Insolvency & Bankruptcy Code, 2016

Pre Reading Terms

1. Insolvent:?Whenever individuals or companies are unable to repay their due debt they’re deemed to be insolvent.
2. Bankrupt: Legal declaration of one’s incapability to pay off debts.
3. Financial creditors: Entities (lenders like banks) that have provided funds to the corporate.?Their relationship with the entity is a pure financial contract, such as a loan or debt security.
4. Operational creditors are those who claim operational dues (corporate has the debt) from the corporate debtor. It can be with respect to goods, services, employment, Government taxes/duties, etc.
5. Insolvency Professionals (IPs)/ Insolvency Professional Agencies (IPAs):?The resolution process shall be conducted by licensed Insolvency Professionals (IPs). These IPs will be members of Insolvency Professional Agencies (IPAs).
6. Bankruptcy and Insolvency Adjudicator:?The National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies. The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms, adjudicates insolvency resolution for individuals.
7. Pre-packaged insolvency proceedings: ‘Pre-packs’, offer a unique mechanism which aims to combine the benefits of informal workouts with the legal certainty of formal insolvency proceedings. Essentially, pre-packs are hybrid mechanisms allowing out-of-court resolutions to be recognised under insolvency law with appropriate safeguards for all stakeholders.

Introduction & History

?India's growth for 4 decades after independence was very stagnant because of socialistic approach & it was also called as Hindu growth rate.

?We were having so many licenses, limitations, regulations & hurdles that it was one of the main reasons for the slow growth rate. More fuel was added to the fire by the unnecessary & confusing legislations with loopholes in them like cheese in Pizza.

?Starting a company was much much easier than closing a company. The debtors faced huge difficulties when it came to recovering their money from the defaulters & bankrupt companies. Having a robust and speedy dispute resolution system was necessary to avoid piling up of cases & it was very normal to get the case verdict after 10-20 years & sometimes even more.

?Earlier Separate laws were in place to handle these matters like,

1. Sick Industrial Companies Act?(SICA),
2. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,?(SARFAESI)
3. Companies Act
4. Recovery Of Debts And Bankruptcy Act,?1993

When the Indian government realised this issue they understood that it was one of the main hindrances which was keeping companies away from investing in India along with certain other issues like appropriate infrastructure, corporate friendly regulations, etc.

?In order to resolve the long pending & time taking insolvency process the GOI enacted Insolvency & Bankruptcy Code 2016.

?IBC brought the speedy resolution process of Insolvency proceedings which was to be completed within 180 days (now 330 days) with an exception of additional 90 days in case of any reasonable delay.

?Amendments after the enactement

1. It included MSMEs in the insolvency resolution process and have access to speedy redressal.
2. The Bill allows the withdrawal of a resolution application submitted to the NCLT under the Code.?This decision can be taken with the approval of 90% of the committee of creditors.
3. Financial Creditors were defined more clearly and it included Allottees to whom the land is been allotted, sold or transferred by the defaulter company.
4. In 2019 operational creditors were given the benefit of recovery to the extent they would've received had the company went for liquidation.
5. Resolution time increased to 330 Days+ 90 Days (2019).
6. Now, Home/property allottees are also to be considered as Financial Creditors.
7. ?It provides protection to the new Buyer?of a loan defaulter company against prosecution for misdeeds of previous owners.
8. ?Moratorium would now only be imposed onto the Company. The Guarantors won't be barred by moratorium.

Important points to note

• Out of 20,963 cases pending in tribunals, 13,170 cases are of IBC, with amount involving 9.20 lakh crores. Meanwhile, 4365 cases are with financial creditors and the amount involved is 6.77 lakh crores.
• Banks and financial institutions have taken a cumulative haircut of ?3.22-lakh crore or 61 per cent of their admitted claims since the IBC regime was implemented.
• Both financial and operational creditors have taken 4,376 companies to the NCLT under IBC between December 2016 and March 2021.
• In a few cases, the recovery for banks has been abysmally low, with the haircuts ranging between 90 and 95 per cent.
• In at least 58 of the 348 cases where a resolution plan had been approved until March 31, operational creditors recovered nothing, even as financial creditors managed to recover a substantial portion of the dues owed to them.
• It is pertinent to note that operational creditors are also borrowers of banks, and any adverse impact on their recovery will indirectly hit the banks.
• Massive haircuts taken by financial creditors in the insolvency resolution cases of Videocon Industries and Jet Airways, among others, have led to questions being raised on the efficacy of the IBC.
• In one case of C Sivasankaran-owned Siva Industries and Holdings, offered a one-time settlement of bank loans of ?5,000 crore by paying just ?500 crore. (90% Haircut)
• Videocon Industries and its 12 group companies had admitted claims of ?64,839 crore, but banks agreed to hand over the company to Anil Agarwal-owned Vedanta. (95% Haircut)
• The Jalan-Kalrock consortium got the troubled Jet Airways after banks wrote off 95% of its loan.
• The recovery for operational creditors is way worse than Financial Creditors. For instance, in cases where the admitted claims were over ?5,000 crore, operational creditors recovered only 12.5 % of their total admitted claims.
• The recovery for financial creditors has been better at 42 % in insolvency cases where the total admitted claims were over ?5,000 crore, while in cases where the total admitted claims were less than ?5,000 crore, they recovered only 29.7 per cent.

As of March-end, 79 per cent of the total 4,376 cases under the IBC are pending for over 270 days, and the average time taken for the completion of insolvency resolution was 492 days. This delay, experts said, was another reason for low interest among bidders in the stressed assets market.

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Importance/Significance

1. The IBC helped improve debt recovery from 26% to 39.3%.
2. Though a lot of lacunas are yet to be cleared this is a very significant & important initiative taken by Indian Govt.
3. If implemented successfully it’ll uplift India amongst the top destinations in terms of Ease of Doing Business Index.
4. When covid struck the nation, accepting new IBC proceedings was stopped for 1 year which was a huge relief for nation in situation of distress.

?Loopholes/Drawbacks

1. Commercial Financial Creditors Face difficulty in becoming a part of Committee of creditors Because of the NPA in their operations they are considered to have lack of knowledge in managing and assessing the value of the company.
2. Slow judicial process?in India allows the resolution processes to drag on, this was the same reason for slow recovery under SICA or RBBD.
3. Lack of capacity.?There are inadequate no. benches to hear and resolve disputes quickly at the NCLT/ NCLAT.
4. The more the delay the more inflation, Depreciation, amortisation would deteriorate the amount recovery.
5. The time value of delays in the Essar case, assuming an inflation rate of 4%, and where the final bid is worth over ?42,000 crore, is close to ?5 crore a day. (Inflation)
6. Limitation time of 3 years is having multiple problems because of pending cases in other courts companies don’t approach NCLT for IBC proceedings & by that time the limitation period expires. It’s for dormant people but when company has actively initiated the proceedings how they can be considered as dormant??

Top Recommendations (Committees & Public)

1. The 14- member Insolvency Law?Committee has recommended that homebuyers should be treated as financial creditors & amounts raised under a real estate project will qualify as financial debt.
2. Ineligibility criteria for resolution applicants may have unintended consequences for asset reconstruction companies, scheduled banks, alternate investment funds, overseas financial institutions, investment vehicles, registered foreign institutional investors, registered foreign portfolio investors and foreign venture capital investors. Pure play financial entities must be exempt from Section 29A of IBC which debars persons who have an NPA account, or control or are promoters or in the management of a corporate debtor that is classified as an NPA account from being resolution applicants.
3. Moratorium against a company (and its assets) facing insolvency proceedings also includes Guarantors’ assets which are separate from those of the corporate debtor, and proceedings against the corporate debtor would seriously impact the Guarantors.
4. Contractual principles of guarantee must be respected and the moratorium should not be extended to guarantors. It is suggested that regulated financial creditors who become related parties solely on account of conversion or substitution of debt into equity shares before the initiation of insolvency process shall not be considered related parties.
5. Certain?bidders wait for the top bid to become public and then submit their bid after that. The CoCs have discretion in accepting late resolution plans & because of this?genuine bidders are discouraged from bidding at the right time.
6. Resolution Considering Mehta Committee recommendations of dividing debt into 3 categories:

• Resolution of bad assets below Rs 50 crore within 90 days.
• Resolution of bad assets below Rs 50 crore within 90 days.
• Resolution of loans above Rs 500 crore:?The panel proposed creation of a National Asset Management Company (AMC) to take over such Non-Performing Assets from banks.

1. An AMC should be set up under an existing?Asset Reconstruction Company (ARC)?like Arcil Ltd which is already promoted by banks.
2. Allow multiple bidders to buy parts of business. This will increase the chances of getting good monetary recovery.
3. NCLT must admit cases within 30 days

Important Cases & Court Interpretations

1.?????The hon’ble supreme court in the case of?Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors, CIVIL APPEAL NO. 8766-67 OF 2019,?struck down the word?“mandatorily”?stating that the time taken during the legal proceeding should not affect the interest of the litigant.

2.?????In the case of?Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India & Others [(2019) 4 SCC 17], it was contended that the distinction made between the financial creditor and operational creditor was violative of?Article 14 of the Constitution.?Furthermore, the issue of exclusion of the operational creditors from the committee of creditors was also raised before the Hon’ble supreme court.

Hon’ble Supreme Court clarified that Financial Creditors are experts, they have a better understanding about the valuation of a company & that’s why they can help in better & quick recovery of debt. Operational creditors on the other hand are not well equipped to take decisions & their recognition for CoC would unnecessarily increase the resolution process timing.?

3.?????Promila Taneja v. Surendri Design Pvt. Ltd.

Lease dues are not yet considered as operational debt.

4.??V. Padamakunar V. Stressed assets stabilization fund (SASF) (NCLAT 2020)

Reflection of debt in balance sheet can't be considered as an acknowledgement. Can't avail Limitation act benefit of Renewed time period.

Latest Updates from the IBC Ordinance 2021

?“Pre-pack” a solution before you approach the courts. That’s to say that maybe we can have a process where lenders can work with the management internally before submitting a resolution plan to the courts. This way, the courts won’t be overburdened. And the management can even retain control of their companies.

?1.?Pre-packaged insolvency resolution is allowed for micro, small or medium enterprises (MSMEs). (Section 54A) (Between 1 Lac- 1 Crore amount recovery).

?2. Pre-packaged insolvency resolution process will be completed within one hundred and twenty days out of which ninety days’ time has been given to the resolution professional to file the resolution plan with the Adjudicating Authority and thirty days time has been given to the Adjudicating Authority to approve the resolution plan.

?3. To provide punishment for offences related to pre-packaged insolvency resolution process. (Section 77A)

?Opinion

1. At present, there are Only 897 registered professionals are there.

• We need a lot more Insolvency Professionals than this figure to enable smooth resolution process.
• In order to be an insolvency professional one must either be a Chartered Accountant, or a Company Secretary, or Cost Accountant or an Advocate with min. 10 years of experience or a graduate with 15 years of experience.
• One must also pass the insolvency examination conducted by the IBBI.

1. Pre pack resolution extends to only companies & limited liability partnerships. (HUF, sole proprietors, etc not included). HUF, Sole properties, unregistered partnership, & other excluded organisations should be included in the Pre-pack. Pre-pack lacks well defined norms which will again create a havoc. They should be clarified as soon as possible.?
2. Asset Reconstruction Companies can’t recover their debt u/s 7 of IBC. (in the capacity of Financial Creditor)
3. ?Co-operative, NBFC, some banks, etc. are not eligible as financial creditors because of their increased NPAs (Non Performing Assets).
4. ?Limitation period of 3 years should be exempted for creditors who are vigilant and have cases pending in some other court. Recognition of debt in balance sheet should be considered as Re-acknowledgement of debt.
5. Lack of Appropriate Infrastructure & Justices

• IBC proceeding are run in NCLT & NCLAT who are already very limited & overburdened with other Company cases. There’s a dire need to either increase their no. or set up separate tribunals for such matters. We need more tribunals & judges to deliver resolutions in time.
• In India Judicial system is very slow & has lots of issues. One of the main issues is this that we don’t have sufficient strength of Judges & Quasi-Judicial Authorities who will help in speedy resolution. More efforts & regulations should be made to initiate proceeding of companies at a healthy state so that good debt recovery is achieved.
• No. of judges & NCLTs should be increased to NCLTs to cope with the rising no. of cases and making the process swifter.

All unnecessary hurdles, regulation & formalities should be removed to fast track the process. Adoption of tech savvy process would ease the process to a large extent & encourage more insolvency cases to be filed.

?HUF, Sole properties, unregistered partnership, & other excluded organisations should be included in the Pre-pack. Pre-pack lacks well defined norms which will again create a havoc. They should be clarified asap.

More efforts & regulations should be made to initiate proceeding of companies at a healthy state so that good debt recovery is achieved.

?We must always remember:

?“Justice Delayed is Justice Denied”

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