Criticality of the Hour to introduce amendments to IBC enabling the Code to mature from nascency
On 18th January 2023[2], the Ministry of Corporate Affairs issued a Discussion paper seeking comments from the general public and stakeholders and shareholders on the various exhaustive changes proposed to be carried out to the Insolvency and Bankruptcy Code, 2016.
The Parliament enacted the Insolvency and Bankruptcy Code in 2016 to introduce a speedy and more effective insolvency regime in the Country. Earlier, the Sick Industries Act was riddled with loopholes and became an Act that the defaulting Companies and their promoters enjoyed and Lenders were left remediless. Due to such failures and the mounting debt and as a resort to curb the banking system’s bad loan problems, this Code was introduced as a need of the hour alternative.
The introduction of the Code was not only to control and manage the bad debt problem but also to reorganize and restructure the entire insolvency regime, maximize the value of assets, promote entrepreneurship and balance the interests of all the stakeholders. However, the Code was like a breath of fresh air that attempted to streamline the resolution process for defaulting companies, known as corporate Debtors under the Code. However, being a new statute and in its infancy, the Code needed key improvements, especially with the changing financial landscapes and the demands that it has brought in.
The Code has undergone many rounds of amendments since its inception, however, the Code can clearly be said to be in the “nascent” stage. A welcoming and hopeful change to clear away the lacunas in the Code was introduced via the Discussion Paper wherein the Ministry Of Corporate Affairs proposed to carry out significant improvements and amendments to the Code and invited comments for the same.
The Discussion Paper aims to make the insolvency regime a better enactment by making it more robust, modern and sophisticated, however, on a bare perusal of the Paper it seems that the same was aimed at introducing changes for smoother admissions of the insolvency proceedings for defaulting companies and streamlining the resolution process for quicker winding up of the insolvency resolution of a Company so that it can be either quickly taken over by a Resolution Applicant or be sent to liquidation.
In the Authors’ opinion, the Discussion Paper is riddled with many lacunas that need to be dealt with by the Ministry of Corporate Affairs and the Parliament more patiently and expertly which would require appreciating the recent trends and judgments passed under the Code and making it less Lender centric statue.
Firstly, it is imperative to deal with the changes that have been proposed by the Ministry to the current Insolvency Process:
Introduction of a state of the Art electronic platform to facilitate better management of information about the Companies to keep the Information Utilities up to date with the Companies
The Ministry is set to debut a state of the art platform inclusive of all information about the financial health and solvency of a particular Company, including, but not limited to, any notices that may have been issued against the Company by its concerned Financial Creditors, Operational Creditors, Shareholders, and such. That the entire financial portfolio in a sense shall be a click away to access the situation the Company is in.
The Platform attempts to take it a notch higher and make a case management section qua a defaulting Company with the facility to file concerning applications with the Adjudicating Authority, negating the current e-filing system and most of all the Ministry aims to design the platform to invite attention and participation from other market players.
Enable smoother admission of insolvency process for Companies by:
Increasing reliance to be placed on records submitted in the Information Utilities:
The Discussion Paper proposes to make changes to Section 215 of the Code wherein the admission of Section 7 or Section 9 Applications shall be based on the Information Utilities only. The aim behind this amendment is to summarise the admission process even further, that is, if the Information Utilities show conclusive evidence that default has occurred by the Company, then the same shall be inducted into Insolvency proceedings.
However, the paper makes a mention that in limited cases will the Adjudicating Authority entertain perusal of records not available with the Utilities.
Overturning Vidarbha Industries Judgement:
There is no denying the fact that under the Code, the powers of the Adjudicating Authority are limited when considering an Application under Section 7 or 9, however, in the judgment of Vidarbha Industries Power Limited v. Axis Bank Limited, (2022) ibclaw.in 91 SC, the Supreme Court took a bold and landmark stand that redefined and expanded the discretionary powers of the Adjudicating Authority(s) at the time of considering Insolvency Petition’s and reject the same despite their being an existence of debt.
Vidarbha(supra) was a welcoming change in the insolvency law regime as it expanded the scope of powers of the Adjudicating Authority and gave the liberty to delve into pertinent factors, for instance, solvency, the financial health of the Company, other pertinent factors, that may not be available on the Information Utilities portal.
Empowering the Adjudicating Authority to penalise for “violations” under the Code:
The Code is already imbedded with Section 65 which talks about penalties to be imposed on parties for fraudulent and malicious initiation of the Corporate Insolvency Resolution Process.
However, as per the Paper, the Ministry seeks to improve Section 235A, which talks about ‘Punishments where no specific penalty or punishment is provided’. The Ministry proposes to convert Scion 235A into a civil penalty and give rights to the Adjudicating Authority to penalise for non-compliance with the provisions of the Code Such proceedings shall be initiated after an Application is made by the IBBI or any other person authorised in this regard.
Another proposed amendment under the headers seeks to empower the Adjudicating Authority itself to impose a penalty where the Authority thinks that a person has filed a frivolous and vexatious application with a minimum penalty of 1 Lakh Rupees.
Streamlining the Insolvency Resolution Process by:
Rethinking a Fast-Tracked Resolution Process:
Here the Discussion Paper proposes that unrelated financial creditors of a corporate debtor may come together to select and approve a resolution plan through an informal, out-of-court process. This process would involve the Adjudicating Authority only at specific points, such as for final approval or to impose a moratorium if such a measure is deemed necessary. To ensure that the integrity and core elements of the out-of-court process are preserved, the IBBI is expected to develop and specify a detailed procedural framework. This approach aims to streamline the resolution process while maintaining adherence to key legal requirements.
Improvement in Real Estate Cases:
The legal framework has evolved to recognize ‘house allottees’ as Financial Creditors, granting them a place in the Committee of Creditors through the judgment of Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd. Through IRP & Ors., Company Appeal (AT)(Ins.) No. 926 of 2019.
However, due to their unique nature, conflicts of interest can arise between house allottees and other Financial Creditors, which may not align with the objectives of the Corporate Insolvency Resolution Process. Consequently, it is proposed that when a Corporate Insolvency application is filed against a Corporate Debtor, particularly a promoter of a real estate project, the Adjudicating Authority should have the discretion to admit the case but apply insolvency provisions only to the specific projects in default. This approach would allow for the segregation of those projects from the broader entity solely for resolution. It is noted that applying for insolvency at the entity level in real estate cases could potentially impede progress.
Reimagining the consideration of the resolution plan and manner of distribution of the proceeds from the same:
Currently, the Committee of Creditors is not allowed to approve multiple resolution plans, whether they involve the sale of the Corporate Debtor’s assets or its resolution as a going concern; the resolution plan must address the Debtor’s insolvency as a going concern. It is now proposed that the Committee should have the flexibility to approve resolution plans that address individual or collective assets of the Debtor, with the condition that at least one of these plans provides for the Debtor’s insolvency resolution as a going concern. Once a resolution plan is approved by the Adjudicating Authority, it should be implemented while awaiting the approval of any additional plans within the Resolution Process.
The Insolvency process will conclude when the Committee and Adjudicating Authority have approved and finalized resolution plans for all of the Debtor’s assets, including its insolvency resolution as a going concern.
Group Insolvency:
The proposals recommend having a common Adjudicating Authority and a common Resolution Professional in cases where the Corporate Debtor has related parties, such as holding companies, subsidiaries, or associate companies, including those where the Corporate Debtor is a subsidiary of a common holding company. It is also proposed that Committees of Creditors for separate Debtors can jointly apply to ensure cooperation and coordination between their respective Corporate Insolvency Resolution Processes.
The main objective of these proposals is to improve coordination among related entities, making the resolution process more effective. The emphasis is on fostering cooperation and coordination rather than pursuing substantive consolidation in group insolvency cases.
Improving the Recovery Mechanism for Operation Creditors:
The proposal has succinctly dealt with improving the recovery mechanism for unsecured Operational Creditors under Section 53 during the liquidation process.
Although the efforts poured in by the Ministry in drafting the Discussion paper are laudable, however, the same still suffers from incredible deficiencies that the paper fails to address. The brief illustrations towards the same, in the personal opinion of the Author, are made hereunder:
The Plight of the Operational Creditors under the Current Insolvency Regime:
In terms of admission of the Application under Section 9:
The Proposal fails to address the pertinent lacuna that has hit several Operational Creditors whenever a Section 9 Application is filed before the Adjudication Authority, the concept of “disputed debt”. More often than not the entire claim of the Creditors has been rejected on mere arguments that the same is disputed debt by the Corporate Debtor.
Hence, parameters and concrete requisites must be set in place to ascertain what can be categorised as “disputed debt” to enable the Operational; Creditors and grant a better recovery mechanism.
As such, it has become a well known fact that the Code is Lender centric and does not grant much favour to the Operational Creditors and their plight.
In terms of Recovery of Dues:
The Ministry, in a laudable effort, has improved the stance of the Operational Creditors to receive their dues under the Liquidation process, however, the same changes must be stretched towards the unsecured creditors under the Corporate Insolvency mechanism as well.
This is a critical and necessary change that needs to be brought in as there is no rationale for distinguishing creditors on the sole basis of financial and operational. All unsecured creditors (whether operational or financial) should stand on the same footing in the waterfall mechanism.
In terms of the Discussion Paper hoping to introduce amendments that shall make it mandatory for the OCs to honour their commitment to the Corporate Debtor till the life of the agreement subsists:
Presently, successful resolution applicants often encounter challenges when certain Operational Creditors attempt to terminate ongoing agreements and discharge their liabilities due to the insolvency of the Corporate Debtor after the resolution plan has been approved. To address these issues, it is proposed that anti-deprivation principles should be extended and applied to certain agreements during the implementation phase, which occurs after the approval of the resolution plan. However, these principles would only apply to contracts involving government entities.
However, this is a problematic insertion as it attempts to bind the Operational Creditor to the new management under the same compromises it had extended to the previous management without obtaining the Creditors’ consent.
The preamble of the Code seeks to promote entrepreneurial spirit, however, the fact of the matter is the Lenders hijack the entire insolvency process and treat it the same as their playground
The preamble of the Code is intended to foster and support an entrepreneurial spirit, emphasizing the importance of creating a fair and balanced framework for insolvency resolution. It aims to facilitate the growth and recovery of businesses by providing a structured process for dealing with financial distress.
However, the reality often diverges from this vision. In practice, lenders frequently exert significant control over the insolvency process, effectively monopolizing it and using it to further their interests. This tendency can undermine the Code’s objectives, turning the insolvency process into a mechanism that primarily serves the needs of lenders rather than achieving its broader goal of revitalizing and supporting entrepreneurial endeavours. This dominance by lenders risks overshadowing the Code’s intent to create a more equitable and effective system for business recovery.
The “commercial wisdom of the CoC” cannot be treated as the gospel truth or the final word, the CoC acts as an Administrative body in essence and has to make up its decisions with cogent rationale.
The notion of the “commercial wisdom” of the Committee of Creditors should not be regarded as an infallible or absolute authority in the insolvency process. Although the CoC holds a significant role and is entrusted with crucial responsibilities in the resolution of a corporate debtor’s financial distress,it is fundamentally acting as an administrative body that operates within a structured framework. As such, the decisions made by the CoC must be based on a thorough, well-reasoned analysis rather than being treated as the final or unquestionable word on the matter.
The CoC’s judgments, while important, should not be perceived as the ultimate truth or as immune from scrutiny. Instead, the CoC is required to base its decisions on a cogent and rational rationale that is transparent and justifiable. This means that the CoC must carefully evaluate all relevant factors, conduct a comprehensive analysis of the options available, and provide clear reasoning for its decisions.
This approach helps ensure that the decisions made are not only in the best interest of the creditors but also uphold the principles of fairness and transparency in the insolvency resolution process. The role of the CoC is to act judiciously, with a clear understanding of the implications of its decisions, rather than assuming that its commercial wisdom is beyond question or review.
Though Adjudicating Authority is an administrative body and it is essential for the Tribunals to conduct summary trials as mandated by the Code, however, certain cases are not cases where simpliciter default has been committed and hence the Company ought not to be penalised without appreciation of evidence beyond what is available on the Information Utilities
While the Adjudicating Authority operates as an administrative body and is tasked with conducting summary trials as stipulated by the Code, it is important to recognize that some cases are not merely instances of a straightforward default. In these situations, the complexities of the case may require more than just a cursory review of the default. Therefore, the Tribunal mustn’t impose penalties on the company without thoroughly considering all relevant evidence, including information that extends beyond what is readily available from the Information Utilities. A comprehensive assessment of the facts and circumstances surrounding the case is necessary to ensure that any decisions or penalties are fair and well-informed, taking into account the broader context and any mitigating factors that may be present.
Conclusion:
It is undeniable that the introduction of a new, comprehensive, streamlined and stringent insolvency regime has been a much needed welcoming change to all creditors, big or small. However, in the present environment of commercial jurisprudence, the Code, as it is, is not enough to ensure justice is delivered to all parties involved in an insolvency resolution process concerning a corporate entity or person.
The Code aims to encourage entrepreneurial spirit, but in practice, lenders often dominate the insolvency process, treating it as their own domain. The “commercial wisdom of the CoC” should not be regarded as absolute, as the CoC acts as an administrative body that must base its decisions on sound reasoning. While the Adjudicating Authority is required to conduct summary trials as per the Code, some cases involve more complex issues than mere defaults, and companies should not be penalized without thoroughly considering evidence beyond what is provided by Information Utilities.
References:
[1] Advocate, Delhi High Court and Supreme Court, LLB (Amity Law School, Amity University, U.P.). Author can be reached at kochhar.sugandh25@gmail.com
[2] https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf
