The Insolvency and Bankruptcy Code, 2016 was enacted with a view to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bounded manner. The main intention behind the code is to maximize the value of the assets of such persons, promote entrepreneurship, ensure availability of credit and balance the interest of all the stakeholders including the alteration in the order of priority of the payment of government dues.
The summary of the Code
The code is designed, as mentioned, to ensure the resolution of the debts of corporate persons, in a time bounded manner. The creditors, operational as well as financial creditors, may subject to the required compliance and observation of necessary formalities mentioned under the code, file an application with National Company Law Tribunal (NCLT) for initiating the insolvency resolution process against the Corporate debtor. Apart from it, there is a provision in the code which enables the Corporate Debtor itself to file application for initiating the resolution process. The NCLT shall, within fourteen days of the receipt of the application, ascertain the existence of the default from the records. If there is an existence of debt and the same is defaulted, then the application shall be admitted and a resolution professional shall be appointed as interim resolution professional.
The corporate insolvency resolution process (CIRP) shall be completed within a period of 180 days, which can be further extended with the consent of the NCLT, upto a maximum of 270 days, from the date of insolvency commencement date. On admission of the application, moratorium shall come into effect, which prohibits institution of suits, alienation of properties, actions under SARFAESI, recovery proceedings etc against the corporate debtor. A public announcement shall be made in newspapers inviting claims from the creditors of the corporate debtor and after collating and verifying all the claims, the interim resolution professional shall constitute a committee of creditors (CoC) for taking decisions regarding the insolvency resolution. The CoC at its first meeting shall reappoint, the interim resolution professional or replace the interim resolution professional, as resolution professional. The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. The resolution professional shall prepare an information memorandum for formulating a resolution plan. Any person, except those who are specifically excluded under section 29A of the Code, are eligible to submit a resolution plan. The resolution plan shall provide for the modalities, source and manner in which the debts of the corporate before can be resolved. On approval of the resolution plan by the CoC, the Resolution professional shall submit the same to NCLT for its final nod. On approval of the resolution plan, the moratorium shall come to an end and the resolution plan shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. If there is no resolution plan or the plan has been rejected by the NCLT, the corporate debtor shall face liquidation under the provisions of the Code.
The story so far; in short.
The code, when introduced into the Indian legal environment, spurts lot of confusions, misalignments etc, mainly due to the lack of jurisprudence and precedents. Since its introduction, the code was embraced by the creditors community in an overwhelming manner, and more than 12000 cases were filed before various benches of National Company Law Tribunal, across the nation. Due to the lack of clarity on the various provisions of the Code, though the process is highly time-bounded, the time limits specified under the code were not duly adhered to, which resulted in huge delay in the entire resolution process, that originally envisaged. The government had, in very timely fashioned manner, intervened whenever bottlenecks noticed, and amended the provisions of the code to keep the spirit of the same.
Recent amendment to the code
The Insolvency and Bankruptcy Code (Amendment) Bill, 2019, a bill further to amend the Insolvency and Bankruptcy Code, 2016, had got the assent of Rajya Sabha on 29th July, 2019 and became an Act with President's assent. The entire amendment was intended to upkeep the true sprits of the law and thereby ensure the timelines of the entire resolution process. Following are the highlights of the recent amendment to the code.
Reassuring the maximum time limit for resolution.
The amendment mandates for the completion of the corporate insolvency resolution process within a period of three hundred and thirty days from the insolvency commencement date which includes the time taken for any legal proceedings in relation to the resolution process. The ninety days’ one-time extension should also have to be covered under the maximum time limit specified in the amendment. This amendment will enable the resolution process to escape the legal cobwebs and tangles and thereby ensure the resolution within specified time limits.
Voting by authorized representative.
The code enables the class of financial creditors, who are large in numbers, to appoint a authorized representative to represent them and vote at the Committee of Creditors. Prior to the amendment, the provisions of the code were ambiguous, as the manner in which the authorized representative have to vote was not specifically mentioned therein. This had created lot of confusions especially when the financial creditors within the class were having varied interest and opinion. The newly introduced sub- section 3A under section 25A provides that the authorized representative shall cast his vote on behalf of all the financial creditors in accordance with the decision taken by a vote of more than fifty per cent of the voting share of the financial creditors he represents, who have cast their vote in order to facilitate decision making in the committee of creditors, especially when financial creditors are large and heterogeneous group. This removes the ambiguity in the provisions to a greater extend.
Fair and equitable distribution under resolution plan.
While submitting the resolution plan, it has to be ensured by the resolution professional, that adequate provisions has been made for payment of debts in the manner specified under section 30 of the Code. As per the newly amended clause, if the resolution plan is not approved or rejected by the NCLT, the operational creditors shall receive an amount that is not less than liquidation value of their debt or the amount that would have been received if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priorities in section 53 of the Code, whichever is higher. In similar scenario the financial creditors who do not vote in favour of the resolution plan shall receive an amount that is not less than the liquidation value of their debt.
Clarification on applicability of resolution plans.
The amendment clarifies that the resolution plan approved by the Adjudicating Authority (NCLT) shall also be binding on the Central Government, any State Government or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, including tax authorities. This weeds out lot of ambiguity in the applicability of the resolution plan, especially when the Government authorities are in receiving end.
Empowering Committee of Creditors.
The amendment to sub-section (2) of section 33 of the Code clarifies that the Committee of Creditors can take decision to liquidate a Corporate Debtor at any time between its constitution and approval of the resolution plan. Though this is intended to expedite the resolution process, it may go against the whole concept of resolution, as the Creditors, especially in case of corporate debtors having huge asset base, will be more interested to liquidate the entity and get their money back rather than reviving the same through a resolution plan.
Conclusion
The idea behind the code is to create a congenial and credit friendly corporate environment. The code recognizes the role of creditors in the development of an organization and envisioned to protect assets and business of their debtors, from value erosion, through proper and timely resolution process. Many of the hitches and hurdles identified during its initial implementation stages are ironed out through timely interventions and the recent amendment is a continuation of those efforts. Once the proposed amendments are notified the same will ensure proper and time bounded resolution of corporate debts and thereby improve the availability of the credit and ensure the balance the interest of the stakeholders to a greater level.
Bijoy P Pulipra (The author is an insolvency professional, company secretary and registered valuer. He can be reached at bijoy@artismc.com)