BY- Chitrak Mitra Nandi, student of St. Xavier’s University, Kolkata
Abstract:
Insolvency and bankruptcy are terms which are often used interchangeably but there is a small difference in the meaning of those two terms. Insolvency refers to incapability to pay its debt which is within the date of repayment the loan is defaulted whereas bankruptcy is inability to pay debts which is not dependent on the time of repayment but is a long-term default. Insolvency and Bankruptcy laws in India have been tailor-made in interest of creditors and other investors of a company which usually affects a larger group of people which is not the case in insolvency of an individual. The Insolvency and Bankruptcy Code, 2016 is a giant step towards building a comprehensive law for protection of creditors and also to regulate the company’s liquidation proceedings if there is no chance of survival. An Insolvency and Bankruptcy Board was also established for the proper administration of IBC,2016. It is a creditor-driven process and entire insolvency and bankruptcy administration is done by the creditors themselves through their representatives who are appointed from the Insolvency and Bankruptcy Board and independent from the company’s control. It is often debated that there should be legal reforms for securing the interests of the shareholders of the company. This article would explore the intricacies of the Insolvency and Bankruptcy Code such as role of Insolvency Professionals, constitution of Committee of Creditors and the resolution sequence and also the reforms which has happened in the corporate legal framework of India.
The background of Insolvency and Bankruptcy Code shows that there were no separate legal provisions contained in the Companies Act for that purpose and the economic reforms of 1991 of Liberalisation, Privatisation and Globalisation led to a massive influx of foreign capital and expansion of wealth of Indian investors and companies in India. This opening of the economy also gave a ‘Right to Entry’. The Foreign Exchange Regulation Act was also replaced with the Foreign Exchange Management Act. Another major reform was that the Monopolistic and Restrictive Trade Practices Act was repealed and the Competition Act, 2002 was enacted. This gave a competitive market and free economy. The ‘Right to Exit’ was not in the initial phases considered by our lawmakers but with the unlimited expansion of the private sector there was a need for a regulation to ensure that the companies could exit the market in case they could not compete in the highly competitive market. Insolvency and Bankruptcy Code was a fast-track solution to this problem.
Some of the benefits of IBC are-
A. Ease of doing business
B. Time-Bound process- 180 days+ 90 days (exceptional circumstances)
C. Comprehensive law which covers company, Limited Liability Partnership, Individual and Partnership firms
D. One- Stop solution
E. Regulatory Body- Insolvency and Bankruptcy Board
I. Body Corporate
II. Common seal
III. It can sue and be sued
The IBB has two separate sections- Information Utility and Insolvency Professional Agency which appoints insolvency professionals.
The IBC has repealed Presidency Town Insolvency Act, 1909, Provincial Insolvency Act, 1920 and Sick Industrial Companies Act, 1985. It has further amended the Companies Act, 2013, Partnership Act, SARFESI Act, LLP Act, Finance Act, Income Tax Act, Central Excise Act and Customs Act.
Information utility refers to financial advisors who guide the company on their revival plan. The Insolvency proceedings are commenced by the creditors of the company who apply to the National Company Law Tribunal challenging that the company is unable to pay its debt. The tribunal would then appoint a Committee of Creditors who would delegate the management to the Insolvency Professionals. Within 180 days, a resolution plan shall be tabled before the Committee which shall contain an action plan for the revival of the company for its approval. The Insolvency Professionals would manage the company once insolvency proceedings are initiated. The Committee has to approve the resolution. A creditors meeting is usually convened and voting is done based on which the resolution is passed. If the resolution is rejected by the creditors, then there is no option other than the company going into liquidation.
The Insolvency Adjudication Process under IBC, 2016 states that any individual person or partnership firm may go through the debt recovery tribunal and if they are aggrieved by the order they may appeal before the Debt Recovery Appellate Tribunal and then to the Supreme Court. The same process for the companies or LLP is through the National Company Law Tribunal from which an appeal lies to the National Company Appellate Tribunal and then to the Supreme Court. The Insolvency and Bankruptcy Board of India is the regulatory body and the Insolvency Professional Agency has to be registered with the Board which is only the Institute of Chartered Accountants, Institute of Cost Accountants or Institute of Company Secretary can act as an IPA and the insolvency professionals are also practising CA, CS, Cost Accountants or advocates in the eligibility criteria.
Financial Creditors under section 5(7) are those creditors who has provided a financial debt to the company. Their relation with the company is based purely on a financial creditor. They may include banks or financial institutions who have given loans to the company or even unsecured creditors. They are most important in the scheme of things as they form part of the Committee of Creditors. Operational Creditors on the other hand are defined under section 5(20) are those persons who are suppliers of goods and services and the company has made credit purchases from them. Their liability comes from the entity for a transaction or an operation. Under section 5(28) voting rights are given to financial creditors proportionate to their financial debt. Higher the value of debt, higher is the voting power.
Insolvency professional is defined under section 3(19). It refers to a person enrolled as a member of an insolvency professional agency under section 206 and who has obtained registration from the Board under section 207. The role and functions of an insolvency professional is diverse.
1. Management of operations of a company- Take control of the assets and manage the operations during the insolvency proceedings.
2. Resolution Plan- Insolvency professionals invite the resolution plan from resolution applicants and in compliance with the Insolvency and Bankruptcy Code in the best interest of the creditors.
3. Convening and conducting the meetings of Committee of Creditors for approval of Resolution Plan.
4. Distribution of proceeds- Sale of assets among the creditors on the basis of priority.
5. Compliance and reporting in accordance with IBC and they have to provide a periodical progress report to the NCLT and other relevant authorities.
6. The IP has to maintain professional conduct and standard of ethics during the insolvency proceedings.
7. Resolution of disputes arising between shareholders and creditors
8. Transparency of insolvency proceedings.
The Committee of Creditors is the body which appoints the insolvency professionals and they act as agents or on behalf of the COC as they have the professional expertise for proper conduct of insolvency proceedings. Section 21 deals with the constitution of the Committee of Creditors. Section 24 deals with the modalities for meeting of COC. Section 28 provides a list of actions that may be taken by the Insolvency Professionals only with the prior approval of the COC. The IBC (Second Amendment) Act has added section 25A to provide for the rights of authorised representatives of financial creditors. The roles and functions of the COC are as follows-
1. Composition- Banks, financial institutions and other creditors.
2. Decision making body- It is a primary body which takes decision regarding the insolvency proceedings
3. Voting Mechanism- Voting rights are proportionate to the value of the debt.
4. Appointment of Insolvency Professionals
5. Evaluation of Resolution Plan- In the meeting of the COC the resolution plan gets evaluated and is accepted by majority voting.
6. Negotiation- The COC may negotiate with the resolution applicants to modify or improve their plan in the best interest of the creditors.
7. Monitoring the resolution plan- The resolution plan once accepted has to be implemented and the COC is entrusted with the supervision of the implementation of the resolution plan to obtain the desired results and also the insolvency professionals are under their supervision and they have to submit a periodical progress report to the COC.
8. Liquidation- If the COC determines that a viable resolution plan cannot be approved within the statutory time period or if the approved plan fails, then it may resolve to liquidate the assets of the corporate debtor. The COC makes a review of the liquidation process and distribution of proceeds among the creditors as per the provisions prescribed under the Insolvency and Bankruptcy Code.
CASE LAWS:
In 2017, in the first application made under the IBC in Innoventive Industries case the Supreme Court held in its order that initiation of insolvency and bankruptcy proceedings by a financial creditor under the IBC requires establishment of a payment default of a specified amount and the NCLT must admit the application in such case. However, in Vidarbha Industries case a division bench of the Supreme Court diluted this principle and held that the NCLT has the discretionary power to admit the insolvency petition irrespective of the payment default and it relied on the term ‘may admit’ under section 7 of the statute as reasoning of its decision. It also stated that the NCLT may consider the viability and overall financial health of the corporate debtor while considering the application. In the subsequent case of M Suresh Kumar Reddy, the Supreme Court held that the admission of the Corporate Insolvency Resolution Process application depends entirely on the facts and circumstances of the case and thus, it opened the gates to long-standing litigation in the initiation stage itself.
Conclusion
Insolvency and bankruptcy proceedings in India has become one of the most lucrative practice areas for professional lawyers as it requires specialisation. India has seen bold reforms in its legal framework to accommodate the companies which have made losses and in order to restructure the financial assets of the company in a way it can revive and the creditors are not deprived of their dues. However, the Insolvency and Bankruptcy Code is not entirely flawless and needs to be amended to strike a balance between the rights and interests of creditors and shareholders. There are situations where despite having a reasonable resolution plan it has been out voted by the creditors and the shareholders have been made scapegoats for the company’s failures. The IBC has also included provisions for regulating the administration and asset management of the company by insolvency professionals even when the company is going through liquidation proceedings.
Frequently Asked Questions (FAQs)
1. When was the Insolvency and Bankruptcy Code enacted?
2. Describe the insolvency adjudication process.
3. What is the role and functions of Insolvency Professionals?
4. What is the role and functions of Committee of Creditors?
5. Who is a financial creditor and an operational creditor?
ANSWERS-
1. The IBC was enacted in 2016.
2. The Insolvency Adjudication Process under IBC, 2016 states that any individual person or partnership firm may go through the debt recovery tribunal and if they are aggrieved by the order they may appeal before the Debt Recovery Appellate Tribunal and then to the Supreme Court. The same process for the companies or LLP is through the National Company Law Tribunal from which an appeal lies to the National Company Appellate Tribunal and then to the Supreme Court.
3. 1. Management of operations of a company- Take control of the assets and manage the operations during the insolvency proceedings.
2. Resolution Plan- Insolvency professionals invite the resolution plan from resolution applicants and in compliance with the Insolvency and Bankruptcy Code in the best interest of the creditors.
3. Convening and conducting the meetings of Committee of Creditors for approval of Resolution Plan.
4. Distribution of proceeds- Sale of assets among the creditors on the basis of priority.
5. Compliance and reporting in accordance with IBC and they have to provide a periodical progress report to the NCLT and other relevant authorities.
6. The IP has to maintain professional conduct and standard of ethics during the insolvency proceedings.
7. Resolution of disputes arising between shareholders and creditors
4. 1. Decision making body- It is a primary body which takes decision regarding the insolvency proceedings.
2. Appointment of Insolvency Professionals
3. Evaluation of Resolution Plan- In the meeting of the COC the resolution plan gets evaluated and is accepted by majority voting.
4. Negotiation- The COC may negotiate with the resolution applicants to modify or improve their plan in the best interest of the creditors.
5. Monitoring the resolution plan- The resolution plan once accepted has to be implemented and the COC is entrusted with the supervision of the implementation of the resolution plan to obtain the desired results and also the insolvency professionals are under their supervision and they have to submit a periodical progress report to the COC.
6. Liquidation- If the COC determines that a viable resolution plan cannot be approved within the statutory time period or if the approved plan fails, then it may resolve to liquidate the assets of the corporate debtor. The COC makes a review of the liquidation process and distribution of proceeds among the creditors as per the provisions prescribed under the Insolvency and Bankruptcy Code.
5. Financial Creditors under section 5(7) are those creditors who has provided a financial debt to the company. Their relation with the company is based purely on a financial creditor. They may include banks or financial institutions who have given loans to the company or even unsecured creditors. They are most important in the scheme of things as they form part of the Committee of Creditors. Operational Creditors on the other hand are defined under section 5(20) are those persons who are suppliers of goods and services and the company has made credit purchases from them. Their liability comes from the entity for a transaction or an operation.
