Indian Insolvency and Bankruptcy Code, 2016

• FastrackGovind
• company law, Constitution law, Contract Act, Finance
• December 13, 2023

Introduction

In a booming economy such as India, a healthy credit flow and the development of fresh capital are crucial, and when a corporation or business becomes insolvent or “sick,” it begins to default on its obligations. To prevent credit from becoming stranded in

It is crucial that banks or creditors are able to collect as much as possible from the defaulter as rapidly as possible, lest the system collapse or bad loans result.

If the firm is still viable, it can be given a fresh start with new owners, or its assets can be liquidated or sold in a timely way. This allows for the injection of new credit into the system and the minimization of asset depreciation.

In 2016, when India’s Non-Performing Assets and debt defaults were accumulating and older loan recovery mechanisms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals were deemed to be underperforming, the Insolvency and Bankruptcy Code (IBC) code was enacted to overhaul the corporate distress resolution regime in India and consolidate previously existent mechanisms.

When insolvency is initiated under the IBC, there are two possible outcomes: resolution or liquidation. If resolution attempts fail, the company’s assets are liquidated.

Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) was introduced under the Insolvency and Bankruptcy Code, 2016 which came into effect on December 1, 2016. The Insolvency Bankruptcy Code is a comprehensive and time-bound process for resolving corporate debtor’s insolvency with the goal of maximizing the value of their assets. Legal framework for insolvency and bankruptcy was ineffective and fragmented prior to the establishment of the IBC. The laws governing the subject before enacting this code are Companies Act, 1956 and the Sick Industrial Companies (Special Provisions) Act of 1985, two outdated legislations, were insufficient and inefficient in addressing the growing problem of non-performing assets (NPAs).

The CIRP procedure was introduced as part of a larger initiative to increase investor confidence and the convenience of doing business in India. Since the CIRP process was first introduced in 2016, various changes to the IBC have been made with the goal of enhancing the procedure and increasing its effectiveness in resolving the insolvency of corporate debtors.

CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Code. The corporate debtor’s “DEFAULT” serves as the catalyst for starting the CIRP. The Process of Insolvency of Corporate Debtors applicable when there is a minimum default of Rs. 1 crore (10 million). The Government revised the minimum amount of default for starting CIRP from INR 1 lakh to INR 1 crore by notification dated March 24, 2020.

The process of CIPR initiated in case of default of the Corporate Debtor by filling an application before the Adjudicating authority in the manner as provided under Chapter II of Part II of the Insolvency and Bankruptcy Code. Corporate Insolvency Resolution Process may be initiated by a Financial Creditor under Section 7, Operational Creditor under Section 9, and Corporate Applicant of a corporate debtor under section 10 of the IBC. There will be two possible outcomes when insolvency is triggered under the code: Liquidation or Revival of the corporate debtor. All attempts are made to resolve the insolvency by either coming up with a restructuring plan or a new ownership plan. If the resolution attempts fail, the company’s assets are liquidated. The code’s main goal is to save and revive the corporate debtor as once the CIPR fails, does the liquidation proceeding will initiate.

The Provisions of Insolvency and Bankruptcy Code Applies to

• A company incorporated under the Companies Act of 2013 or any previous legislation;
• A company governed by any special Act in force at the time, except to the extent that the said provisions are inconsistent with such special Acts;
• A Limited Liability Partnership incorporated under the Limited Liability Partnership Act of 2008;
• Any other corporation authorised under any law currently in force.

Process Under IBC

• When a corporate debtor (CD), or a company that has taken out loans to operate its business, defaults on its loan repayment, either the creditor (a bank or an entity that has lent money for operational purposes) or the debtor can file a petition under Section 6 of the IBC to initiate a Corporate Insolvency Resolution Process (CIRP). Historically, the least amount of default following which the lowest sum at which a creditor or debtor may file for insolvency was 1 lakh, but in light of the strain the epidemic has placed on businesses, the government has increased this amount to 1 crore.
• To file for insolvency, one must contact a recognised adjudicating authority (AA) under the IBC; in India, the authorised AAs are the several benches of the National Company Law Tribunal (NCLT).
• The Tribunal has fourteen days to accept or reject the application, or to offer an explanation if the acceptance is delayed. If an application is accepted by the AA, the CIRP or resolution procedure begins. 330 days is the new statutory timeframe for completing the settlement procedure.
• After the application is accepted, the AA appoints an insolvency professional agency-registered interim resolution professional (IRP) (IPA).
• IRPs may be qualified and registered chartered accountants, company secretaries, attorneys, etc. Once appointed by the Tribunal, the IRP assumes charge of the defaulter’s assets and activities, collects information about the company’s status from Information Utilities (databases that track the debtor’s credit history), and facilitates the establishment of a Committee of Creditors or CoC.
• A CoC, which consists of all (unrelated) financial creditors of a defaulting firm, is the most crucial corporate decision-making body in any CIRP, as it determines whether the defaulting company is viable enough to be reformed and given a fresh start, or whether it should be liquidated. Moreover, it selects an insolvency professional (IP), who may be the same as the IRP or a different expert, to oversee the company’s activities during the CIRP.
• The IP solicits and evaluates ideas for a company’s resolution plan, which may include debt restructuring, merger or demerger company. It proposes qualifying proposals to the CoC, which can adopt a plan if it wins approval from 66% of committee members with voting rights. If the CoC does not adopt any proposed resolution, the firm is liquidated.
• If a plan is accepted, the CoC presents it to the Tribunal (before the maximum 330-day limit), which then authorises and orders the debtor to follow the plan. The AA can also deny a proposal.
• The IBC was updated to include pre-packs or the pre-pack insolvency resolution procedure (PIRP) for Micro, Small, and Medium-Sized Businesses (MSMEs). Creditors and owners of a company agree out of court to sell the company to an interested bidder under a pre-pack resolution. The buyer might be a third party or a business associate. The existing law restricts the pre-pack settlement option to defaults less than 1 core rupees.

STATUTORY AND REGULATORY DEVELOPMENTS

1. Amendment to the CIRP Regulations, 2016

Recently, the IBBI published the Insolvency Resolution Procedure for Corporate Persons (Fourth Amendment) Rules, 2022, which contains the following significant amendments:

• Enabling a compromise/arrangement
• Section 230 of the Companies Act, 2013 allows a firm and its creditors to reach a settlement and arrangement. A liquidator appointed under the Code may submit an application with the NCLT requesting a meeting of creditors for a compromise or arrangement under Section 230 of the Companies Act, 2013. According to the “IBBI Discussion Paper on Streamlining the Liquidation Process,” all liquidations completed in the aforementioned method took an average of 466 days. The majority of this time is spent by the NCLT in deciding the liquidator’s application.
• In order to prevent such delays, Regulation 39BA has been inserted to the Code, requiring the “Committee of Creditors” (COC) to examine the possibility of a compromise or agreement before opting to liquidate the corporate debtor. If the COC suggests a compromise or agreement, the resolution professional must present such a proposal to the NCLT when the application for liquidation is filed with the NCLT.
• At the time that the liquidation application is under determination by the NCLT, the resolution professional and the COC should continue to explore the possibility of a compromise or agreement. This will guarantee that if a compromise or agreement can be reached, it will not be held up by superfluous procedural procedures.
• Request for the Resolution Plan
• Newly introduced Regulation 36(B)6(A) allows a resolution professional to make a “second request for submission of resolution plan” for the sale of corporate debtor’s assets. This provision may be invoked if no resolution plans were submitted in response to the initial invitation.
• The underlying objective of this modification appears to be to reduce delays in completing CIRPs. Before, there was no advice about the number of times a resolution expert might restart the “request for submission of resolution plans” procedure.
• Hence, every CIRP would have many rounds in which the public would be encouraged to submit resolution ideas, either owing to orders from the COC or directives from the adjudicatory authority. The current amendment aims to address this problem by limiting the number of times this procedure may be performed, so making the overall CIRP more efficient and time-bound.
• Permitting the sale of the Corporate Debtor’s assets
• Regulation 36C stipulates that if the entire value of the corporate debtor’s assets exceeds one hundred crores of rupees, the resolution expert must design a strategy for marketing the debtor’s assets.
• The implementation of such a plan is contingent on CoC approval.
• Generally, an RP would run advertising in newspapers and a press release on the corporate debtor’s website in order to distribute information. Despite the fact that there are rigorous deadlines for the filing of resolution plans from the date of publication of the request to do so, the investment community is often unaware of such processes. If an RP receives fewer or lower-quality resolution plans, it is likely that the debtor will be pushed into liquidation.
• Hence, marketing the debtor’s assets is vital and is a step in the right path for maximising the value of the debtor’s assets in a timely way.
• Submission of the Information Memorandum
• The modification to Regulation 36(1) modifies the timing for the RP’s submission of the Information Memorandum (IM). The new Regulation 36(1) requires the RP to submit the IM to the CoC no later than the ninety-fifth day after the date of the insolvency start.
• Rule 36(2) was also changed to broaden the scope of required IM contents. A IM must now include ‘important selling propositions’ and ‘all pertinent material that demonstrates critical information about the corporate debtor (including its operations and financial statements). An IM should also include all “contingent liabilities” of the debtor, “geographical coordinates” of all fixed assets, and details of business performance, key contracts, key investments, and other factors, as well as carried forward income tax losses, input credit of GST, key employees, key customers, supply chain linkages, utility connections, and other pre-existing facilities.
• The IM, which is analogous to a consolidated statement of the debtor’s assets and liabilities, is compiled by the RP for the benefit of the COC and potential resolution applicants. The IM is a crucial instrument that enables adequate marketing of the real worth of the debtor’s assets and fair disclosure of facts to secure the investor-interest. acquirer’s A thorough and strong IM is expected to instil more trust in investors seeking to acquire distressed assets under the IBC.

2. Amendment to IBBI (Liquidation) Rules, 2016

• Establishment of a Stakeholder Consultation Committee
• The IBBI (Liquidation Process) (Second Amendment) Regulations, 2022 6 (the “Liquidation Amendment Regulations”) amended Regulation 31A of the IBBI (Liquidation) Regulations, 2016 (the “Liquidation Regulations”) to require the first meeting of the Stakeholder Consultation Committee (SCC) to be held within seven days of the liquidation commencement date. 7 Yet, the current Regulation 31A(1) of the
• The Liquidation Rules require the liquidator to form the SCC within sixty (sixty) days after the liquidation’s start.
• Hence, there may be an unintentional discrepancy between the timing for the SCC’s formation and its first meeting.
• Substitution of the liquidator
• The newly included Rule 31A(11) of the Liquidation Regulations stipulates that the SCC may suggest the change of the liquidator if at least 66% of the committee members vote in favour. The change permits the SCC to submit a petition for replacement of the liquidator with the NCLT.
• By the aforesaid modification, the SCC has been granted the statutory/regulatory authority to replace a liquidator who fails to carry out their statutory responsibilities. Traditionally, completion of the sale of troubled assets through public auction has been beset by excessive delays. Yet, the current procedure of liquidation under the Code necessitates a rapid conclusion of the sale and dissolution of the stressed organisation; thus, the liquidator must be proactive and answerable to the SCC.

Conclusion

IBC has been a game changer for the Indian economy. It has provided everything that is needed to simplify the insolvency resolution process, including ease of exit. It is clear that the IBC is perhaps one of the most important laws passed in the past decade, positively impacting the “ease of doing business in India” and serving as a powerful stimulus for the expansion of the Indian economy. Given the ongoing growth of the Indian economy, IBC will consequently have much higher expectations moving forward than it did at the beginning. As a result, in addition to having high expectations, IBC will also need to overcome a number of obstacles in the area.

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