Insolvency and Bankruptcy Code in India

The Joint Committee was tasked with reviewing the Insolvency and Bankruptcy Code, 2015, which was presented to the Lok Sabha on December 21. The Committee had given its recommendations and a revised Bill in response to such a referral. The Insolvency and Bankruptcy Code, 2016, was approved by the two Houses of Parliament in May 2016. This economic reform’s main goal is to put more emphasis on creditor-driven insolvency settlement.

Converting the current system’s “Debtor in Possession” to “Creditor in Control”

The Insolvency and Bankruptcy Code, 2016 in India is a developed step toward resolving the legal situation with regard to financial failures and insolvency. The code has great value for all stakeholders, including different Government Regulators, because it offers an easy departure with a painless method in instances of insolvency of people as well as organisations. The introduction of this Code eliminated conflicting clauses found in other legislation.

• Sick Industrial Companies (Special Provisions) Act, 1985
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• The Companies Act, 2013.

Prior to the adoption of this Code, there were several agencies responsible for handling issues connected to debt, defaults, and bankruptcy, which typically causes delays, complexity, and greater expenses during the settlement of insolvency. For ill industrial enterprises, the “Board for Industrial and Financial Reconstruction (BIFR),” one of the Insolvency Regulators, has been a myth. The Insolvency and Bankruptcy Code, 2016, is anticipated to accelerate cases that have been languishing for a long time and resolve them within 180 days with an additional 90-day window.

The Code and it’s Applicability

The following entities’ bankruptcy, voluntary liquidation, or insolvency shall be subject to the requirements of the Code:

1. Individuals and Partnership Entities
2. LLP or Limited Liability Partnership formed under the LLP Act 2008
3. Any other organisation operating under another currently enforcing legislation, as indicated in this regard by the Central Government
4. Any other corporation currently subject to any special act, unless the relevant provision is in conflict with the requirements of such Special Act
5. Company incorporated under the Companies Act, 2013.

Additionally, this code will only be applicable if the default minimum is INR 1 lakh. However, the Central Government may designate the minimum amount of default of larger value, which shall not be more than INR 1 crore, by publishing the announcement in the Official Gazette.

But there is an exception applicable for the same:

Code does not apply to corporate entities are regulated financial service providers, with the following exceptions:

• Banks
• Insurance companies and
• Financial Institutions.

Objectives of the Code

To accomplish the following goals, bankruptcy law must have a strong legal foundation:

• Better resolution of disputes between creditors and the debtor

In order to lessen issues with common property and knowledge asymmetry for all economic parties, it can give procedural clarity regarding the bargaining process.

• Establish a line between improper behaviour and company collapse

It can also provide parties the freedom they need to find the best option possible during talks in order to maximise value. A forum for negotiations between creditors and outside financiers will be established under the bankruptcy law, opening up the prospect of such rearrangements.

• Losses from macroeconomic downturns must be apportioned

A weak insolvency system produces notions like these because of the stereotype of “wealthy boosters of insolvent entities”:

Since all defaults are the result of wrongdoing, the promoters should be held personally and financially liable for the failures of the businesses they are in charge of.

• Losses from macroeconomic downturns must be apportioned

A clearly established bankruptcy structure leads to a clear distribution of these losses. The most typical methods of allocating losses are taxes, inflation, currency depreciation, expropriation, or wage or consumption restriction. Foreign creditors, small company owners, savers, employees, owners of both financial and non-financial assets, importers, and exporters may be impacted by these.

Objectives of the Code

The Insolvency and Bankruptcy Code, 2016, was created with the express purpose of striking a fair balance between:

• an objective shared by all parties involved in the business, such that they may access financing.
• the potential loss a creditor might experience as a result of default.

The following are the goals of the 2016 Insolvency and Bankruptcy Code:

1. reorganisation and insolvency resolution legislation for corporations, partnership businesses, and private people are being consolidated and amended.
2. to establish deadlines for law’s execution in a time-limited bankruptcy settlement (i.e. 180 days).
3. to increase the worth of interested parties’ assets.
4. to encourage entrepreneurialism
5. to make credit more widely available.
6. To balance the interests of all stakeholders (including alteration). Balance should be completed in the sequence of paying government obligations first.
7. create an Indian Insolvency and Bankruptcy Board to oversee insolvency and bankruptcy legislation.
8. to increase debt funding levels across a number of financial instruments.
9. to provide entities a gentle revival mechanism.
10. to address international insolvency.
11. to establish a database of defaulters in order to address India’s bad debt issue.

Issue of Non-Performing Asset

The non-performing asset (NPA) issue is addressed in two ways by the Insolvency and Bankruptcy Code, 2016 (IBC), which was enacted on May 28, 2016, in response to the rising number of non-performing loans, with the goal of creating a consolidated framework for the timely resolution of insolvency for corporations, partnership firms, and individuals.

First and foremost, debtors are advised to alter their behaviour to ensure sound business judgement and avoid company disasters. It also envisions a procedure through which financially troubled business companies will go through rehabilitation and be placed back on their feet.The Indian bankruptcy regime changed under the IBC from “debtor-in-possession” to “creditor-in-control.” The creditor-in-control approach transfers control of the debtor to its creditors and depends on newly appointed management’s managerial abilities to take over a failing enterprise and secure its survival. The main goal of the IBC, according to the Apex Court in Swiss Ribbons v. Union of India, is to assure the corporate debtor’s rebirth and continuance. IBC is taking into account a wider public welfare issue.

Major Three Classes of Targets

Financial creditors, operational creditors, and corporate debtors are the three categories of people who can start the corporate insolvency resolution procedure (CIRP), according to the IBC.

In Mobilox Innovations v. Kirusa Software, the Apex Supreme Court noted that an operating debtor should be devoid of any pre-existing disputes that cannot be resolved quickly in insolvency proceedings. In Lalit Kumar Jain v. Union of India, the Supreme Court made it clear that a guarantor’s obligation was coextensive with the primary debtor’s. As a result, the guarantors might face comparable legal action.The speed with which bankruptcy issues are resolved under the IBC is arguably its most crucial component. In Kridhan Infrastructure v. Venketesan Sankaranarayan, the Supreme Court made the observation that the IBC’s deadlines for insolvency resolution should not be completely suspended indefinitely.

A moratorium is enacted once an insolvency petition is approved. A moratorium prevents the establishment and continuation of any actions against the corporate debtor during the CIRP, the Supreme Court ruled in P Mohanraj v. Shah Brothers Ispat. A moratorium serves as a “shield” to stop further asset depletion for the corporate debtor, but it has no protective effect on the senior management members who brought about the insolvency.

A few people are also prohibited from filing a resolution plan or taking part in the insolvency resolution process under the IBC. In Chitra Sharma Vs. Union of India, the Supreme Court ruled that the prohibition on certain people was put in place to prevent those accountable for the corporate debtor’s insolvency from entering the CIRP through a backdoor.

Similar to this, it was noted in Phoenix ARC v. Spade Financial Services that the IBC stipulates that any family members of a corporate debtor are not eligible to participate on a committee of creditors (CoC). Such a clause is intended to guard against connected parties of the corporate debtor undermining CoC judgments.In addition to having the authority to initiate insolvency resolution actions, the National Company Law Tribunal (NCLT) is granted extensive residual jurisdiction under the IBC to address any issues that may emerge during the insolvency and liquidation of corporate debtors. However, the Apex Court in the Jaypee Kensington case found that there was no room for interference with the CoC’s business judgement during the adjudicatory process about a settlement plan. The resolution plan would be referred back to the CoC for revision if an adjudicating authority discovered any flaws.

The IBC has made significant changes to Indian insolvency law. It has helped businesses create disciplined borrowing practises. Promoters worry that, in the case of a default, they may lose control of their businesses. It is observed that a staggering 18,629 applications totaling more than 5,29,000 crore were already settled before being allowed. According to a World Bank research, India’s ranking in resolving insolvency rose from 136 in 2017 to 52 in 2020 following the adoption of IBC. Low recovery rates exist under the IBC. In certain circumstances, haircuts of up to 95% are given during the insolvency process. Since 2016, the lenders have lowered claims by an average of 61%.

The fact that insolvency cases are still pending makes the issue worse. The majority of cases—roughly 71%—are still pending after more than 180 days, which is clearly at odds with the goal of quickly resolving insolvency. In terms of personnel, the NCLTs were operating without a President in September 2021 and were lacking 34 members out of a total sanctioned strength of 62 members.

The IBC ecosystem’s digitalisation is another significant concern. Due to lengthy delays well beyond the statutory restrictions, the insolvency process has been slowed down by a lack of digitization. Admission of cases in NCLT has frequently proven to be difficult.The National Company Law Appellate Tribunal (NCLAT) and the NCLTs should be digitised, according to a Special Parliamentary Committee’s report. Virtual hearings should be allowed in order to quickly handle the outstanding matters.

It is crucial that the major players do all reasonable efforts to prevent the IBC’s authority from dwindling. It must be the intention to eventually create a more complicated legal system by filling in the gaps that are found. According to statistics, the majority of liquidations take place when the debtor’s assets gradually depreciate over the course of a protracted insolvency procedure.

Thus, the speed with which the insolvency is resolved is crucial. The government must allocate sufficient funds to improving the infrastructure of tribunals, digitising the insolvency resolution process, and upskilling insolvency practitioners.India’s insolvency regime has unquestionably been revitalised by the IBC. It has been effective in reducing the threat of NPAs, which is on the rise, but it has also aided the economy in a number of subtle ways, including enhancing credit discipline. According to sources, when insolvencies under the IBC were resolved starting in 2016, a total of 2.5 lakh crore was reintroduced into the banking system.

The IBC does, however, have several areas that might have significant improvement, just like any other law. The Indian insolvency regime has to make significant progress before it can compete with other developed international jurisdictions.

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