Daizy Chawla charts the progress of India’s Insolvency and Bankruptcy Code
‘The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole.’
The Insolvency and Bankruptcy Code 2016 is an act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders, including alteration in the order of priority of payment of government dues.
In order to tackle the challenges qua effective implementation of the Code, constructive interpretation by the tribunals, courts and nodal agencies, together with necessary amendments to the Code, have ensured that the above stated preamble of the Code is upheld and applied.
It would not be wrong to say that the Code is still an evolving statute and the following noted pragmatic amendments to the Code are proof of this:
1) Based on a series of back-outs by successful resolution applicant(s) after the resolution plan has been approved by the Committee of Creditors (CoC) as well as the adjudicating authority, an amendment has been introduced by inserting sub-regulation 4A in regulation 36B of the Insolvency Resolution Process for Corporate Persons (Amendment) Regulations 2019, requiring resolution applicant(s) of an approved resolution plan to provide performance security, which shall stand forfeited in case the resolution applicant fails to implement or contributes to the failure of the resolution plan. The idea behind this was to make the successful resolution applicant liable for its commitment.
2) Further, sub-regulation 1B in existing regulation 36B was also added, directing resolution applicant(s) to give a declaration if in the past it or its related parties failed to or contributed to failure of the implementation of a resolution plan, so that the resolution applicant should treat the whole corporate insolvency resolution process (CIRP) in a more serious manner, and should not pick and choose from options available.
3) Moreover, any creditor under the newly-inserted sub-regulation 9 of regulation 39, being aggrieved by non-implementation of a resolution plan, is allowed to apply to an adjudicating authority for appropriate directions against such resolution applicants who fail to implement the resolution plan.
4) At times, when CIRP starts, the corporate debtor and the creditors realise that they will not achieve anything from CIRP, especially an operational creditor who falls last under the waterfall mechanism of distribution of the proceeds (as provided under section 53 of the Code). Therefore, the Code was amended and the addition of section 12A was made to provide withdrawal of an application seeking initiation of insolvency resolution after the same is admitted by the National Company Law Tribunal (NCLT), subject to approval by at least 90% of the CoC.
5) To achieve the object for which the Code was enacted, a reduction in the voting threshold of the CoC from 75% to 66% with regard to key decisions, such as appointment or replacement of resolution professionals, extension of the insolvency resolution process, approval of the resolution plan, etc, was made.
6) The amendment of section 29A clarifying: (a) the term ‘related party’ was enlarged in its scope whereby some of the categories of resolution applicants were exempted from certain disqualifications to widen the pool of potential bidders; (b) resolution applicants should not hold a non-performing asset at the time of submission of the resolution plan; and (c) a resolution applicant should not be ineligible for any disability suffered in the past and is not subsisting at the time of submission of the resolution plan.
7) As there was no clarity regarding limitation, the creditors, especially operational creditors, were using CIRP as a debt recovery tool, which was more than three years old. Therefore, to restrict the misuse of the Code, section 238A was added, by which provisions of the Limitations Act 1963 were applied to all proceedings and appeals made under the Code.
8) Initially, when the Code was introduced, there was no provision or classification of the claim that an allottee to a real estate project could make. The term ‘financial debt’ received the explanation that any amount raised from allottees under a real estate project (including homebuyers) will be considered as a financial debt, resulting in homebuyers (earlier ‘other creditors’) to be considered as financial creditors and accordingly members of the CoC, though this amendment has also been used as a mode of recovery by allottees and already various writ petitions before the Supreme Court are pending, challenging the addition of such allottees of real estate projects under the category of financial creditor.
9) The interest of secured creditors who do not relinquish their assets was not clear when the Code was introduced. An amendment has been made to protect the interest of such creditors so such assets cannot be sold during the liquidation process. In other words, assets subject to security interest cannot be sold in liquidation proceedings unless the same have been relinquished to the liquidation estate.
Further, some of the judgments passed by the courts resulted in the chiselling of the statutory mandate of the Code, resulting in value maximisation of stakeholders, at-par treatment of creditors regardless of any categorisation, apart from effective implementation of the Code:
1) Vijay Kumar Jain v Standard Chartered Bank & ors (CA No 8430 of 2018 – decided on 31 January 2019) – the Division Bench of the Supreme Court, while upholding the statutory scheme provided under the Code, held that though the erstwhile board of directors are not members of the CoC, they have a right to participate in each and every meeting held by the CoC and also have a right to discuss along with members of the CoC all resolution plans that are presented at such meetings. The court also observed that it cannot be denied that operational creditors, who may participate in CoC meetings but have no right to vote, are vitally interested in such resolution plans and must be furnished with copies of such plans beforehand if they are to participate effectively in the meeting of the CoC. The court observed that repayment of debts of operational creditors is an important part of the resolution plan qua them on which operational creditors must comment. Hence, the court ordered that even though operational creditors have no right to vote but are only participants in meetings of the CoC, they would certainly have a right to be given a copy of the resolution plans before such meetings are held so that they may effectively comment on the same to safeguard their interest.
2) Binani Industries Ltd v Bank of Baroda & anor (CA (AT) (Insolvency) No 82 of 2018) – the National Company Law Appellate Tribunal (NCLAT) held that the resolution plan was discriminatory in nature due to the disparity in treatment of similarly-placed financial and operational creditors, and upheld the importance of maximisation of assets over procedural compliance.
3) K Kishan v Vijay Nirman Company Pvt Ltd (CA No 21824 and 21825 of 2017) – the Supreme Court held that proceedings under the Code cannot be initiated until all available statutory appeal mechanisms have been exhausted by the parties. The court clarified that operational creditors cannot use the Code either prematurely or for extraneous considerations, or as a substitute for debt enforcement procedures.
4) State Bank of India v V Ramakrishnan & anor (CA No 3595 and 4553 of 2018) – the Supreme Court, while applying the principles of guarantee provided under contract law, held that moratorium under section 14 of the Code does not intend to bar actions against assets of guarantors in respect of recovery of the debts of the corporate debtor.
5) IDBI Bank Ltd v Jaypee Infratech Ltd (CA No 26/2018 in Company Petition No (IB)77/AD/2017) – NCLT Prayagraj held that mortgages created by a corporate debtor in favour of the lenders of its holding company amounted to preferential, undervalued and fraudulent transactions, thereby nullifying the effect of certain transactions carried out for the purpose of undermining or circumventing any of the provisions of the Code.
6) Ferro Alloys Corporation Ltd v Rural Electrification Corporation Ltd (Comp App (AT) (Ins) No 92 of 2017) – the Supreme Court affirmed the NCLAT judgment, which held that insolvency proceedings against the corporate guarantor may be undertaken without initiating prior proceedings against the principal debtor under the Code.
Keeping in view the above developments, other judgments, circulars issued, etc, it can be seen that by each passing day, the Code is evolving in the right direction, resulting in successful implementation of the resolution plans, since the time value of money is a vital concern to ensure the effectiveness of the Code.
Daizy Chawla, Singh & Associates.
This article is for academic purposes and should not be construed as legal advice. In case of any queries/comments, please feel free to contact daizy@singhassociates.in or call +91 1146 667 000.