The huge pendency of cases is attributed to the inefficiencies of the patchwork of legislation that governed corporate and personal insolvency prior to the IBC. The main aims of the IBC are therefore focused on improving the time it takes to effect either a rescue or liquidation and on maximising the returns for stakeholders.
The appointment of an insolvency professional to achieve these aims is seen as key, as it seeks to run the processes largely outside of the court system. In addition, the IBC hopes to promote entrepreneurship, especially in relation to individuals who will have access to a “fresh start” bankruptcy process. The IBC appears to take much of its inspiration from international best practices and is consistent with many bankruptcy reforms taking place around the globe at present.
According to the World Bank’s Ease of Doing Business report, it takes more than four years on an average to resolve insolvency in India. A person on the ground would confirm that it takes much more time than that. The proposed insolvency and bankruptcy law seeks to cut down the time to less than a year. This will not only improve the ease of doing business in India but also facilitate a better and faster debt recovery mechanism in the country. It is widely believed that this legislation will change the negative perception of recovery and litigation associated with India.
The Government has formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate stress-free and time-bound closure of businesses. The draft legislation, since the report issued in November 2015 by a panel headed by former law secretary Mr. T.K. Viswanathan, has gone through various changes, including changes recommended by the Joint Parliamentary Committee in April 2016. The Insolvency and Bankruptcy Code, 2016 (“Code”) has now been passed by the Lok Sabha and the Rajya Sabha.
The proposed bankruptcy legislation seeks to address the issues faced currently in the context of insolvency and winding up. The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).
Proposals By T.K Vishwanathan Committee
A committee headed by former Law Secretary T.K Vishwanathan had proposed the following-
- A time period of 180 days, extendable by 90 days to deal with resolving cases of Insolvency and Bankruptcy.
- During the period of resolving the issue of bankruptcy, the management of the business or the firm would vest in the hands of a Resolution Professional that is a new class of professionally equipped to deal with such cases and who would be supervised by a proposed New Regulator.
- The proposal also envisages them getting into talks to revive firms and work out a repayment plan.
Right to Contest Admission of Insolvency Applications Filed by Financial Creditors
In a landmark judgment recently delivered by the National Company Law Appellate Tribunal (NCLAT) in the case of Inventive Industries Limited v. ICICI Bank Limited, the NCLAT has held that the National Company Law Tribunal (NCLT) is bound to issue only a limited notice to the corporate debtor before admitting a case under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code).
While dismissing the appeal filed by Inventive Industries Limited against an order passed by NCLT, Mumbai admitting the insolvency petition filed by ICICI Bank Limited, the NCLAT has clarified that adherence to principles of natural justice would not mean that in every situation the NCLT is required to afford reasonable opportunity of hearing to the corporate debtor before passing its order.
The Judgment makes it clear that:
Under Section 7(5) of the Insolvency Code, the NCLT is only required to be satisfied on whether:
- The corporate debtor has defaulted.
- An application filed by the financial creditor is complete.
- A disciplinary proceeding is pending against the insolvency resolution professional, proposed by the financial creditor.
- Beyond the above-mentioned issues, the NCLT is not required to look into any other factor, including the question of whether permission or consent has been obtained from one or other authority, including the JLF. The corporate debtor cannot insist on a trial and/or an adjudication of debt by the NCLT before an insolvency application is admitted.
- If the NCLT is satisfied that it is required to admit the application but the application is incomplete, the financial creditor should be granted seven days’ time to complete the application. However, in a case where there is no default or the defects in the application cannot be rectified or the record enclosed by the financial creditor is misleading, the application should be rejected.
- As an order of admission of the insolvency application has serious civil consequences for the corporate debtor, its directors and shareholders, the NCLT is bound to issue a limited notice to the corporate debtor before admitting a case for: (i) ascertaining whether a default has occurred based on material submitted by the financial creditor; and (ii) to find out whether the application is complete and/or there is any other defect required to be removed.
Applying the aforesaid legal findings to the facts of the case before the NCLAT, although no notice was issued by the NCLT to the Company before admitting the case, the Company had intervened before the admission of the case and all the objections raised by the Company were noticed, discussed and considered by the NCLT before passing the NCLT Order. In light of the above, the NCLT Order was not illegal.
The judgment provides much-needed clarity with regard to the scope and extent of the corporate debtor’s right to contest the admission of insolvency applications filed by financial creditors and will provide guidance to the NCLTs across the country in deciding insolvency applications filed by financial creditors.
Insolvency and Bankruptcy Fund
The Code creates a Fund for the purposes of insolvency resolution, liquidation and bankruptcy of persons. Deposits to the Fund will include:
- Grants made by the Central Government,
- The amount deposited by persons as Fund contribution, and
- Interest earned on investments made from the Fund.
While the Code is silent on the manner of use of the Fund, it states that any person may withdraw up to the amount of his deposit if insolvency proceedings are initiated against him for specific purposes.
The Code provides a moratorium period during the insolvency resolution process when no proceedings can be taken against the debtor. During such period, the IPs are required to take over the management and powers of the board of directors of the debtor. This is a welcome provision as it will provide the debtors with the time and space to revive the company rather than being hounded by litigations from all sides. This provision, introduced in India for the first time, has been modelled on the UK practices where the insolvency professional controls the process during the insolvency resolution as against the US approach wherein the debtor remains in possession and control of the business even during the resolution process.
The Code touches upon cross-border insolvency empowering the government to enter into bilateral agreements with foreign countries for enforcing the Code. It further gives the IPs the authority to write a letter to the courts and/or authorities of other countries with which reciprocal arrangements have been made for seeking information or requesting action in relation to the assets of the debtor situated in such country.
Global institutions are continuing to grow their investments in India and in this context they are increasing their exposure to Indian entities. Over the years, many concerns have been existing and/or raised amongst international investors on the regulatory and country risks while providing financing to and/or investing in India. The time taken for resolution has been a major point of debate. This Code in the specific will, when implemented in letter and spirit, provide a major boost to the India economy, especially on account of timely resolution and certainty in recovery.”
In contrast to the current regulatory landscape, the Code does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. "Specific attention is to be drawn to the rights of unsecured and secured creditors in the priority of their claims and therefore the level playing field for their access to an effective insolvency resolution.” The strict timelines for resolution of insolvency and liquidation proceedings would definitely be an incentive and provide the requisite impetus for economic growth.
“The Code as a new law, replacing over a dozen laws, when implemented post the infrastructure being put in place, will prove to be the most important step in changing the legislative landscape of India by removing the negativity attached to litigation time and ease of recovery.”
Fast Track Corporate Insolvency Resolution
For debtors that have assets or income which fall below certain financial thresholds (to be specified by the Central Government), a fast-track procedure is available, which provides for the resolution to take place in a more condensed period of 90 days. The provisions relating to the fast track procedure are yet to become operational.
The Code is to do away with the antiquated existing laws covering aspects of insolvency and bankruptcy. Though the Code sets out certain provisions to amend and override the existing laws to avoid future litigation, a clear provision needs to be introduced to explicitly state the existing laws being repealed by the introduction of this legislation. The Code has received the consent of the Lok Sabha (lower house of Parliament) on 5th May 2016 and of the Rajya Sabha on 11th May 2016. It now awaits President’s assent to come into force. The infrastructure and operational formalities to make this legislation a reality would soon be underway.
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