- Meenakshi Gupta, Associate
- Ayush Patria, Intern
ABSTRACT
The Government of India declared a nationwide lockdown on March 24, 2020, to prevent COVID-19 from spreading to the rest of the population. The Ministry of Home Affairs issued certain directions that ensured the closure of the majority of government and private offices, as well as other commercial establishments, except for a few essential services. Many Micro, Small, and Medium Enterprises (MSMEs) faced the imminent prospect of going out of business as a result of the country-wide shut down. One significant development within the dynamic realm of insolvency and bankruptcy was the adoption of the Insolvency and Bankruptcy Code, 2016, amid the wave of numerous changes proposed by the government for the promotion of ‘Ease of Doing Business’ in India. The bankruptcy resolution procedure in India has been perplexing prior to the implementation of the IBC law. The Insolvency and Bankruptcy Code of 2016, which came into effect in 2016, marked a significant shift in the Indian insolvency framework. The COVID-19 pandemic’s exceptional or unexpected condition created a number of economic difficulties, as well as having an influence on the bankruptcy regime. During this pandemic crisis, the legislature has enacted laws to address the concerns surrounding the insolvency regime.
RISE OF IBC LAW
Recognizing the importance of reforming the bankruptcy and insolvency regime for improving the business environment and easing distressed credit markets, the government introduced the Insolvency and Bankruptcy Code Bill in November 2015, which was drafted by a specially formed Bankruptcy Law Reforms Committee under the Ministry of Finance. The Insolvency and Bankruptcy Code, 2016, was enacted by both chambers of Parliament after a public consultation process and recommendations by a joint committee of Parliament. While the Code’s enactment represents a watershed moment for India’s economic reforms, its impact will be seen only when the institutional architecture and implementing rules envisioned by the Code are put in place.
The 2016 Insolvency and Bankruptcy Code is an Indian bankruptcy legislation that attempts to consolidate the current framework by creating a single insolvency and bankruptcy code. The Sick Industrial Companies Act (SICA), enacted in 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), enacted in 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, enacted in 1993, and the Companies Act, enacted in 2013, are just a few examples. As a result, a number of instances were unsolved for years. All of these provisions are unified under the Insolvency and Bankruptcy Code, providing for a more comprehensive mechanism to resuscitate a business in the case of insolvency. This code guarantees that the business is appropriately reformed and restored.
The Insolvency and Bankruptcy Code creates a centralized structure in India to deal with corporate insolvency. It attempts to improve the efficiency of the insolvency and bankruptcy law system by separating the commercial and judicial aspects of the process. On October 1, 2016, the Insolvency and Bankruptcy Board of India was created to supervise and execute different insolvency and bankruptcy proceedings filed by financial and operational creditors, such as Indian banks, house purchasers, and others. The IBC law creates a new institutional structure with a regulator, insolvency experts, information utilities, and adjudicatory processes to help with the formal insolvency resolution process and liquidation within a specified period.[1]
One of the most essential features of the IBC is that it allows creditors to assess a debtor’s viability as a business decision and agree on a strategy for its revival or fast liquidation. To allow a formal and time-bound insolvency resolution and liquidation procedure, the Code creates a new institutional framework that comprises a regulator, insolvency experts, information utilities, and adjudicatory procedures.[2]
IMPACT OF IBC LAW ON THE INDIAN ECONOMY
Prior to the IBC, the sole purpose of insolvency legislation was to relieve the insolvent entity. The creditors, on the other hand, were ignored. Furthermore, the approach was difficult and confusing due to the presence of multiple laws and adjudicatory bodies. This led to a lengthy insolvency proceeding, some of which lasted for years. The enactment of the Code, like all other important milestones, was well-publicized after the IBC was presented. As a result, investor confidence increased, bringing the goal of just doing business closer. The Act’s shorter timeframe, maximizing the value of an insolvent company’s assets, putting greater emphasis on resolution rather than liquidation, and so on are some of the causes for such beneficial effects. This major step has shifted control of the facility from the borrowers to the creditors.
In ‘Easy of Doing Business’, India has risen to the 63rd rank in 2020, up from the 130th position in 2017.[3]According to a statement from the International Bank for Reconstruction and Development, the IBC has increased the recovery rate of stressed assets to 48 percent in two years, up from 26 percent before the law was adopted.[4]These changes have boosted India’s worldwide ranking, and it is predicted that they would provide a significant boost to foreign investment and Merger & Acquisition activity in the country. Certainly, the IBC has had a beneficial influence on the sector, resulting in several resolutions and liquidations, putting more money in the hands of banks and financial institutions. The current scenario, however, with the rise in COVID-19, is unprecedented.
OVERVIEW OF IBC LAW APROPOS CORPORATE INSOLVENCY RESOLUTION
The Corporate Insolvency Resolution Process is a procedure outlined in the Code for resurrecting an insolvent business. Under the IBC, a corporate insolvency resolution process can be started even if the default is intentional, that is when the corporate debtor has the ability to pay but chooses not to. As a result, the ‘default’ of a payment obligation is the main focus under IBC.
Insolvency has an impact on not just the debtor firm, but also different stakeholders such as creditors and employees, as well as the economy as a whole. The importance of having a strong and effective insolvency system to deal with issues of business collapse and restructuring becomes clear. The IBC was written in such a way that corporations do not have to go into liquidation. Before that, the choice of restructuring or resolution is presented. The firm only falls into liquidation if a settlement is not reached. The fundamental goal is to maximize asset value, promote entrepreneurship, increase credit availability, and balance the interests of all stakeholders.
In dealing with stressful business circumstances, a system of Corporate Insolvency Resolution plays an essential function in an economy. Financial or business failure may be the cause of corporate failure. Thus, a firm’s distress can be caused by either financial or economic hardship. Financial distress occurs when a company has a viable business but an unviable financial structure. Economic distress occurs when the company’s operation is unviable. The primary goal of an insolvency resolution system is to keep viable firms alive rather than putting them into liquidation and liquidating the unviable ones.As a result, we require an effective system of corporate insolvency resolution that allows for the earliest and most efficient settlement of corporate insolvency. The significance of the Corporate Insolvency Resolution Process, which is part of Chapter II of the Insolvency and Bankruptcy Code of 2016, maybe seen here.
The IBC, 2016, Chapter II, allows for a settlement mechanism in cases where the corporate debtor has defaulted. Under the IBC, the creditors are divided into two categories: financial creditors[5] and operational creditors[6].A financial creditor, under section 7, or an operational creditor, under section 9, of the IBC, can initiate the Corporate Insolvency Resolution Process. Section 10 of the IBC allows the corporate debtor to use the provisions of the Corporate Insolvency Resolution Process on his own. By submitting an application to the Adjudicatory Authority, i.e., the NCLT, financial creditors, operational creditors, or the corporate debtor can initiate the Corporate Insolvency Resolution Process. Once accepted, the application must be completed within 180 days, with a 90-day extension possible, but no more than 330 days overall.[7]The procedure is carried out in accordance with provisions 6 to 32 of Chapter II of the IBC. Its distinguishing aspect is that, unlike previous laws, it is enacted without the involvement of judges. When the NCLT accepts the application, an insolvency professional is appointed to form a committee known as the Committee of Creditors (COC),[8] which is made up of financial creditors. This temporary resolution professional will be replaced by a resolution professional, who will either be the interim resolution professional himself or a new individual competent to be one. The board of directors will be replaced by this resolution professional, and the company will continue to operate as a continuing concern. In the meanwhile, the COC can be resolved. The resolution proposals may be approved by the resolution applicant and must be presented to the COC for approval. The Resolution Professional will present it to the NCLT for the final node after it has been accepted by 66% of the COC. It must be implemented once it has been authorized by the NCLT. As a result, it is possible to say that a resolution plan has been implemented. However, if the plan is either not approved by the COC or rejected by the NCLT, or if they are unable to reach a resolution plan, or if no resolution plans are received at all, and the maximum period prescribed by the IBC has elapsed, the company will be forced to liquidate under sections 33 to 54 of the IBC, 2016. There, a Liquidator is appointed, and the procedure is carried out in accordance with the Insolvency and Bankruptcy Code, 2016, culminating in the business entity’s departure.
In a nutshell, IBC allows for a two-step procedure. First, the firm is offered a chance of resurrection, which must be achieved within a certain time frame. This would help to minimize needless delays, which was one of the key flaws in the previous legislative framework. When it is determined that the resolution procedure will not be completed, it is forced to proceed to the second stage, which is the liquidation process. As a result, it is advantageous for the stakeholders involved in it to obtain what is left with the firm, as well as a simple departure for a financially unviable organization, which will ultimately help the economy.
IMPACT OF COVID-19 PANDEMIC
Companies, particularly Micro, Small, and Medium Enterprises (MSMEs) were under heightened stress as a result of the COVID-19 epidemic. Almost all businesses were affected by the shutdown, with India’s NIFTY 50 Index dropping below 8100 for the first time since 2017. With large-scale shutdowns of factories all over the world and a severe drop in demand for various goods, the impact on the global economy was also considerable.
If the IBC had been permitted to operate, it would have resulted in a massive number of default lawsuits being filed. Furthermore, there was concern that corporations with more assets and resources might take advantage of the situation to improperly liquidate certain businesses while allowing others to be artificially kept alive. During this pandemic crisis, the legislature has passed ordinances/amendments to address the concerns surrounding the insolvency regime. Central government notifications and amendments were used to implement the measures. As a result, the government has decided to put a six-month moratorium on new IBC procedures commencing March 25, 2020. Later, it was extended until March 24, 2021.[9]
In exercising the powers given under Section 4 of the IBC, the federal government increased the minimum amount of default to ₹1 Crore from ₹1 Lakh in order to activate the provisions of the IBC.[10]This was mostly done to preserve Micro, Small, and Medium Enterprises (MSME) (MSMEs).
Implications of Increased Threshold Limit
However, because the circular did not clarify whether it was in effect retrospectively or prospectively, it caused uncertainty. NCLT benches in Kolkata and Chennai issued a clarification at this point. In the case of Foseco India Limited vs. Om Boseco Rail Products Limited[11], the Kolkata NCLT bench held that the central government notification dated March 24, 2020, was prospective because it did not specify anything, applying the rule of Interpretation of Statutes, which states that a statute will be presumed to be prospective unless expressly or by implication specified to be retrospective. In the matter of Arrowline Organic Products Pvt. Ltd. vs. Rockwell Industries Ltd.[12], the Chennai NCLT Bench concluded that the notification was merely prospective.
Effects on Pending and Future Cases
Another issue is that, because this isn’t retroactive, the previous ₹1 lakh limit would apply on the ongoing cases. If such is the case, what will happen to cases that are still outstanding at various levels, such as those that are awaiting admission by the NCLT or those that have already submitted the demand notice but have not yet filed the application with the NCLT. It should be noted that this threshold limit was previously discussed in the Report of the Insolvency Law Committee, which stated that the low threshold has put pressure on the Administrative Authorities with a large number of cases and that because going through CIRP entails high costs, it results in a sub-optimal outcome, and thus to raise the limit to ₹50 lakh, and concerning MSMEs.[13]
CONCLUSION
The legislature’s decision to remove the lockdown period and raise the threshold limit is a welcome step toward ensuring that Micro, Small, and Medium Enterprises have enough cushion to recover from the financial hardships caused by the COVID-19 pandemic. It will also help to declutter the IBC cases by filtering out the frivolous ones. The low threshold of ₹1 lakh has previously been questioned for the risk of forcing an otherwise robust company into liquidation due to a tiny amount of debt default by a single operational creditor. The change has been praised as a positive step by critics of the previous threshold restriction since it limits the broad powers of operational creditors who were more interested in recovery than settlement. It is important to note that operational creditors do not profit from a company’s liquidation because they are ranked below finance creditors in terms of proportional payback. For operational creditors, the IBC is just a last resort option. However, in situations where a personal guarantee is issued, usually by the promoters/directors, it may still be utilized as a method for recovery because the threshold for initiating actions has not been increased proportionally, and it might be a route to put pressure on the businesses. After all, the IBC’s primary goal is to guarantee that the corporate debtor continues to operate as a continuing concern.
[1]. ShinuVig, Insolvency Reforms in India: Policy and Economic Implications, The Journal of Contemporary Issues in Business and Government, 14, Volume 25, Number 1 (2019).
[2]. The Insolvency And Bankruptcy Code, 2016 – Key Highlights, Mondaq (July 08, 2021, 10:15AM), http://www.mondaq.com/india/insolvencybankruptcy/492318/the-insolvency-and-bankruptcy-code-2016–key-highlights
[3]. Eyebrows raised over India’s ease of doing business ranking by World Bank, The New India Express (July 8, 2021, 10:23 AM), https://www.newindianexpress.com/business/2020/aug/29/eyebrows-raised-over-indias-ease-of-doing-business-ranking-by-world-bank-2189787.html
[4].Has IBC been successful in reducing India’s stressed assets?, Financial Express (July 8, 2021, 10:32AM), https://www.financialexpress.com/industry/has-ibc-been-successful-in-reducing-indias-stressed-assets-interview/1799898/
[5]. Section 5(7), Insolvency and Bankruptcy Code, 2016.
[6]. Section 5(20), Insolvency and Bankruptcy Code, 2016.
[7]. Section 12, Insolvency and Bankruptcy Code, 2016.
[8]. Section 21, Insolvency and Bankruptcy code, 2016.
[9]. Impact of revision of threshold of default under IBC on operational creditors, Lexology (July 9, 2021, 09:43AM), https://www.lexology.com/library/detail.aspx?g=51269ab8-fa6a-4d08-91cb-e1db12abb848
[10]. ibid
[11]. CP(IB)No. 1735/KB/2019
[12]. CP(IB)1031/CB/2019
[13]. Report of the Insolvency Law Committee, Ministry of Corporate Affairs (February 2020)
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