Economic development of a country is crucially dependent on the legal environment of a country. A strong legal environment of a country makes it globally strong. So far as the legal environment of India viz. commercial law is concerned, the introduction of Goods and Services Act and the Insolvency and Bankruptcy Code are two vital reforms for Indian Economy. The Insolvency and Bankruptcy Code enacted on May, 2016 and the same became effective from December, 2016. Since the same Code has been brought into force, it made the Indian commercial regime emphatically powerful through enhancement of the Foreign Direct Investment, Increased Mergers and Acquisitions, improving India?s Ease of doing Business ranking, etc. The insolvency and Bankruptcy Code, 2016 plays a crucial role in limiting the risks of credit and has consolidated and amended the law as to insolvency resolution process in India. It aims at providing a rescue mechanism for distressed entities, facilitating faster windup of insolvent entities and providing an easier route to investors.
In 2019, an amendment to this Act was proposed by the Finance Minister to amend some loopholes of the Act. This Article will be discussing the objectives behind passing of this Act, its provisions and the recent Amendment made.
Before the introduction of this Act the insolvency regime in India was administered on the basis of Individual Insolvency and Corporate or firm Insolvency. The Individual Insolvency was regulated through the Presidency Towns Insolvency Act, 1909 only for residents of Mumbai, Kolkata and Chennai, while the Provincial Insolvency Act, 1920 was for others. These laws being old legislation were not efficient to implement in the present scenario. Corporate and Firm Insolvency till now has been regulated by the numerous and overlapping laws which are as follows:-
1. Indian Partnership Act,1932
2. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002.
3. Companies Act,1956
4. Recovery of Debts due to Banks and Financial Institutions Act, 1993
5. Companies Act, 2013
6. Sick Industrial Companies Act, 1985
Due to contradictory and inefficient provisions of the abovementioned legislations the Insolvency and Bankruptcy Code was enacted. Thus, the objective of the new law is to promote entrepreneurship, availability of credit and to balance the interests of all stakeholders by consolidating and amending the laws relating to restructuring and indebtedness resolution of commercial persons, partnership firms and individuals in a time-bound manner and for expansion of value of assets of such persons and matters connected therewith or incidental thereto. It focuses on to club together the laws relating to insolvency of companies and limited liability entities inclusive of LLP, unlimited liability partnerships and individuals, currently having a number of legislation, into a single legislation.
If we see how efficiency of this legislation it is a wide-ranging law which visualizes and regulates the process of insolvency and bankruptcy of all persons including corporate, partnership, LLP?s and individuals which has reduced the multiplicity of numerous laws in a single matter. The Bankruptcy Code eradicated the multiple laws covering the recovery of debt and insolvency and liquidation process and present singular platform for all the relief?s relating to recovery of debts and insolvency.
One of the most prominent features of this Act is that it takes less time to provide resolution and defines fixed time frames for insolvency resolution of companies and individuals. The process is mandated to be completed within 180 days, which is extendable to a maximum of 90 days. Further, for a speedier process, there is a provision for fast track resolution of corporate insolvency within 90 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay the creditors.
There is single authority under the Code, i.e., National Company Law Tribunal (NCLT) which does not even allow the Civil Court to interfere with the application pending before it and thereby reduces the large quantity of litigation. The NCLT resolves the matters of insolvency resolution for Companies and Debt Recovery Tribunal is authority entrusted to decide the insolvency resolution for individuals.
The Act also provides for a new regulatory authority ?Insolvency and Bankruptcy Board of India? to regulate professionals, agencies and information utilities engaged in the resolution of insolvencies of companies, partnership firms and individuals.
Finance Minister Nirmala Sitharaman tabled the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 in the Rajya Sabha on 24th July, 2019 which focuses to amend the Insolvency and Bankruptcy Code, 2016. Let us understand the functioning of the resolution process in order to have better understanding of the amendment.
As per the IBC 2016, a financial creditor files an application before the National Company Law Tribunal for initiation the insolvency resolution process. The NCLT have to find the default within 14 days. Further, The Committee of Creditors (COC), the members of which are financial creditors, is constituted for taking decisions. It may simply either restructure the debtor?s debt or liquidate the debtor?s assets. After which, COC appoints a resolution professional who presents a resolution plan to it. Then the Committee is required to approve it and it must be completed within 180 days, the period may be extended for 90 days on the approval of the National Company Law Tribunal only. On account of refusal the debtors the matters goes into liquidation. The Code offers an order of urgency for the distribution of assets in case of bankruptcy of the debtor.
Now, let us consider the amendment proposed to the Act. This bill addresses three issues which are as follows:-
a. IT STRENGTHENS PROVISIONS AS TO THE TIME-LIMITS
The Insolvency and Bankruptcy Act, 2016 provides that the resolution as to insolvency must be completed within a period of 180 days which is further extendable by a period of 90 days only on the approval of the Tribunal. The proposed amendment bill states that the resolution process must be completed within 330 days. The period of 330 days includes time of extension and time taken in legal proceedings. It also adds that after the enactment of the bill the cases pending for over 330 days should be resolved within 90 days only.
b. IT SPECIFIES THE MINIMUM PAY OUTS TO OPERATIONAL CREDITORS IN ANY RESOLUTION PLAN.
The Code 2016 aims that the resolution plan ensures that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation. Whereas the bill provides that the amount which is to be paid to the operational creditor should be the higher of
(i) Amount which can be received under liquidation, and
(ii) The amount which can be received under a resolution plan when such amounts were distributed under the same order of priority (as for liquidation).
Furthermore, the Bill cites that it would also apply to insolvency processes, first, which that have not been approved or rejected by the National Company Law Tribunal (NCLT), second, that have been appealed to the National Company Appellate Tribunal or Supreme Court, lastly, where legal proceedings have been initiated in any court against the decision of the NCLT.
c. IT SPECIFIES THE MANNER IN WHICH THE REPRESENTATIVE OF A GROUP OF FINANCIAL CREDITORS SHOULD VOTE.
The IBC Code categorically mentions that, in definite cases, when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented to the COC by an authorised representative. These representatives may give their votes on behalf of the financial creditors as per instructions received from them. The Bill further mentions that such representative will vote on the foundation of the decision taken by a majority of the voting share of the creditors that they represent.
d. RESOLUTION PLAN
Pertaining to it, when a resolution plan is approved, it binds all stakeholders whereas the introduced amendment states that the passed resolution will be binding on the Union Government, State Government or any local authority which can raise demands after the approval of a resolution plan and can make sure that once a plan is approved, it is binding on them as well.
e. LIQUIDATION BY THE COMMITTEE OF CREDITORS
This amendment confirms that the CoC may have the authority to take the decision to liquidate the corporate debtor any time after the Committee gets constituted and before the resolution plan, including at any time before the preparation of the information memorandum.
In this famous case of Essar Steel India Limited the NCLT ordered that ?one of the bench makers for assessing the viability and feasibility of a resolution plan is whether operational creditors are given roughly the same treatment as financial creditors and if not, then such resolution plan must be modified or rejected so that the NCLAT could not act as a resolution professional and distribute funds?. Hence, it maintained status quo order and the implementation of the Essar Order were kept on hold. The appeals are currently listed for hearing.
These reforms can be a major factor in the development and growth in FDI and GDP of our nation. The Insolvency and Bankruptcy Code, 2016 has been undoubtedly landmark legislation and still evolving, however, it had some challenges as to its application. In order to overcome and improve the functioning of the Act, the Amendment Bill, 2019 has been drafted so that it can meet with several unforeseen challenges. It can be considered that this amendment the third round of changes to the Insolvency and Bankruptcy Code, 2016. The proposed amendment primarily focuses on the restoration of a corporate debtor by safeguarding the timely admission and completion of the resolution process and implanting disciplines amongst stakeholders to avoid inordinate delays.
? Research Paper on ?A Study of Insolvency and Bankruptcy Code and Its Impact on Macro Environment of India? published in IJEDR 2019 Volume 7, Issue 3 ISSN: 2321-9939.
? Article published on PRS Legislative Research titled as Insolvency and Bankruptcy (Bill), 2019
? An Article on mondaq.com titled as Insolvency and Bankruptcy (Amendment) Act,2019, Key Changes.
? Image Credits ? www.legalbites.com