Insolvency and Bankruptcy Code, 2016 is said to be the next big economic reform after GST. There is a drastic need to enact this as legislation as none of the regulatory bodies is in line with standards prescribed by the international organizations. This code has essentially strived to revamp the prevailing frameworks on Insolvency and Bankruptcy of individuals and corporates by offering uniform and comprehensive code. The pre-existing laws are ineffective and inefficient and have caused gargantuan strain on an Indian credit system.
In many cases, parties still follow the 19th-century procedure of Insolvency and Bankruptcy i.e. prescribed under the Indian Contract Act, 1872. The enactment of various legislation likes Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, are unable to give the desired denouement. Sick Industrial Companies (Special Provisions) Act, 1985 and the winding-up provisions of the Companies Act, 1956 have dwindled the confidence of money lender. The other enactments like Presidential Towns insolvency Act, 1909 and the Provincial Insolvency Act. 1920 are now centuries old and are rarely used in contemporary cases and their existence is also little known. These antediluvian laws are the reason that India ranks 136 out of 189 countries as per the index of the World Bank index on ease of resolving insolvencies.
Part I of the code deals with scope and definitions of corporate insolvency mechanisms germane to company, limited liability partnership and other entities. It talks about two types of process i.e. insolvency resolution and liquidation.
Talking about the timeline, the code prescribes 180 days in which the insolvency resolution process has to be completed. During this time with the creditor and debtor are expected to negotiate and finalize a resolution plan through resolution professionals.
Also, in order to achieve quick triggers, the code prescribes mechanisms that can be used on the early sign of distress.
Part III of the code deals with the insolvency of individuals and partnership firms. There has been a minimum INR 1000 of threshold to initiate the process. Though certain debt is excluded from the ambit of the code that is secured debt and other excluded debt. These excluded debts are a liability imposed by court/tribunal, student load, maintenance under law, unencumbered life policy, pension plans, etc.
The debtor has the right to initiate a fresh process under this code. Though conditions stipulated in the code are stringent for example the debtor’s income must not exceed INR 60,000 and debt shall not exceed INR 35,000. The interim-moratorium period will be issued to the debtor for 180 days during which no case of debt can be filed against him/her. There are certain restrictions imposed on him/her during that period, for example, he/she cannot act as a director of a company and right to depose the assets are also ceased.
Insolvency resolution process under individual bankruptcy
(i) Repayment plan– The creditors and debtors have to arrive at a plan on how and when the repayment is to be made. The process will be supervised by the insolvency professional.
(ii) Moratorium – The code prescribes a period of 180 days within which the adjudicating authority has to pass an order, failed to act within such period the moratorium of the debts under consideration shall cease to have an effect.
(c) Bankruptcy trustee– Like in the case of corporate insolvency, the bankruptcy trustee is responsible for managing the assets of the individual bankrupt
Institutional Framework mandated by code
The Code has either ameliorated the pre-existing institution or has contemplated establishing a new institution. These institutional frameworks are Adjudicating authority, Bankruptcy trustees, Committee of creditors, Insolvency professional agency and Insolvency professionals.
The code promulgates Debt Recovery Tribunal (DRT, for sake of brevity) as the adjudicating authority for the matters of insolvency and bankruptcy concerning Individuals and Partnership Firms.
This step of the code has been criticized a lot, as DRT is already overburdened with lots of pending cases and is indolent in disposing of the cases. Making it as an adjudicating authority will aggravate the quandary of the tribunal, which is also suffering from the inadequacy of infrastructure and inefficient and miniscule no. of staffing. DRT also entertains the case of SARFAESI Act, which eventually will encumber the tribunal with many jurisdictions. DRT has not even fulfilled their primary roles effectively which is now aggravated with the induction of cases of the old and new jurisdiction. Further, there are few tribunals in a state, and accessibility to those tribunals is arduous.
There was an improper judicial impact assessment on the part of the legislation. Judicial impact assessment is a process whereby the legislator tries to anticipate the probable cost and infrastructure which is a must for proper and effective implementation of law.
Bankruptcy Trustee (BT, for the sake of brevity) has to be the insolvency professional. She/he will be responsible for all the estate of the bankrupt, and distribution of all the assets on the basis of priority. Also, no reason was provided in the court for designating insolvency professional as BT. This could also create a ruckus in the process of resolution as bankruptcy trustee is responsible for many stakeholders and there would be many stakeholders who would claim to be the beneficiary of the trustee. They are also given plenipotentiary power to carry on their decision without prior approval of the committee of creditors.
Committee of Creditors
The code envisages the committee of the financial creditor which is to be constituted by the interim resolution professional. There is a minimum 75 % vote required to make any decisions. The committee with the assistance of interim resolution professional can call for any information that is pertinent to their issue. The operational creditor is excluded from the committee of creditors as they are not expected to ruminate on affairs related to commercial viability. The committee plays a crucial role in overhauling the process and functioning of liquidator.
The main function of the committee is to appoint resolution professional (the code also has provision to appoint an interim resolution professional as the resolution professional). The probable reason for the code to bestow the committee with this power is because they have the incentive to choose the most equipped resolution professional because the fee payable to him will be deducted from the final amount due to the creditors. The resolution professional has to work under the aegis of the committee of creditors.
Anyone to be insolvency professionals has to register with the board. There are certain codes of conduct and principles as contemplated in the code. The various role enshrined in the code viz. Resolution professional, Bankruptcy trustee, and liquidator. This makes the role of insolvency professional very pivotal. She/he has to monitor the performance of members and to assign general principles for the professional conduct of its members.
The role of information utility is defined under the code, which is to create and store financial information in a universally acceptable format. As the name suggests, all the matters concerning information have to be given to information utility. There are many information utilities mentioned in the code, but the fact is that these all are already present in the repository and will now be burden with super-repository.
Insolvency and Bankruptcy Board of India
Amongst various innovative approaches, establishing Insolvency and Bankruptcy Board of India is one of them. The board will be a body of corporate having the perpetual succession and will be in each state. The board has the right to register insolvency professional agencies, insolvency professionals and information utilities and to specify their eligibility requirements. The board also has the onus to promote transparency and best practices in governance. All the records relating to insolvency and bankruptcy cases are to be kept in the record by the board. The board is responsible for the periodic research and study for the efficient functioning and performance of the insolvency professional agencies. The board will have its head office in Mumbai as it is the financial capital of the country.
Some of the paradigm shift brought in by establishing this board are:-
- Has the authority to levy fees and charges on the registration of insolvency professional agency, resolution professional and information utilities.
- To keep a check on the work of insolvency professional agency, resolution professional and information utilities and to order them to comply with the norm
- To ask insolvency professional agency, resolution professional and information utilities any information that is germane to their work.
The committee of creditors with the supervision of resolution professional approves a resolution plan. A resolution applicant is the one who submits the resolution plan and which is to be approved by the committee of creditors. Resolution applicant can be any person – a creditor, a debtor, manager, etc.
The code does not talk about nitty-gritties about the process of appointment of a resolution applicant. This might become a big shortcoming as ‘any person’ is defined ambiguously in the code, which in turn can be a benefit for ‘any person’ as he/she can enter the process through the backdoor without following any formal process.
SECTION 29-A: PANDORA’S BOX
Fortunately, the legislator took note of this fault and to curb this loophole an ordinance was introduced in November 2017 and then in January 2018. Section 29-A than becomes the most debatable provision. Now the definition is wider and as per Section 25(2)(h), the resolution applicant is the one who submits a resolution plan.
From the perspective of a resolution applicant, the provision.on of 29-A is Pandora’s Box as it puts up an applicant in the negative list on failing some criteria and eligibility. Section 29-A list the ground under which resolution applicants can be disqualified. These conditions are: –
- If a person is an undischarged insolvent
- As per the guidelines of the RBI if the resolution applicant is the wilful defaulter
- The person is convicted of an offence which is cognizable in nature and is punishable with more than 2 years
- A person which is impeded by the SEBI for trading
- An overarching analysis of Section 29-A depicts that there are typically 4 layers of ineligible applicants-
- 1st Layer – Where the person is itself ineligible
- 2nd Layer – Where a person connected with resolution applicant is ineligible
- 3rd Layer – Where a person is ‘related party’ of person connect
- 4th Layer – Wherever a person is acting under the aegis of a person falling under first/second/third layer of category
In the case of RBL Bank Ltd. v MBL Infrastructure Ltd.Where a resolution plan, submitted by the promoter was rejected after the Insolvency and Bankruptcy (Amendment) Ordinance, 2017 (‘Ordinance’), which notified Section 29A to the Insolvency and Bankruptcy Code, 2016 (‘the Code’), was brought into force. The NCLT took a view that refusal under clause (c) should not be valid, as the period of 1 year did not lapse after the account was notified as NPA.
With respect to clause (h), NCLT took a view that there was no intention of the Government to exclude all the promoters, only for the reason for issuing a guarantee which is enforceable, unless such guarantee has been invoked and not paid for, or the guarantor suffers from any other antecedent listed in Section 29(a) to (g). The objective of the Ordinance is to restrict some people from submitting a Resolution Plan who, on account of their antecedents, may unfavorably affect the reliability of the process under the Code.
The guarantors in respect of whom, a creditor has not invoked the guarantee or made a demand under guarantee should not be prohibited. Therefore, no default in the payment of dues by the guarantor has occurred, cannot be covered under clause (h) of Section 29(A). It cannot be the intent of clause (h) to penalize those guarantors who have not been offered an opportunity to pay by calling upon them to pay the dues, by invoking the guarantee. Therefore, the words “enforceable guarantee” appearing in clause (h) are not to be understood by their ordinary meaning or in the context of enforceability of the guarantee as a legal and binding contract, but in the context of the objectives of the Code and Ordinance in general and clause (h) in particular.
Following are challenges that may be faced in matters of implementation and administration of the Code:
- Shortage of NCLT Benches – Considering the fact that the NCLT has an inadequate number of judicial and technical members, unless, there are dedicated benches to hear insolvency cases or the number of Benches are significantly increased and well equipped, effective disposal of insolvency matters may become a distant dream.
- Quality professionals’ shortage – Successful implementation of the Code will require a huge force of trained and skilled insolvency professionals. A strong focus and a well-defined plan will be needed to develop a large pool of insolvency professionals and an institutional structure that will produce, certify and regulate them. Such insolvency professionals will not only need to understand the nuances of restructuring/liquidation but must also be capable of carrying out the affairs of the company during the process. Until an efficient infrastructure of insolvency professionals who are efficient managers is put in place, effective implementation of the Code would seriously be prejudiced.
- Need for better monitoring of insolvency professionals (IPs) – There is a need to ensure an adequate mechanism to monitor the IPs in place so as to ensure transparency and avoid unethical practices. This would entail significant capacity building both in terms of human resources and IT capabilities.
- Interplay of existing laws – The Code not only repeals two statutes but also amends eleven other statutes such as Companies Act, SICA, SARFAESI, etc., for effectuating the provisions relating to insolvency and bankruptcy of all legal and natural persons under the Act. It is imperative that the provisions of all the key legislations are synchronized in order to ensure that there are no discrepancies or overlaps with existing laws. Failure to ensure this may lead to more confusion in the short run as far as applicability of specific laws is concerned.
- Information systems – The underlying assumption for the success of the Code is to have access to quality information. For this to materialize, robust utilities with state of the art technologies will swiftly need to be put in operation.
- No timeline for disposal of appeals – The Code does not prescribe any timelines within which the NCLT is required to approve or reject a resolution plan. Similarly, there are no timelines prescribed for disposal of appeals. Therefore, the resolution could still be a long drawn process.
- Financial creditors vs. operational creditors – Operational creditors will receive their dues after unsecured financial creditors, in order of priority. Credit is extended by financial creditors after a higher level of risk assessment, whereas the same opportunity may not be available to operational creditors due to business exigencies. Thus, their position in the order of priority for the distribution of assets during liquidation prejudicially affects their interest. This one was also discussed in the case of Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd.,
- High cost of bankruptcy resolution process – The Code adopts the UK bankruptcy regime. Studies conducted in the UK on their bankruptcy regime reveal that while adoption of the same resulted in higher realizations, they also correspondingly increased the cost of bankruptcy which may not materially improve recoveries.
- Non-cooperative management – The formulation of a resolution plan would depend on the quality and sufficiency of the information contained in the information memorandum (‘IM’). The ability of the IRPAs to prepare a detailed IM would depend on the cooperation of the management as they would alone be privy to the management and operations of the company.
- Role of the Insolvency Board – Instead of making the IPs and/or IPAs self-regulated, the Board has been assigned with the responsibility of regulating their performance and laying down the standards of performance. In most insolvency/ liquidation proceedings, Government will be an interested party for recovery of the unpaid statutory dues of its several departments. This will make the impartial operation of insolvency professionals (whose entry and exit in the insolvency profession is regulated by the Government through the Board) difficult. As such, for achieving the objectives of the Code and ensuring good governance of the IPs and/or IPAs, the minimum standards set by the Board should be further strengthened in practice with self-regulation.
Recommendations and Conclusion
The code is a landmark piece of legislation in making a drastic paradigm shift of the laws related to insolvency and bankruptcy. India can now boast of having legislation which is in consonance with the international standards
The code in its institutional framework proposes the need for lots of infrastructures, which is very difficult seeing the land allocation problem in India and the wretched condition of pre-existing tribunals. The code further talks about lots of professionals and trained and skilled staff. The need is to establish a proper institution which will train, regulate and certify these professionals. They must be capable enough to carry out the process of insolvency of the company as well as individuals. Doubtless, the process would take lots of resources of the exchequer and will also consume substantial time. There is large no. of cases pending in debt recovery tribunal (around 55,000 as per estimate) that too when the tribunal deals with cases only banks and certain financial institutions. Now DRT is overburdened with insolvency cases of companies and individuals. The code also proposes the right to appeal against the order of NCLT and DRT to the National company law appellate tribunal. The insolvency and bankruptcy board of India has the onus to regulate insolvency professionals, and it will be very difficult for the board to manage all the insolvency professionals in the country. There is no scope for self-regulation for these professionals.
With the enactment of the code, there is interplay with 13 existing laws, in which 2 are repealed and 11 are amended. The problem might arise when there are overlapping of the laws, though it is imperative from the legislator that they had ensured that no overlapping of laws exists.
The laudable approach of the code is to provide effective mechanisms to deal with issues related to cross border elements. This is very pivotal for Indian companies as many have their assets outside India and foreign companies have subsidiaries in India. Though, this act specifically does not deal with this issue, but only provides for a legal basis for dealing with the issue.
These challenges could be overcome to a great extent only when the Code gets perfected and its institutional infrastructure reaches its Capacity. For this, the IPs, the IUs, the NCLT and the IBBI all need to be properly set up and functioning in a manner envisaged by the Code.
As IPs form the backbone of the Code, the Insolvency and Bankruptcy of India (‘IBBI’) need to have adequate capacity to monitor the IPs and ensure that malpractice and fraud do not seep into the profession in the early days. For this, the IBBI needs to ramp up its human resources and its IT capability and build a far greater level of preparedness than it is at, right now.
The manner in which the Code is currently being implemented seems to focus more on expeditiously operationalizing the law rather than effectively implementing it. These concerns, if not addressed suitably, will defeat the purpose of enacting a new insolvency law to improve the recovery rate in order to promote the development of credit markets and entrepreneurship.
This important reform will go a long way for speedy disposals and recovery for the creditors generally and process driven by creditors will help in improving the image of the country as far as ease of doing business is concerned and should help attract foreign direct investment as the investors and creditors are assured of well-defined time-bound process of 18 days which is comparable to the best available in the Developed world.
The Code is a step in the right direction and while there will be nuances and controversies in dealing with the process, it is appreciated that during the short span of time, various landmark and unique decisions were delivered by NCLT, NCLAT and Supreme Court. It is premature to comment on whether the Insolvency professional will be able to run and manage a corporate debtor (sick company) while its promoters could not run the same. However, in the time to come, these professionals will become experts in dealing with the process, as the Code has given full power and duties are assigned to the Insolvency professionals. Though most of the creditors, banks/financial institutions bank upon the process of this Code, certain creditors have taken a decision to invoke the Insolvency and Bankruptcy Code as a last resort.
Endnotes Parliament passes the Insolvency and Bankruptcy Code. [online] Available at: http://www.pib.nic.in/newsite/PrintRelease.aspx?relid=145286 [Accessed 16 Apr. 2018].  Objective section of the code  Resolving Insolvency – Doing Business – World Bank Group, Available at: http://www.doingbusiness.org/data/exploretopics/resolving-insolvency (Accessed Apr 17, 2018)  For the sake of simplicity, the Author uses the word ‘insolvency’ and ‘bankruptcy’ interchangeably unless if the context requires otherwise.  Vanessa Finnch, Corporate Failure, Corporate insolvency law, (2009), 154-164. Section 78(3), Insolvency and Bankruptcy Code, 2016.  Section 17, SARFAESI Act, 2002  Meaning as provided by department of justice of US [online] Available at: < doj.gov.in/sites/default/files/judicialimpactassessmentreportvol2_0.pdf > [Accessed 16 Apr. 2018]  Section 79(9), Insolvency and Bankruptcy Code, 2016.  Section 125, Insolvency and Bankruptcy Code, 2016.  Shivam Goel (2018), The Insolvency and Bankruptcy Code, 2016: Problems & Challenges, Imperial Journal of Interdisciplinary Research (IJIR), 3(5), 3-5.  Section 21, Insolvency and Bankruptcy Code, 2016.  Clause 21(2), in the notes on clauses appended in the bill.  Section 22, Insolvency and Bankruptcy Code, 2016.  Section 200, Insolvency and Bankruptcy Code, 2016. Section 210, Insolvency and Bankruptcy Code, 2016.  Section 188, Insolvency and Bankruptcy Code, 2016.  Vanita Bhargava and Shweta Kabra, Interpretation of Supreme Court of Insolvency and Bankruptcy Code, 2016, (2017) PL (CL) November 90. Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd., 2017 SCC Online SC 1154
Himanshu is a dedicated and devoted writer who soon is going to pass out from NLU-Delhi. He loves to read and keeps himself updated about the recent legal issues.