Overview: INSOLVENCY AND BANKRUPTCY CODE, 2016: CHALLENGES AND REFORMS

Profile of the Author: Bhakti Vakil, student of Prestige Institute of Management and Research, Department of Law, Indore pursuing B.A. LL.B (Hons.) 5th year having areas of interest in constitutional law, civil law, corporate law and intellectual property law.

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 replaces a fragmental legal framework and a broken institutional set-up that has been delivering poor outcomes for years for creditors and distressed businesses seeking an exit. Prior to 2016, the insolvency laws were extremely fragmented in India among the Provincial Insolvency Act, 1920, Companies Act and the Sick Industrial Companies Act. The need for a comprehensive law encapsulating the entire insolvency regime was deeply felt; hence the enactment of a unified insolvency code was a welcome step.

PURPOSE OF THE ACT

It is believed that IBC is not only the most well – intentioned, but also ambitious piece of economic legislation in the country. It is one of the key structural reforms to resolve India’s non-performing assets conundrum. It was set up on the basis of four critical pillars [1]:

• A robust and efficient adjudicating authority to hear the cases
• A regulated professional of insolvency Professional (IPs) to manage the insolvency and bankruptcy cases
• A regulated competitive industry of information utilities (IUs) to reduce information asymmetric in the insolvency resolution process.
• A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform legislative, executive and quasi-judicial functions with respect to the IPs, and IUs and draft regulation for the resolution procedure under IBC.

The code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnership and individuals. The ‘Bankruptcy Law Reforms Committee’ under the Ministry of Finance drafted the code to curb the insolvency issues pertaining to the companies. But there are various amendments and changes made throughout these four years, which still leave space for improving.

CHALLENGES FACED AFTER IMPLEMENTATION

After implementation, the code faces certain challenges which created chaos and moreover led to complication in the resolution process. Some of the major concerns raised were:

• The biggest issue is NCLT dealing with the matter of insolvency. As NCLT already was overburdened because it dealt with the cases of former Company Law Board (CLB) and the new cases coming into way at the time. Moreover, after the code, cases with Debt recovery tribunal (DRT) and Board for Industrial and Financial Reconstruction (BIFR) are to be considered as IBC cases.
• Since NCLT would deal with pre-IBC cases, the laws, regulation, definition and procedure would that of previous laws. Therefore, the code needs to be more clear and perfected as law, NCLT found it monotonous to mold the case laws and judgment under new law, and the procedures.
• IBC mandates that an insolvent asset must be resolved in 270 days. If an insolvent asset does not find a buyer within that period or if the committee of creditors, the decision making body on these assets, is not happy with the bids, the asset should be liquidated at the minimum value assessed by the resolution professional managing the asset [2].
• It requires one committee of creditors consisting of all financial creditors to be constituted without cap on number. Many companies have depositors or investors with assured returns running into thousands. Having a large number of creditors in the committee affects smooth conduct of meetings. In many jurisdictions, law provides different committees for different classes of creditors. A similar provision is needed in IBC.
• The lack of IU infrastructure is going to be another challenge. Under the IBC, a CIRP can be triggered only when a default by the debtor company has taken place. In the IBC design, the IU enables a quicker initiation of cases by providing access to irrefutable and transparent evidence of the default.
• The narrow definition and language of insolvency resolution process cost restricts advance against supplies and similar payments to be treated as resolution process cost, thus preventing refund on priority in the event of default.
• Many big cases have assets located in other jurisdictions. It is challenging to claw back these assets in the absence of cross-border insolvency law.
• Insolvency proceedings of subsidiaries are likely to end up in different NCLTs as the jurisdiction is decided by the registered office of the debtor. This would lead to incoherence in insolvency proceedings of group companies. The law should also mandate one RP to be appointed for a group of companies.

REFORMS/AMENDMENT MADE

After 2016, the Government of India has made many amendments considering the economic condition and the poor implementation of the code. Major changes were made in 2018 and recently amid the COVID scenario, the Government issued The Insolvency and Bankruptcy Code (Second Amendment) Act, 2020. The changes so far made are:

• The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 inserted Section 12A titled ‘withdrawal of application admitted under Sections 7, 9 or 10. The section provides that withdrawal of the insolvency application under sections 7, 9 or 10 will be allowed only if approved by 90% of the voting share of the Committee of Creditor.
• The Insolvency Law Committee [3] recommended the insertion of a specific section making the Limitation Act applicable to the code. Hence section 238A was inserted through Amendment Act which lays down that provisions of Limitation Act, 1963 shall apply to the proceeding or appeal under the code.
• The Committee recommended that the voting share for approval of resolution and other critical decisions such as extension of CIRP beyond the statutory period of 180 days under Section 12(2), replacement or appointment of resolution professional under Section 22(2) and 27(2), and passing a resolution for liquidation under section 33(2), be reduced from 75% to 66% or more of the voting share of financial creditors.
• The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 provides that for default arising during the six months from 25th March, 2020, CIRP can never be initiated by either the company or its creditor [4]. It can extend to one year via further notification as the Finance Minister Nirmala Sitharaman said “IBC is not a recovery law. Its main purpose is to save companies and keep them as a going concern”.
• The Amendment Bill of 2020 prohibits RP from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited [5] under Section 10A.

Apart from these variations, the Government of India dealt with other issues like preferential and undervalued transactions, bar under section 29A(g), insertion of Section 240 to support MSME sector and so on.

CONCLUSION

In a short span of time, the code has thrown up a bunch of legal issues. As a result, businessmen, lawyers, judges and specialized professionals have faced unique challenges. Considering the poor implementation, vagueness of the provision, it was not surprising to witness frequent amendments being made to the code. However the intervention of the judiciary and report of the Insolvency Law Committee has delved into most of the problems and suggested adequate reforms.

FREQUENTLY ASKED QUESTION (FAQs)

1. Does the COVID-19 affect the IBC law or the companies that were already in debt?

This COVID pandemic affected every sector, including companies. The Finance Minister of India, Nirmala Sitharaman pointed out the suffering and hence inserted section 10 A in the code which indicates that the Government wanted to give opportunities to the companies to be stable.

2. How the reforms so made impacted on the companies, does the progression enhance?

The reforms are the clear depiction that due to slow growth, the committee needs to be set up so that the suggestion to improve the insolvency process can be provided. Together the committee and the judicial intervention enhance the growth as if the flaw had not been detected it would affect the economy. And that’s the last thing the Government wanted, still the experts are in the view to have a more clear vision on this matter.

[1] Rajeshwari Sengupta and Anjali Sharma ‘Challenges in the transition to the new Insolvency and Bankruptcy Code’ (The wire, 15 Dec 2016)

[2] Joel Rebello & Atmadip Ray, ‘With IBC about to be 3, a look at the hits & misses and the road ahead’ The Economic Times (New Delhi 24 April 2019)

[3] Ministry of Corporate Affairs, A report of Insolvency Law Committee (26TH March, 2018)

[4] Insolvency and Bankruptcy Code, 2016 Section 10 A

[5] Insolvency and Bankruptcy Code, 2016 Section 66(3)

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