Affidavit of Service to that effect, stating the service status.

4.        Company Application

The Petitioner, for the purposes of initiating CIRP, either under the provisions of the Sections 7, 9 or 10, has to file the Company Application, under the provisions of the Rules ancillary to the Code, such as the ‘Insolvency and Bankruptcy (Application to the Adjudicating Authority) Rules, 2016’ and the provisions contained therein.

There are interim applications filed within the parent Company Application, they are termed hence as Interlocutory Applications or IA’s. They are filed with the purpose of seeking interim measures from the Tribunal, for the protection of assets, compel the appearance of the Respondent, compel the production of documents, initiation of action against delinquent actions of Respondents, etc. Most recently, the headline of such applications have been altered so to name them Interlocutory Application, instead of Company Applications (erstwhile Company Petitions).

5.        Replies and Rejoinders

The Respondent or the Opponent Party shall be given an opportunity to file an opposing document, known as a Reply in the form of an Affidavit or Affidavit in Reply as fondly referred to. As against the said Reply, the Applicant shall, upon the permission of the Tribunal, be permitted to thereafter file a rejoinder to the Reply, thus completing the pleadings, if there is no more Affidavits on Sur Rejoinder, or Affidavit of Sur Sur Rejoinder allowed.

6.        Adjudicating Authority

The NCLT, every NCLT, is called as the Adjudicating Authority and it exercises Summary Jurisdiction, hence, procedural provisions of CPC are not applicable, as the NCLT have their own set of Rules, being the NCLT Rules, 2016.

7.        Corporate Debtor

The Corporate Debtor is a corporate person who owes a debt to any person and is in default. The CD is unable or is not in a position to make the contractual or promised repayment, leading to an indefensible and documented default, against whom CIRP is thereafter liable to be initiated.

8.        Creditor

Creditor is any person to whom the debt is owed to. The goods or services rendered must be express and documented in all practicality.

9.        IRP A/w. RP

After the Tribunal is convinced of the facts of the matter, leading to the conclusion that the Debtor is indeed in default, the Tribunal shall allow the Petition and appoint an Interim Resolution Professional in terms of Section 16 of the Code and within 30 days, the IPR shall be required to take out appropriate paper proceedings and form what is known as the Committee of Creditors or CoC. The CoC shall thence have the prerogative of either continuing with the same IRP or appoint a new professional, and the appointed person shall be known as the RP.

10.     CIRP

The official term for the events that transpire post the Admission of the Company Application is known as the Corporate Insolvency Resolution Process. True to its word, it’s a process of resolving the financial stress of the Debtor and not a process to extortion!

11.     Liquidation

That if the Debtor, within the 270 days period, now 330 days, fails to resolve the monetary issues with the CoC, the RP shall be constrained to file an application under section 33 of the Code for an order of liquidation of the Debtor. The said liquidation shall thence have to be completed within 2 years from the date of the order.

12.     Admission

The Order of initiation of CIRP by the NCLT is termed as Admission Order.

Following is an Example:

ORDER

This petition filed under Section 7 of I&B Code, 2016, against the Corporate Debtor for initiating corporate insolvency resolution process is at this moment admitted. We further declare moratorium u/s 14 of I&B Code with consequential directions as mentioned below:

I. That this Bench as a result of this prohibits:

a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

d) the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.

II. That the supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the moratorium period.

III. That the provisions of sub-section (1) of Section 14 of I&B Code shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

IV. That the order of moratorium shall have effect from xx.xx.2019 till the completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of section 31 of I&B Code or passes an order for the liquidation of the corporate debtor under section 33 of I&B Code, as the case may be.

V. That the public announcement of the corporate insolvency resolution process shall be made immediately as specified under section 13 of I&B Code.

VI. That this Bench at this moment appoints Mr xxxxx, a registered insolvency professional is having Registration Number [IBBI/IPA-xxx/xxxxx/2017-18/xxxx] as Interim Resolution Professional to carry out the functions as mentioned under I&B Code. Fee payable to IRP/RP shall comply with the IBBI Regulations/Circulars/Directions issued in this regard.

…The Registry is at this moment directed to immediately communicate this order to the Financial Creditor, the Corporate Debtor and the Interim Resolution Professional even by way of email or WhatsApp. Compliance report of the order by Designated registrar is to be submitted today.

PART – D

1.        Timelines in the Code

a)      14 days time to admit the Company Application

b)      Section 12 – Completion of CIRP within 180 days + Additional Time of 90 days (Now another additional 90 days)

c)       Section 23 – RP to continue to manage the affairs of the Company even after 270 days, till an order is passed by the Tribunal on the approval of the Resolution Plan.

d)      Liquidation process to complete within 1 year