Critical Analysis: Insolvency and Bankruptcy Code 2016 [IBC]

This is a critical analysis on Insolvency and Bankruptcy Code, 2016 (IBC)

Introduction

In India, before the advent of IBC, the Insolvency Resolution Process involved several legislations. There was no one single consolidate law to deal with Corporate Insolvency. These statues include the Sick Industrial Companies Act, 1985[1]–SICA, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[2]– SARFAESI, DRT Act 1993[3] and the Companies Act 2013[4].

Broadly these laws provide for the dissimilar process of asset realization, seizure and debt structuring in order to facilitate the fulfilment of the outstanding debts.[5] However, due to the presence of so many legislations, the efficiency in the Insolvency Process took setback. The process was not efficient and it used to have inordinate delays. This gave rise to the immediate need to renovate the insolvency regime.

Applicability of different legal avenues an laws have led India to witness a huge piling of NPAs- Non-Performing Assets. Consequently, a long waiting period for creditors to recover their money from defaulters. The Insolvency and Bankruptcy Code is an attempt at completely reform the disintegrated corporate insolvency framework.

It aims to restore faith in creditors for speedy disposal of their cases. The Code aims to consolidate existing insolvency and debt recovery laws for the individuals and corporate entities into a single piece of legislation. This code has unified the statutes related to enforcing creditors’ rights and attempted to streamline the manner in which the revival of Debtor Company can be made without adversely affecting the rights of creditors.

Applicability of the Code

This code provides the creditors with a mechanism to initiate the Corporate Insolvency Resolution Process [CIRP] in the scenario in which the corporation defaults in repaying its debt. The code makes a distinction between Financial Creditors and Operational Creditors.

Financial Creditors

A financial creditor is the creditor whose relationship with the debtors is of pure financial contract[6]. Recent reforms in the code have tried to address the interests of the homebuyers through treating them as the financial creditors for the purpose of this code. As per the recent ordinance- the amount raised from the buyers under the real estate project – (a buyer for the commercial or residential under-construction property) is to be treated as the “financial debt” because such amount has the effect of commercial borrowing[7].

However, there is no clarification on whether such buyers/allottees are to be treated as unsecured or secured financial creditors. Such classification may be possible through the agreement entered into corporate debtor and homebuyers. In the absence of such clarifications, there will be uncertainty regarding their priorities in receiving dues from the proceedings of insolvency.

Operational Creditors

An Operational creditor refers to a person to whom an operational debt is owed and includes any person to whom such amount has been legally assigned or transferred for goods or services done by them. Vendors and suppliers, employees, government etc. are examples of operational creditors.[8].

The Institutional framework of the Code

The creation of several new institutions has been proposed by the code which possesses specialized functions in the insolvency resolution process. The IBC has created the supervisory and regulatory body called as IBBI- the Insolvency and Bankruptcy Board of India, which has the overall responsibility to effectively operationalize, implement and educate of Insolvency and Bankruptcy Code.

The IBBI has the further responsibility to smoothen functionality of IBC through framing rules/regulations and studying the practical implications to overcome any hurdle or difficulty. The Code envisions the creation of a core of professional insolvency practitioners which are known as Resolution Process- RP, who is tasked with the overseeing certain aspects of the resolution process.

The IBC also sets up IPA- Insolvency Professional Agencies which are professional bodies who will regulate the RPs.  Individual RPs are required to be registered with the IPA which are empowered to conduct exams, layout code of conduct and certify professionals.

Information utilities provided by the Code

The IBC provides the establishment of the information utilities[9] which are tasked with the maintenance, collection, collation, supply and provision of financial data to the business, adjudicating authorities, financial institutions, insolvency professionals and other stakeholders.

It thereby functions as a comprehensive database on corporate debtors which are of financial in nature. For operational creditors, it is options to provide financial information to information utility. This information includes overall debt, liabilities and defaults which is to be sourced from the creditors through the utility service.

It is a positive step towards having transparency where all security interest which is created on the assets are reported to the utilities[10], by financial creditors[11]. Such utilities’ records have evidentiary value in the insolvency resolution process and it can assist various stakeholders to arrive at the best resolution of distressed companies.

However, the IBC is silent on the interlinking and networking of multiple utilities. NeSL- National e-governance Service Ltd has become the first utility through IBBI.

The framework of the IBC

All proceedings under the Code against the corporate entities is to be adjudicated by the National Company Law Tribunal which has been designed as a special forum to tackle all aspects of the insolvency resolution proceedings.

The National Company Law Tribunal is refereed as the sole Adjudicatory forum in respect of the corporate insolvency and no other tribunal or court can stay action initiated through the NCLT.  Appeals from the orders of NCLT lie before the NCLAT- National Company Law Appellate Tribunal[12].

All appeals against the NCLAT lies with the Supreme Court of India.[13] The IBC has explicitly ousted the jurisdiction of the Civil courts with respect to the matters addressed by the IBC.[14] In addition to that, it is now well settled that the Limitation Act is applicable to the proceedings under the IBC[15]. 

When it is not viable of resolution of debts or restructuring, the NCLT can order the dissolution of the company. It is a two steps process. First is revival and second is liquidation.

Judicial developments of The Insolvency and Bankruptcy Code 2016

With almost 3 years since the commencement of the IBC-2016, there have many challenges in implantation of the code. However certain effective amendments coupled with the constructive interpretation by the judiciary have helped to eliminate such issues and challenges.

IBBI- Insolvency and Bankruptcy Board of India which is the supervisory and regulatory body of the IBC has also done a commendable job in regulating space and proactively spreading the awareness. Many important judgements have been pronounced throughout just 3 years.

Certain landmark judgements of the Supreme Court has attempted to ensure that spirit of the code is given priority over the procedural requirements. Through such judgements, proper interpretation of the code is done along with new insights and different point of view.

IBC- Eligibility of the bidders

Section 29A of the IBC provides for the eligibility criteria which is applicable to any person/entity and resolution applicant acting in concert or jointly provided that such resolution applicant fulfils certain requirements. In the case of “ArcelorMittal India Private Limited & Others v. Satish Kumar Gupta & Others”[16], the SC has explored Sec 29-A[17] of the Insolvency and Bankruptcy Code and it was found that Sec 29-A requires lifting of the corporate veil too.

According it was held by the Supreme Court that if on the basis of the facts of the case it can be inferred that certain people were acting jointly in such manner as to impute that such people were acting mutually then such people would fall under the category of “person acting jointly”.

In addition to that while IBC does not specifically define the phrase “person acting in concert”, the Supreme Court by taking into account existing laws and precedents held that such phrase shall have the similar meaning of the term as assigned by the SEBI Takeover Code.

In this case, the further meaning of terms such as “control” and “management” under sec 29A was discussed by the Supreme Court of India. It was held that “control” will cover only proactive or positive control and not any sort of reactive or negative control. It was further held that “management” will cover the de jure management of the corporate debtor.

In addition to that the issue that whether a resolution applicant can avoid falling within the criteria for ineligibility under sec 29-A was examined by the Supreme Court. The SC applied to look back approach and it was held that along with the present credentials of the resolution applicant on the date of submission of plan can be considered, his past actions which are relevant and proximate to the current resolution plan can also be considered.

Invalidation of fraudulent, extortionate or preferential transactions

Through judicial interpretation, Insolvency and Bankruptcy Code has conferred powers on the Adjudicating Authorities to reveres or nullify the effect of certain transaction which are carried out for the purpose of circumventing or undermining any provisions of the Code.

In the case of “IDBI Bank Ltd vs Jaypee Infratech Ltd”[18], it was held by the NCLT Allahabad that mortgages created by the JIL- “Jaypee Infratech Ltd” in favour of the creditors of its holding company JAL- Jaiprakash Associates Ltd amounts to the fraudulent and preferential undervalued transactions.

Upon finding that such transactions were preferential, undervalued and fraudulent, the NCLT Allahabad ordered that to release encumbered lands from holding company JAL- Jaiprakash Associates Ltd’s landers and directed to vest them back in the JIL- “Jaypee Infratech Ltd”.

Following factors were taken into account by the NCLT to reach an abovementioned conclusion.

1. Making mortgage in favour of the holding company JAL’s landers, in beneficial position or interest in the case if JIL’s assets are distributed as per the distribution scheme under sec 53 [19] of the IBC.
2. Such mortgage was not in the ordinary course of business of Jaypee Infratech Ltd.
3. Jaypee Infratech Ltd did not have any benefit from such mortgage in any manner.
4. Jaypee Infratech Ltd created a mortgage in favour of JAL without any counter-guarantee or any consideration.

Insolvency code is a Special Law which has an overriding effect

In the case of “Jagmohan Bajaj v. Shivam Fragrances Pvt. Ltd & Anr”[20], it was held that initiating of CIRP can’t be defeated by taking recourse to the pendency of internal dispute between Corporate Debtor’s Directors on the allegations of mismanagement and oppression.

IBC is a special law with an overriding effect[21]. Thus it was held that rights of financial creditors can’t be made docile to pending proceedings as per Sec 241[22] and Sec 242[23] of the Companies Act 2013. 

Challenge of Arbitral Award

In the case of “K.Kishan v Vijay Nirman Company Pvt Ltd”[24], it was clarified by the Supreme Court that the operational creditors can’t use IBC for extraneous considerations, as a substitute for debt enforcement procedure or prematurely or extraneous considerations or as a substitute for the debt enforcement procedure.

It was held that petition filed under sec 34 of the Arbitration and Conciliation Act -1996 against the arbitral award is a stage of pre-existing dispute which concludes its initial stage in the form of award and it remains continue till the date of final adjudicatory process concluded under sec 34 and 37 of the Arbitration Act.

Therefore it was held that the proceedings under IBC can’t be initiated till all mechanism available through statutory appeal have been exhausted by the parties.

Prevalence of the IBC over the Income Tax Act 1961

The High Court of Telangana, in the case of “Leo Edibles & Fats limited vs The tax recovery officer- IT Department, Hyderabad”[25], dealt with the issue of settlement of dues pending before the Income Tax Authority during the liquidation of the debtor company. 

It was held by the High Court that in the event where assessee company is under the liquidation process as per provisions of the Insolvency and Bankruptcy Code, the IT authority can’t claim the priority of recovering dues under the Income Tax Act. It was further held by the High Court that assets which are under the attachment can no longer create an interest in favour of the IT authority by making them secured creditors under the Insolvency and Bankruptcy Code-2016.

Apart from that in respect of moratorium, the High Court ruled that proceedings initiated under the IBC confirm that any previous pending litigation, initiated before the commencement of the insolvency/bankruptcy proceedings are suspended.

No necessity to accept only matured claim by resolution professional

In the case of “Andhra Bank vs M/s F.M. Hammerle Textile Ltd”[26], it was held by the NCLAT that it is not mandatory that all the claims submitted by the creditors need to be matured on the date of initiation of the Corporate Insolvency Resolution Process.

Even the for the debt which is due in future upon its maturity, the “Operational Creditor” or “Financial Creditor” or “Unsecured Creditor” or “Secured Creditor” can file such claim. Rejection of claim cannot be made by the Resolution Professionals on the grounds that only claims which are matured can be entertained and others can’t be looked into. Thus in the total liabilities of the corporate debtor, un-matured claims including uninvoked guarantees can be included[27].

Moratorium under Section 14 of the IBC applicable to the personal guarantor also

In the case of “State Bank of India vs V. Ramakrishnan & Anr”[28], it was held that under Sec 14 of the IBC- moratorium does not intend to create bar against assets of the guarantors for the recovery of debts from the corporate debtor.

The scope of the sec 14 of the IBC for moratorium can be restricted to the assets of the corporate debtor only. It was held that even in the case of personal guarantee- principles of contractual guarantee is to be respected during the moratorium.

Equality in making payments to the Financial Creditors

In the case of “Binani Industries Limited v. Bank of Baroda & Another”[29] it was held by the NCLAT that the resolution plan submitted by the Dalmia Company was discriminatory in nature because of unequal treatment of similarly put operational and financial creditors.

In addition to that NCLAT dealt with the importance and priority of maximization of assets over the procedural compliance of IBC. Therefore it was ruled by the NCLAT that a resolution plan making unintelligible discrimination between creditors on similar footing would result in invalidation of such resolution plan by the Adjudicatory Authority.

Committee of creditors can’t initiate liquidation without inciting expression of interest

In case of “Vedika Nut Crafts Pvt Ltd”[30], it was held by the NCLT bench that the committee of the creditors can’t initiate liquidation process before inviting Expression of Interests[31] by the prospective/ strategic resolution applicant.

Such a decision will be arbitrary and would violate fair play and legal provisions. It is the mandatory duty of the Resolution Professionals to invite Expression of Interests because in absence of that there would be no possibility of any prospective applicant to make an offer.

NCLT under IBC doesn’t have jurisdiction to examine the legality of a foreign decree

In the case of “Usha Holdings L.L.C. vs Francorp Advisors Pvt Ltd”[32], NCLAT held that Insolvency resolution is not litigation and Adjudicating Authority under IBC is not Tribunal or court. Accordingly, NCLAT doesn’t have the jurisdiction to decide whether the foreign decree is proper or legal.

In this case, an appeal was filed against the order of refusal to admit a petition under Sec 9 of the IBC. The appellant’s claim for being an operational creditor was rejected on the basis of money decree passed by the US Court to which the company was complying with.

Recognition of Rights of Operational Creditors

In the Case of “Mobilox Innovations Private Limited (“Mobilox”) versus Kirusa Software Private Limited”[33], the Supreme Court of India has settled the issue of the interpretation of the term “dispute in existence”[34] under the IBC-2016.  Here the question was raised before the Supreme Court as to the interpretation of the code as to what would constitute dispute when it comes to the debts which is owed to the operational creditors.

It was held by the Supreme Court that for the existence of dispute all that NCLT is required to see is whether there is any plausible contention which makes it necessary for further investigation and that such dispute is not the shaky legal argument or just the fact uncorroborated by the evidence.

Delayed claims

In the case of “Speculum Plast Pvt. Ltd v PTC Techno Pvt. Ltd[35]” the NCLAT held that the provisions of the Limitation Act shouldn’t apply to the proceedings initiated under the code. It was held by the NCLAT that for the proceedings under the code the Limitation Act should not apply.

Further, it was clarified by the NCLAT that in the scenario where an application is filed under “sec 7” [36] or “sec 9”[37] of IBC after a long delay, NCLT will provide an opportunity to the applicant under above-mentioned sections to provide an explanation for such delay and before rejecting a belated application any negligence on the part of an applicant can be taken into consideration.

However, it was specifically clarified that the same opportunity won’t be provided to the applicant filing an application under Sec 10 of the code for initiating insolvency resolution process by the corporate debtor against itself in case there is no specific debt or claim. In the case of a claim, it was held by the NCLT that it is the Committee of Creditors who will decide whether such a claim after a long delay can be accepted or not.

If the creditor feels aggrieved by such decision, he can apply to the NCLT for the relief. However, this specific relief for limitation is applicable only on the claims before initiation of the IBC. Through the amendment in 2018[Ins. by Act No. 26 of 2018, sec. 34 (w.e.f. 6-6-2018] sec 238-A was inserted in code which provides for the application of limitation to the code.[38]

Thus this move has cleared all litigations around the country regarding the applicability of the limitation to the IBC.

Certificates for Operational creditors

In the case of “Macquarie Bank Limited v Shilpi Cable Technologies Limited”[39], it was held by the Supreme Court that under sec 9(3)(c) of the Code, for operational creditor the requirement to provide a certificate from the financial institution is not a mandatory and only directory.

The second issue which was touched by the Supreme Court was whether a demand notice of unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?

The Supreme Court answered in affirmative and further held that a court must endeavour to interpret the IBC in a manner that would fulfil its objectives without creating major inconvenience for the innocent parties.

Timeline for rectification of defects

In the case of “JK Jute Mills v M/s. Surendra Trading”[40], it was held by the NCLAT that prescribed period of 14 days for Adjudicating Authority requiring them to pass such order is directory however the period of 7 days which is given to the operational creditor or applicant to rectify the defects in the application is mandatory.

However, it was held by the SC that such period of 7 days to rectify the defects in the application by the operational creditor is also directory and mandatory. On the other hand, the SC has clarified that in the case where such defect is not removed within 7 days, it is mandatory for the applicant to file an application and to show sufficient grounds for the delay due to which objections were not removed within 7 days.

This ruling providing time limit of 14 days for adjudicating authority and 7 days for operational creditor only directory can stretch the timelines in the insolvency process. However, recognition of time as an essence might be helpful to avoid unnecessary delay. It is yet to see whether this ruling will provide fairness or open a way to use it as a tactic for delaying insolvency proceedings.

Analysis of the evolution of IBC through Essar steel judgement

In a recent judgement of “Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors”[41], the Supreme Court has clarified certain core issues regarding Insolvency and Bankruptcy Code, 2016 specifically related to Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’). The present research paper attempts to encapsulate the core of the judgement which has evolved the IBC in a specific manner. The crux of the judgement is as follows:

Jurisdiction of Appellate tribunal and adjudicating authority

In this judgement, the Supreme Court has clarified the scope of judicial review which can be exercised by the Adjudicating Authority and held that it is confined within the ambit of “Sec 30(2)”[42] of the IBC while on the other hand scope of review by the Appellate Tribunal was held to be within the grounds which are provided in “Sec 32”[43] of the IBC read with Sec 61(3).

For Adjudicating Authority it was observed that it can’t exercise equity or discretionary jurisdiction outside the ambit of Sec 30(2) of the IBC in the case where the resolution plan is put before Adjudicating Authority.

It was emphasised by the Supreme Court that the ultimate discretion regarding how much to pay and what to pay to each class or subclass of creditors lies with the COC-Committee of Creditors. It was however with a caveat that the decision of the committee of creditors shall reflect the fact that it has taken into consideration of requirement that the corporate debtor to keep going as a concerned party during the resolution process.

Meaning of that is that COC requires to maximize the value of corporate debtor’s assets and similarly on the other hand interest of all stakeholders which includes operational creditors needs to be considered.

Further, it was observed by the Supreme Court that in such cases where nothing is paid to the operational creditors or the minimum value/ liquidation value which is in most cases is nil after all secured creditors are paid, would not maximise the value of assets of corporate debtors or balance the interest of stakeholder if running of business becomes impossible.

Further, it was held that the judicial review by the Adjudicating Authority includes the examination of resolution plan and to determine that whether such resolution plan approved by the committee of creditors has met the conditions required under Sec 30(2) of the IBC.

Further as mentioned in Sec 30(2) judicial review would include keeping check that such resolution plan submitted by the COC doesn’t contravene any other law for the time being in force including the provisions mentioned in IBC as they are also provisions of law time being in force. If it is found by the adjudicating authority that there is a breach of any condition mentioned as above, it may return the resolution plan to the COC and compel them to re-submit such resolution plan after satisfying above-mentioned criteria.

Equitable treatment to creditors

It was categorically stated by the Supreme Court that equitable treatment is to be applied to similarly situated creditors and such equitable principle can’t be stretched to treat unequal equally.

Such equitable treatment is to be rendered to each creditor based on their class to which they belong to whether unsecured or secured, operational or financial.

Further, it was held that there is no law to not to approve the resolution plan only on the ground that it is unjust or unfair to a class of creditors as long as the interest of each class has been taken into considered and looked into.

The validity of sub-committee constituted by Committee of creditors

With regard to the exercise of Committee of Creditors’ powers it was held by the Supreme Court that such powers which have a serious impact on the running of the business of the corporate debtor, such powers shall not be delegated to any person as per provisions of sec 28(1)(h) of the code.

Also for the approval of resolution plan under Sec 30(4), the same also can’t be delegated to any other person as it is the only committee of the creditors who have been vested with the power to take such decision which it needs to take itself.

It was clarified by the Supreme Court that appointment of sub-committees can’t be done for the purpose of performing administrative or ministerial acts, or for the negotiating with resolution applicants provided that such acts are ratified and approved after due analysis by the Committee of Creditors.

Extinguishment of undecided claims and personal guarantees

It was made clear by the Supreme Court regarding the effect of approving of resolution plan on such claims of the creditors who did not submit their claims before the RP- Resolution Professionals within the specific time period provided under the code.

It was laid down by the Supreme Court that once under Sec 31(3) of the IBC resolution plan is approved by the committee of creditors it shall have a binding effect on all stakeholders and guarantors. It was held by the Supreme Court that once a resolution plan by the successful creditor has been accepted, he can’t suddenly face the challenge of undecided claims thereafter. Such an act would throw a prospective resolution applicant who has taken over successfully business of corporate debtor into the uncertainty of claims.

All such claims are required to be submitted before and decided by the Resolution Professionals in order to make aware a prospective resolution applicant exact amount to be paid to successfully take over and run business of the corporate debtor.

The National Company Law Appellate Tribunal/ the Appellate Tribunal in its judgement also rejected rights of the creditors against the guarantees which were extended by promoters or group of promotors of the corporate debtor. However such decision was overruled by the Supreme Court on the ground that it was violative of Sec 31(1) of the IBC and Supreme Court’s ruling on “State Bank of India vs V. Ramakrishnan”[44]

Apart from above, it was argued by the guarantors of the corporate debtor that the rights of subrogation can’t be extinguished by the resolution plan. It was observed by the Supreme Court that it is difficult to accept the contention that part of the resolution which provided that on an instance of subrogation claims of guarantors extinguished do not apply to the directors of the corporate debtor.

However, in respect of the present case, it was clarified by the Supreme Court that it is refraining from stating anything which might have an effect on the pendency of litigation due to invocation of such guarantees.

Utilization of profits of the corporate debtor

It was held by the National Company Law Appellate Tribunal that the profits of Corporate Debtor during the process of Corporate Insolvency Resolution Process shall be utilized to pay off creditors of the Corporate Debtor. However, the Supreme Court overturned the decision and held that after the consented proposal is approved by the COC, such profits won’t go the creditors.

The constitutional validity of Section 4 of the IBC (Amendment Act) 2019

Constitutional Validity of Sec 4 of the IBC (Amendment Act) 2019 hereinafter referred to as Amending Act -2019 was under constitutional challenge before the Supreme Court.

Sec 4 & Sec 6 of the IBC Amending Act, 2019 brought the mandatory time period of 330 days[45] for completion of Corporate Insolvency Resolution Process failing of which the liquidation process of the corporate debtor would be initiated.

It was observed by the Supreme Court that time period of legal proceedings should not be such which would harm a litigant in the case where tribunal itself would be unable to take up the case within the specified period without fault of the litigant.

It was further held that mandatory deadline provision without such exception would violate Art-14 and Art 19(1)(g) of the Indian Constitution. Because of that, the Supreme Court left sec 4 of the Amending act intact and only struck downed the mandatory provision for being violative of art 14 of the Indian Constitution.

It was held that its restriction was excessive and unreasonable which hampers applicant’s right to carry business, as per Art 19(1)(g) of the Constitution. 

Clarification of effect of such declaration was made and it was laid down that in ordinary case the time taken in Corporate Insolvency Resolution Process must be within the limit of 330 days from the date of commencement of insolvency proceedings including extensions period and the time period in legal proceedings.

However as per the facts of the case if it can be validly shown that only a short period beyond 330 days is required for completion of CIRP and it is in the interest of all stakeholders that instead of liquidation corporate debtor is put back on its feet and the delay in legal proceedings is due to factors which are beyond controls of litigants before the Appellate Tribunal or Adjudicating Authority or large part of such factors are attributable to the delayed process of Appellate Tribunal or Adjudicating Authority itself.

It was held that, in such scenario, time limit of 330 days can be extended.

Disputed claims before resolution professionals

In this case, the Resolution Professionals admitted claims of certain creditors at a notional value of INR 1 on the basis that various disputes were pending before many authorities in respect of the said claim/amount.

However, the Adjudicating Authority and even the Appellate Authority in appeal held that Resolution Professionals are required to register the entire claim.

However, the said decision by the Appellate Authority was set aside by the Supreme Court and it was held that Resolution Professionals were correct in admitting claim at an only notional valuation of INR 1 because of pendency of numerous cases with respect to such claims.

Conclusion and Recommendations

The IBC 2016 is a vital reform which will make it easier to do business in India. The Code will lead to the availability of the credit, balancing the interest of all stakeholders and promote entrepreneurship by amending and consolidating laws related to insolvency resolution of individuals, partnership firms and corporate entities and for maximization of value of assets of the corporate debtor.

The Insolvency and Bankruptcy Code promises to facilitate faster and better debt recovery mechanism and to make it easier to wind up the failing business in the country. The Code is a revolutionary step as through it the credit market is going to be transformed which was malfunctioning due to malpractices and various other problems. The entire code will be implemented through NCLTs and DRTs.

Insolvency and Bankruptcy Code is one of the best reforms implemented by the Indian Government. Firstly the appropriate result needs to be within 330 days. Prior to amendment in IBC, the requisite period was of maximum 180 days which would further allow only one-time extension of 90 days from the date of commencement of insolvency proceedings.

However, it was not practically possible for CIRPs, to conclude all the proceedings within 270 days. This was one of the lacunas of the code which was rectified through 2019 amendment. However, the amendment provided mandatory completion of the proceedings within 330 days and 90 days for transitionary measure after which there will be a risk of liquidation.

This was also acting against the interest of several stakeholders due to delay being caused by the adjudicating authority. Thus in Essar Steel Judgement, the Supreme Court struck down the mandatory provision. However, it now becomes the duty of the Adjudicating and Appellate Authority that time-line of 330 days is extended only in exceptional cases.

Secondly, it is the creditors whose money is at stake and thus Code provides the Committee of Creditors powers to take vital decisions concerning the practicality of running of business and resolution process. 

Thirdly that it is the NCLT which should be judging viable maters of fairness and priority shall be given to the Insolvency Professionals. The IBC aims to justify procedure and process for insolvency and bankruptcy. It intends to increase creditors’ assurance in Indian Market and for that advance procedure for recovery of debts.

Though Code is in its initial stage it has attempted to bring changes through various amendments and have attempted to rectify lacunas. Initially, under the code, it was uncertain that whether amalgamation, merger or demerger can be included under a resolution plan. After 2019 it is now clarified that the resolution plan can include amalgamation, merger or demerger.

The Government has brought many amendments in Insolvency and Bankruptcy Code 2016 to make it an effective instrument to deal with insolvency proceedings. For example, initially, criteria to become Resolution Professionals were not defined and now they are very well defined.

Another example of the needful amendment is a requirement for approval of resolution plan by 75% of Creditors which is now reduced[46] to 2/3rd or 66%. Because initially, only 26% of dissenting creditors could take the company into liquidation.

However, one thing which is not changed is the minimum value of default which can trigger the insolvency proceedings which is just a sum of Rs. 1, 00,000/- because in a corporate regime any small vendor under late-payment or non-payment of dues can initiate Insolvency proceedings although such late payment might be due to temporary disturbance in the cash-flow.

This will increase the caseload of NCLT. To prevent this minimum threshold value to file a suit shall be increased and also no. of benches for NCLT shall be increased. Apart from it to prevent multiplicity of proceedings all powers at initial stage shall lie to NCLT only through IBC and High Court shall have only supervisory power through appeal.

No case shall be allowed to file in different form such as DRTs unless NCLT has adjudicated or rejected the petition. An attempt shall be made to bring all laws regarding debt recovery into single umbrella legislation of Insolvency and Bankruptcy Code.

Though Insolvency and Bankruptcy Code has certain lacunas, the Government has played a pro-active role in bringing amendment in this code. Through the introduction of this code, the Indian Corporate Market can see the hope for a better future for creditors as well as motivation for new investors. Further effective implementation of this code will result into lesser pendency of insolvency of the suit. The quick judicial decision would further result in maximization of assets of the corporate debtor and thus would be more beneficial to creditors.

Author: Nisarg Shah

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[1] Available at http://legislative.gov.in/actsofparliamentfromtheyear/sick-industrial-companies-special-provisions-act-1985

[2] Available at http://legislative.gov.in/sites/default/files/A2002-54.pdf

[3] Available at http://www.drat.tn.nic.in/Docu/RDDBFI-Act.pdf

[4] Available at ebook.mca.gov.in/default.aspx

[5] It is to be noted that creditors even have right to approach the Arbitration Tribunal or Civil Courts for contractual obligation.

[6]As per Sec 5(7) of IBC “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

[7] As per amendment in sec 5(8) of the code-through Ordinance of 2018 for Insolvency and Bankruptcy Code- any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;  [Explanation. -For the purposes of this sub-clause, – (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

[8] As per Sec 5(20)of IBC “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

[9] As per Sec 210 of the IBC, these utilities needs to be registered with the IBBI

[10] See Sec 215 (2) of the IBC

[11] See Sec 215(3) of the IBC

[12] As per Section 61, of the IBC

[13] As per Section 182, of the IBC

[14] As per Section 231, of the IBC

[15] Section 238A, Insolvency and Bankruptcy Code, 2016 (As amended by the Insolvency and Bankruptcy (Amendment) Ordinance, 2018.

[16] CA No. 9402 – 9405 of 2018.

[17] Sec-29A. Persons not eligible to be resolution applicant.

[18] CA No.26/2018 in Company Petition No.(IB)77/AD/2017.

[19] Sec 53of the IBC-.  Distribution of assets.

[20] CA (AT) (Insolvency) No. 428 of 2018.

[21] See Sec 238 of IBC

[22] Sec 241 of the Companies Act-2013. Application to Tribunal for relief in cases of oppression, etc

[23] Sec 242 of the Companies Act -2013- Powers of Tribunal

[24] CA No. 21824 of 2017.

[25] Available at- Writ Petition No. 8650 of 2018https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jul/26th%20Jul%202018%20in%20the%20matter%20of%20Leo%20Edibles%20&%20Fats%20Ltd.%20Vs.%20The%20Tax%20Recovery%20Officer%20(Central)%20IT%20Dept.,%20Hyderabad_2018-07-27%2014_02_39_2018-07-28%2021:02:14.pdf

[26] CA (AT) (Insolvency) No. 61 of 2018. Available At https://nclat.nic.in/Useradmin/upload/7456493665b6a891d72c52.pdf

[27] Also See- Export Import Bank of India v. Resolution Professional, Company

[28] CA (AT) (Insolvency) No. 61 of 2018

[29] CA (AT) (Insolvency) No. 82 of 2018.

[30] (IB)-40(PB)/2017.

[31] INVITATION FOR EXPRESSION OF INTEREST- (Under Regulation 36A (1) of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[32] Civil Appeal (AT) (Insolvency) No. 44 of 2018.

[33] CIVIL APPEAL NO. 9405 OF 2017 Available At https://indiankanoon.org/doc/166780307/

[34] Sec 8(2) of the IBC

[35] Available at https://taxpublishers.in/Ency_CL/CL_Judg_Show?83974000?a0

[36] Sec 7 deals with Initiation of corporate insolvency resolution process by financial creditor.

[37] Sec 9 deals with Application for initiation of corporate insolvency resolution process by operational creditor

[38] Sec-238-A The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be

[39] SC Civil Appeal No. 15135 of 2017 Available at https://indiankanoon.org/doc/185937110/

[40] Available at https://ibbi.gov.in/1stMay17JKJuteMills_SurendraTradingALD2017.pdf

[41] CIVIL APPEAL NO. 8766-67 OF 2019 in SUPREME COURT. Available at https://www.ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdf

[42] Sec 30(2) of the IBC deals with method of examination of resolution plan by Resolution Professional

[43] Sec 32. Of IBC   Appeal. – Any appeal from an order approving the resolution plan shall be in the manner and on the grounds laid down in sub-section (3) of section 61.

[44] Supreme Court CIVIL APPEAL NO. 4553 OF 2018 available at https://ibbi.gov.in/webadmin/pdf/order/2018/Aug/11958_2018_Judgement_14-Aug-2018_2018-08-14%2022:04:34.pdf

[45] As per Amended Sec 12 of the IBC

[46] Sec 30(4) of the IBC

Edited by Medha Mukherjee