This Essay is submitted by –
- Ayush Mehta , Semester IV Students, National Law University, Jodhpur.
- Naman Nayyar,Semester IV Students, National Law University, Jodhpur.
The Insolvency and Bankruptcy Code, 2016 was passed by the Parliament with the objective to consolidate and integrate the multiple laws which earlier dealt with situations of insolvency and bankruptcy. Such a consolidated code helps in speedy dispute resolution, as it provides a legal framework for insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner which benefits all stakeholders. The Supreme Court upheld the Code in Innoventive Industries v. ICCI Bank stating that the legislative intent behind it was to provide an exhaustive code which is complete in itself and covers all matters under it.
Challenges faced by the Code:
The Insolvency and Bankruptcy Code, 2016, though a revelation in the field of insolvency resolution which provides fast track proceedings and reduces the time of insolvency resolution, still faces a number of challenges and flaws.
The primary challenge faced by the code is that of delays in the resolution process. The Code was expected to deal with insolvency in a time bound manner and did just that by providing a strict time frame to resolve insolvency. However, in most cases, this time frame gets extended due to procedural inefficiencies, lack of infrastructure and overburdening of the courts due to increasing number of cases. The Essar Steel case showcases this defect as each day of delay in proceedings is causing huge losses to the lenders.[1] The purpose of the Code is to prevent the firm’s insolvency and help the firm restructure while repaying the creditors. However, the IBC gives preference to the creditors to recover their dues. Thus, if insolvency resolution is not completed before the deadline or if the Committee of Creditors (CoC) reject the resolution plan, then liquidation proceedings start. Due to this liquidation preference, robust revival plans for restructuring the firm are not possible.[2]
The NCLT, NCLAT and the Supreme Court all have reiterated that the recovery of Financial Creditors has to be given preference over the Operational Creditors. However, in most cases, the liquidation value of debtors is so low that it is not even sufficient to pay the financial creditors. Therefore, in a majority of cases, the operational creditors end up getting nothing and this further increases litigations as they approach the NCLT to receive their due payments.[3] Moreover, the composition of the CoC is such that the financial creditors get adequate representations but the operational creditors don’t have any actual power to influence the committee. This puts them in a position where the decisions taken by the CoC, which consists of financial creditors, is binding on the operational creditors. This defeats the purpose of classifying them and puts them at an unequal footing with no say in how their disputes are going to get resolved.[4] Furthermore, the Workmen also don’t have adequate representation in the Insolvency resolution process and are at the mercy of the CoC to decide payment of their dues post insolvency proceedings. There is no governmental involvement to address their grievances and limited jurisdiction of the adjudicating authority to ensure equitable and fair resolution. The CoC have all the powers to decide matters regarding the insolvency and liquidation and without representation, it puts the interests of the operational creditors and workmen in a disadvantageous position.
Provisions relating to cross border insolvency is one of the major fallacies of the Code, as they do not adequately deal with or provide for resolutions of disputes which arise outside Indian jurisdiction. The present laws related to cross border insolvency are Sections 234 and 235 of the IBC. The UNCITRAL Model Law on Cross Border Insolvency provides various provisions and is better equipped than the IBC for providing solutions to foreign entities for insolvency resolution. It lays down that proceedings are to be recognized on the basis of Centre of Main Interest, i.e., the place where the debtor administers his interest on a regular basis,[5] which has been construed to mean the place where he carries out head office functions.[6] This solves the issue of jurisdiction between the parties and provides for faster resolution of the dispute. The Jet Airways insolvency delay provides the best example to highlight this lacuna in the code.
Questionable Approach of NCLAT in Essar Steel Case[7]and Remedial Steps
The NCLAT, in its disputed Essar Steel judgement, took the view that operational creditors stood on an equal footing with financial creditors and their claims are to be considered at par with those of the financial creditors. Further, it stated that the CoC is not empowered to decide the manner in which claims of creditors are to be dealt with. The judgement was opposed to the reality of credit risk assessment and pricing of the credit leading to unsatisfactory outcomes for creditors.
The Supreme Court in Swiss Ribbons vs Union of India upheld the differential treatment of different class of creditors. However, emphasis had been put on fair treatment of operational creditors as a requirement for approval of resolution plans. The amendment has clarified that financial creditors who voted against the resolution plan and the operational creditors are entitled to receive a minimum amount which would have been guaranteed if waterfall distribution was done. The Apex Court, in its landmark judgement, set aside majority of the NCLAT judgement and reinstated the earlier status quo. It has put its trust in the commercial wisdom of the CoC with regards to the resolution plan and liquidity.[8] The court emphasised on limited intervention of courts in matters of insolvency resolution and gave the onus to the CoC. The NCLT may send back a resolution plan approved by the CoC only if it does not maximise the value of assets of the corporate debtor and does not take into account the interests of all stakeholders including the operational creditors. Further, it held that, ‘equality principle cannot be stretched to treating unequal’s equally, as that would destroy the very objective of the code- to resolve stressed assets.’ It stated that CoC may treat different classes of creditors and approve a resolution plan which provides for such differentiation. Thus, the Apex Court through this judgement has disregarded the NCLAT’s narrow interpretation of the Code and forwarded the need to provide progressive judgements.[9]
Changing Course of the Code:
The Second Amendment Act, 2018 brought some relevant changes in the Code. Under the new amendment, an applicant should not hold NPA at the time of submission of the resolution plan, so applicants can withdraw from holding any previous NPA’s and this widens the pool of resolution applicants.[10] The Amendment also brought a reduction in the voting threshold of the CoC from 75% to 66% for key decisions such as appointment,[11] replacement of the resolution professionals,[12] extension of resolution process,[13]etc.
The Third Amendment Act, 2019 further brought changes in the IBC to deal with delays of insolvency resolution. This amendment aims at restoring the powers of the CoC which were curtailed and limited by the NCLAT judgement in the matters of Essar Steel case. An important structural change brought by the amendment is increasing the limit of insolvency resolution proceedings to 330 days from 270 days. This change was made keeping in mind that most cases exceeded the timeline due to legal proceedings against the Corporate Debtor, the Resolution Professional or the CoC. The important thing to note in this amendment is that it would also include time taken in legal proceedings while calculating the deadline of the 330th day. However, this may be subject to misuse as a number of frivolous cases may be filed in order to derail the resolution proceedings.
Conclusion and the way ahead:
The immediate short-term solution for the delay in insolvency proceedings, which is the major roadblock for the Code, may be to raise the admission floor from Rs 1 lakh to a higher threshold, so as to resolve the major resolution matters in a time-bound and prioritised manner, while simultaneously building capacity. Further, a proper training programme for resolution professionals and judges in the NCLT would help expedite the process. Further, it is important to increase the number of NCLT benches to ensure there are adequate benches to deal with increasing number of petitions. Incorporating the UNCITRAL Model into our Code may help solve the problem of cross border dispute resolution and make India an attractive destination for foreign investment. Moreover, time wasted in legal proceedings, which are prima facie frivolous and without cause should not be included in calculating the 330-day deadline.
The Insolvency and Bankruptcy Code is a revelation in its field which intends to improve the efficiency and complexity of insolvency resolutions in India. Recent judicial decisions and amendments provide a glimpse of a bright future, continuing IBC’s march as one of the most modern and progressive restructuring legislations in the world. However, the success of this Code will surely depend on how well the courts and legislation deal with the lacunae present.
Edited by Pragash Boopal
Approved & Published – Sakshi Raje
Reference
[1]https://economictimes.indiatimes.com/news/et-explains/et-explains-all-about-essar-steel-case-and-the-latest-twist-in-the-tale/articleshow/70344568.cms?from=mdr
[2] Ashish Pandey, The Indian Insolvency and Bankruptcy Bill: Sixty Years in the Making
[3] PWC, Decoding the Code: Survey on Twenty-One Months of IBC in India
[4] Sharad Tyagi, IBC: Committee of Creditors should include Operational Creditor
[5]Regulation 13, EU Regulation on Insolvency Proceedings (EC No. 1346/2000).
[6]Re Daisytek-ISA Ltd/ISA Daisytek SAS [2003] BCC 562; Re Enron Directo SA (unrep., 4 July 2002).
[7]Civil Appeal No. 8766-67 of 2019.
[8] K. Sashidhar vs Union bank
[9] Chinmoy Sharma, Essar Steel Judgement: IBC undergoes much needed course
[10] Section 29A(c), Insolvency and Bankruptcy Code (Amendment) Act, 2018
[11] Section 22(2), Insolvency and Bankruptcy Code (Amendment) Act, 2018
[12] Section 27(2), Insolvency and Bankruptcy Code (Amendment) Act, 2018
[13] Section 12(2), Insolvency and Bankruptcy Code (Amendment) Act, 2018