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IBC Code: An Umbrella for All
The Insolvency and Bankruptcy Code, 2016, has proven to become on the pillars of economic reforms in the country on the question of resolution of stressed assets. The enactment of the code has led to a greater stability in financial systems, which is being fundamental to economic growth and most importantly, wealth creation. This code is a consolidated and institutionalised framework, unique designed for an early recognition of debt in time bound manner has immensely aided the proper management of bad assets in the economy, with an objective of restructuration of the entity as going concern rather than pushing into liquidation. The enacted to radically change the process of insolvency resolution in India, which is being watched on by economist and jurist as well as businessmen and investors, which has a reason that each aspect of the implementation of law has the potential to critically impact the ease of doing business in India & this is the only reason, the Code is especially sensitive to interpretation and it is vital that the issues thrown up in its inaugural year of implementation be recognized and the judicial remark on the same be understood. It also writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.
It also writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.
The Statement of Objects and Reasons of Insolvency and Bankruptcy Code, 2016 indicates that the Legislature was of the opinion that the existing framework for insolvency and bankruptcy was inadequate and ineffective and resulted in undue delays in resolution. The Code was proposed with the objective of consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the 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. The Code provides for designating the NCLT and the Debts Recovery Tribunal (DRT) as the Adjudicating Authorities for corporate persons, firms and individuals for resolution of insolvency, liquidation and bankruptcy. The Code was published in the Gazette of India dated 28.05.2016. Provisions of the Code were however brought into effect from different dates in terms of the proviso to Section 1(3) of the Code.
The Insolvency and Bankruptcy Code, 2016 came into effect with the assent of the President of India on 28th May 2016. In a notification dated 1st June, 2016, the Central Government had constituted 11 benches of the National Company Law Tribunal (NCLT) in different states. Under Part II, Chapter VI of the Code, National Company Law Tribunal (NCLT) would be adjudicating authority for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs), any entity with limited liability under any law and bankruptcy of personal guarantors thereof.
The code also contains an enabling provision under section 227 wherein there can be an initiation of the process of insolvency and liquidation process for Financial Service Providers (FSPs). Considering the challenges and tussles faced by FSPs, creditors and customers and in the absence of a dedicated legislation dealing with insolvency liquidation of FSPs, the Central Government has issued two Notifications dated 15th November, 2019 and 18th November, 2019, duly empowered under Section 227 of the Code.
Financial Resolution and Deposit Insurance (FRDI) had an only the purposes of resolution of the financial institutions (including NBFCs). The act was expected that the enactment of such law will pave the way for a comprehensive resolution framework for specified financial sector entities like insurance companies, asset management companies, non-banking finance companies, cooperative banks.
It is a comprehensive Code enacted as the Preamble states, to “consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation 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 order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”. submitted a draft to Indian Financial Code, which included a “resolution corporation” for resolving distressed financial firms and as a result Insolvency and Bankruptcy Code, 2016 was introduced. For investors who invests in such debts, it was quite a boon for them also since after the commencement of IBC 2016 the investors can now recover their investments to some extent if the company goes bankrupt.
The history of IBC was discussed quite in detail in a judgment Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REED 2017 SC 09545 on 21 September 2017 by the Supreme Court of India. In this case the rights of operational creditors in respect of operational debt owed to them is challenged and before pronouncing the judgment the Supreme Court of India quoted a brief history of IBC as follows:
“It was for the first time, in 2001, that the L.N. Mitra Committee of the RBI proposed a comprehensive Bankruptcy Code. This was followed by the Irani Committee Report, also of the RBI in 2005, which noted that the liquidation procedure in India is costly, inordinately lengthy and results in almost complete erosion of asset value. The Committee also noted that the insolvency framework did not balance stakeholders’ interests adequately. It proposed a number of changes including changes for increased protection of creditors’ rights, maximization of asset value and better management of the company in liquidation. In 2008, the Raghuram Rajan Committee of the Planning Commission proposed improvement to the credit infrastructure in the country, and finally a Committee of Financial Sector Legislative Reforms in 2013 submitted a draft Indian Financial Code, which included a “resolution corporation” for resolving distressed financial firms. All this then led to the Bankruptcy Law Reforms Committee, set up by the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of Shri T.K. Viswanathan. This Committee submitted an interim report in February 2015 and a final report in November of the same year. It was, as a result of the deliberations of this Committee, that the present Insolvency and Bankruptcy Code of 2016 was finally born.”
There used to be several laws which regulate insolvency resolution for companies in India. This law included:
Sick Industrial Companies Act, 1985
Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act)
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and
Companies Act, 2013
The law particularly provided for the restructuring of debt, seizure and sale of the debtor’s assets for repayment of outstanding loans. There were similar laws such as the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 regulate insolvency resolution for individuals. While these laws specify processes for resolving insolvency, a creditor may also approach civil courts for recovery of debt.
This IBC seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it amends 11 laws including Companies Act, 2013, DRT Act, 1993 and SARFAESI Act, 2002.
The highlight of the Code is the institutional framework it envisions. This framework consists of the regulator (Insolvency and Bankruptcy Board of India) insolvency professionals, information utilities and adjudicatory mechanisms (NCLT and National Company Law Appellate Tribunal-NCLAT). These institutions and structures are aimed at promoting corporate governance and also enable a time bound and formal resolution of insolvency. The major features of the Code include a two-step process -insolvency resolution for corporate debtors where the minimum amount of the default is Rs.1,00,00,000/-. Two processes are proposed by the Code: a) Insolvency resolution process (Sections 6 to 32 of the Code) – In this, the creditors play a crucial role in evaluating and ultimately determining whether the debtor’s business can be continued and if so, what are the choices for its revival; and b) Liquidation [Sections 33-54 Code] – If revival fails or is not a feasible option, then creditors can resolve to wind up the company. Upon winding up, assets of the debtor are to be distributed.
The new code promises a better and painless procedure for restructuring or reorganisation of firm’s debt and also speed up the liquidation of a failing business and efficient recovery of creditor’s investment. IBC introduces the much awaited and much-needed creditor driven procedure for resolving insolvency and bankruptcy. While the introduction of new code is a historical reform in the country’s economy, its effect will be seen in years to come and will depend on the infrastructure support and capacity of the implementing authorities and newly formed protocols.
The new code construes an institutional framework, consisting of:
IBBI (Insolvency & Bankruptcy Board of India) as the regulating authority
Insolvency professionals (to act as intermediary and help sick units and financial institutions including banks with a smooth takeover or liquidation process)
Information utilities (credit information storing units) and
Adjudicatory mechanisms, to facilitate a timebound insolvency resolution procedure and liquidation if necessary.
Acquisition of companies under Corporate Insolvency Resolution Process administered by the National Company Law Tribunal as per the provisions of IBC, 2016.
1. Clean Company: If the company is bought under Insolvency Process, the buyer gets a clean company irrespective of any old defaults. It means the buyer need not worry about the defaults and any other non-compliances made by the company including Tax obligations if any. While approving the transaction of acquiring such companies NCLT ensures that Resolution Plan submitted by the potential buyer is complied with all the norms. Accordingly, potential buyer will get a CLEAN company in hand and it can be run smoothly & effectively.
2. Customised Payment Terms: Terms of making payments to the Banks/ Lenders can be customised and need not make the full payment of purchase consideration upfront. It can be made in tranches as per the resolution plan proposed & finalised between the COC & potential buyer/s.
3. Loan Facilities: Potential buyer/s can avail the loan facilities from the new Banks/ Financial Institutions to fund the acquisition process. In some cases it is observed that even the funds are raised based on the potential business in future & mortgage of assets of the company as well.
4. Haircut by Lenders: Banks / Lenders are normally willing the take good amount of haircut on total existing loan exposure and hence such deals can be materialized in a best and the most reasonable cost consideration with the added advantage of support of additional loan funds from new Banks/ FIs/ ARCs etc.
5. Consortium of Buyers: Biding in the process is allowed for the consortium of potential eligible buyers. Hence, more than one person/ company can come together to participate in the Bidding process and take advantage of cost effective potentially good deals of buying a company under CIRP under IBC.
Initially, there was an issue of writ jurisdiction of the High Court under Article 226 of the Constitution of India which was invoked to challenge the constitutionality of IBC in cases like Sree Metaliks, REED 2017 Cal 04532, Shivam Water Treaters, C/SCA/19808/2017 and Akshay Jhunjhunwala, REED 2017 Cal 02507. However, the questions revolving around the constitutionality of IBC were put to rest in Swiss Ribbons, REED 2019 SC 01504 by the Supreme Court.
The Division Bench of the Bombay High Court in Anthony Raphael Kallarakkal v. National Company Law Tribunal, Mumbai Bench and Others, REED 2018 Bom 09553, while considering the tenability of writ petition in view of availability of alternate efficacious remedy of appeal before NCLAT under Section 61 of IBC, observed that non-exercise of jurisdiction under Article 226 on the ground of availability of alternate remedy is a self-imposed restraint and where exceptional facts and circumstances have been made out, the High Court can exercise writ jurisdiction under Article 226 in spite of availability of alternate remedy. In Anthony Raphael Kallarakkal however, the Bombay High Court had dismissed the writ petition on ground of availability of alternate and equally efficacious remedies under Section 61 of IBC to prefer an appeal before NCLAT and, a further remedy under Section 62 of IBC to prefer an appeal before the Supreme Court from NCLAT.
Subsequently, a Full Bench of the Supreme Court was called upon in Embassy Property Developments, REED 2019 SC 12501 to decide, inter alia, whether High Courts could exercise the writ jurisdiction under Article 226/227 of the Constitution and interfere with the NCLT’s order in IBC proceedings when a statutory remedy of appeal to NCLAT was available and, the grounds for such intervention. The Supreme Court, vide order dated December 3, 2019, held that “NCLT, being the creation of a special statute to discharge specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action” which is a concept flowing from the Constitution. The Supreme Court further observed that “a decision taken by the government or statutory or quasi-judicial authorities in relation to a matter which is in the realm of public law cannot be treated as one “arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor” under Section 60(5) of IBC and the same can be corrected only by way of judicial review of administrative action”. As NCLT Chennai had exercised jurisdiction which was not vested upon it in law, the Karnataka High Court in this case was held to be justified in entertaining the writ petition.
In Kamal K Singh, REED 2019 Bom 11506, the Petitioner had filed a writ petition under Article 226 of the Constitution before Bombay High Court, challenging the admission order of NCLT Mumbai in an application filed under Section 7 against Rolta India (“Corporate Debtor”). The Petitioner, being the Chairman and Managing Director of Corporate Debtor, had averred that the impugned NCLT order dated October 22, 2019 was bad in law and without jurisdiction, for being in violation of the principles of natural justice and Rules 150 and 152(2) of the NCLT Rules, 2016 as per which the impugned admission order was required to be pronounced by the Bench. The Division Bench of the Bombay High Court, vide order dated November 29, 2019, issued the writ of certiorari for quashing and setting aside the impugned NCLT order on the ground that the same was not pronounced in accordance with Rules 150 to 152 of NCLT Rules, 2016. As the defect in this case was not curable in nature and had vitiated the proceedings in their entirety, the Bombay High Court directed NCLT Mumbai to hear the application filed under Section 7 of IBC afresh on merits and in accordance with law. The Bombay High Court, relying on its earlier judgment in Anthony Raphael Kallarakkal, reiterated that when exceptional facts and circumstances have been made out, the High Court can exercise jurisdiction under Article 226 despite availability of alternate remedy. The Court further observed that if the orders of a court or tribunal subordinate to the High Court had resulted in a failure of justice, then writ of certiorari can be issued irrespective of the availability of alternate and equally efficacious remedies to the petitioner.
The ruling of the Bombay High Court in Kamal K Singh read with its earlier judgment in Anthony Raphael Kallarakkal is pertinent to understand the approach of Bombay High Court in intervening in IBC proceedings where an alternative efficacious remedy is available before NCLAT. Prima facie, the Bombay High Court is likely to intervene only where exceptional facts and circumstances have been made out by the Petitioner, as was the case in Kamal K Singh.
Conclusively, the objective of the Insolvency and Bankruptcy Code, 2016 is multi-faceted. The code only does not only do it seek to promote entrepreneurship, by making availability of credit more transparent, but it also in addition balances the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time bound manner and for maximization of the value assets of such persons and other related matters.