Context: Supreme Court recently upheld the Insolvency and Bankruptcy Code in its entirety.
Insolvency: An entity – a person, family, or company – becomes insolvent when it cannot pay its lenders back on time. For individual debtors, this means that their incomes are too low for them to pay off their debts. For companies, this means that the money flow into the business plus and its assets are less than its liabilities. Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.
Bankruptcy: Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government. There are two main forms of bankruptcy; reorganization and liquidation bankruptcy. Under reorganization bankruptcy debtors restructure their repayment plans to make them more easily met. Under liquidation, debtors sell certain assets in order to make money they can use to pay off their creditors. Hence, insolvency is a financial state and bankruptcy is a legal state.
- After the Independence, bankruptcy and insolvency were specified in Entry 9 of the Concurrent List of the Seventh Schedule, under Article 246 of the Constitution.
- After independence India had numerous Acts to govern Insolvency and bankruptcy issues and matters:
- Sick Industrial Companies (special provision) Act, 1985 (“SICA”).
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI).
- Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”).
- Companies Act, 1956 as well as Companies act, 2013.
- These regimes were highly fragmented, with various adjudicatory bodies/Tribunals to deal with such issues resulting in lack of clarity and certainty of jurisdiction and overlapping of decisions. Judicial intervention and the inefficacy of the Debt Recovery Tribunals (DRTs) had prevented lenders from expediting recoveries.
- There was large number of stressed assets, such as NPAs, with low recovery rates due to a lack of enabling environment for the enforcement of creditor’s rights.
- The lack of credible data regarding assets and indebtedness of companies made the recovery of debt a complex and time consuming process.
- Indian corporate sector was feeling the ‘chakravyuh challenge’ where it was easy to form a company but difficult to wind it up.
- These problems played the trigger for passage of IBC 2016.
- Code provides a specialized forum to oversee all liquidation and insolvency proceedings for individuals, SMEs and Corporates.
- The Code triggers a uniform law or process for a valid claim and has replaced all the existing laws with a uniform procedure to resolve insolvency and bankruptcy disputes.
- IBC proposes a new institutional set-up comprising four critical pillars:
- A robust and efficient adjudicating authority to hear insolvency cases. The National Company Law Tribunal (NCLT) has been notified as the adjudicating authority for the corporate insolvency and bankruptcy cases.
- A regulated profession of insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.
- A regulated competitive industry of information utilities (IUs) to reduce information asymmetries 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 regulations for the resolution procedures under IBC.
|Recent amendments to IBC||Implications of amendments.|
|Minimum voting threshold for the Committee of Creditors (CoC) reduced to 66% from 75% for key decisions, and to 51% from 75% for routine decisions.||Will lead to reduced resolution timelines.|
|Promoters of MSMEs not categorized as 'willful defaulters' allowed to bid for their assets after paying their dues on NPA accounts, under Section 29A of the IBC.||Will reduce liquidation proceedings and improve the loan recovery rate of ban and also aid genuinely distressed companies.|
|Home buyers given ‘financial creditor’ status.||Home buyers will be able to decide the future of defaulting builders alongside their lenders.|
|Amendments to Section 29A have diluted the category of entities disqualified from bidding.||It will lessen the haircuts that banks may have to take as more companies get qualified for bidding.|
|Section 10(3)(c): Special Resolution must be passed by shareholders of Corporate Debtor with at least 3/4 majority mandatory for filing application under section 10.||Board of Director or authorized representative cannot unilaterally take the decision to file under IBC.|
|Section 12A: Withdrawal of ongoing CIRP applications with 90% approval of CoC.||Second chance to Corporate Debtors to make good on the default that has been done to the applicant even after admission by NCLT.|
• In the WB Ease of Doing Business Report, when it comes to resolving insolvency Japan, Finland and US rank first three respectively while India’s rank is 108.
• Japan ranks number one in the world for resolving insolvency, with procedures taking as little as six months and costing a mere 4% of the value of company. The recovery rate is over 90% compared to the OECD average of 70%.
• India’s recovery rate fluctuates between 25% to 45% for different cases and may reach 50% in near future, whereas time period of resolving insolvency is around 4.3 years.
Evaluation of IBC Code since its inception:
Positive effects of IBC:
- Unified law: The interest of all parties i.e. lenders, borrowers and even operational creditors is now addressed under a unified law under the IBC.
- Changed behavior of defaulters: The IBC has given more teeth to lenders and has changed the credit behavior of borrowers. Now, there is a heartening trend of defaulters paying up dues before the case is admitted for insolvency under IBC.
- Shift of control from debtor to creditor: IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor In Control’ regime, as now the Board of Directors is suspended in case of default and and the IP manages the enterprise in the best interest of all its stakeholders.
- Resolving the ‘chakravyuh challenge’: IBC has made possible for struggling companies to ‘exit’ easily y allowing creditors to take the company to the NCLT for winding up.
- Spurs professionalism in financing sector: IBC has reduced crony capitalism, under and over invoicing, serial defaulters and lead to better allocation of capital by limiting the escape routes for defaulters and water tight frame for disposal of cases.
Issues concerning the IBC process:
- Low capacity of institutions: As per IBBI data, of the 1,198 companies admitted under the Corporate Insolvency and Resolution Process (CIRP) until September 2018, only 52 had seen approval of resolution plan.
- Increased cost of litigation for banks: Undue delay in the resolution of cases increases litigation costs of banks which are already reeling with stressed assets.
- Skeptical role of NCLT: NCLT has been used as a platform by dissenting creditors to delay the resolution and some experts point out that once a resolution plan is approved by the CoC, as per the requisite majority, no such objection should be entertained at NCLT, as it defeats the purpose of COC.
- Statutory deadlines missed: IBC allows a maximum of 270 days for lenders to clear a rescue plan, failing which the defaulting company will go into liquidation. But some cases like Essar Steel or Bhushan Power and Steel cases have been under the IBC process for over 500 days and in over 30% of cases the 270-day timeline has been breached.
- Low recovery rate: IBC has failed to secure the due share of banks as the amount realized by banks in cases is falling too low, in some cases amount realized is less than even one-third of bank’s claim value.
- Issue of proxy owners: Despite 29A in place (which restricts original promoters to bid), some promoters have managed to arrange proxy buyers of the asset and continue to manage the asset, from behind a veil.
- Lack of uniformity in NLCT rulings: In the absence of jurisprudence and precedents (because of the new law) different NCLTs are giving different rulings.
- Over-reliance on IPs: The process of resolution lays over-reliance on IPs without any review mechanism for their veracity as some cases have surfaced where IPs have misused their authority.
IBC is like any other law which gets refined during its life time, but following proposals can be considered for its better functioning:
- Codification of adjudication guidelines for NCLT and NCLAT: To bring consistency and objectivity in different NCLT verdicts in similar cases, Supreme Court, through its supervisory jurisdiction, can organise a briefing of NCLAT and NCLTs.
- Time bound delivery by NCLT: The manner in which 270 days deadline has been laid by the Code for COC, similarly time bound duration should be stipulated for NCLT for adjudication.
- Action against IPs: Swift action must be taken against errant IPs for dereliction of their duty and a review mechanism should be setup to cross-check their decisions.
- Swift conclusion of judicial process: Courts must act swiftly in concluding appeals filed post NCLAT level in order to uphold and maintain the credibility of IBC.
Supreme Court has recently directed the Centre to set up ‘circuit benches’ for the National Company Law Appellate Tribunal (NCLAT) in the next six months. Currently, NCLAT functions only out of the national capital. Circuit benches would ensure additional presence of the Tribunal in many cities, provide convenience for appellants, who otherwise had to travel to Delhi, and expedite disposal of matters.