Insolvency and Bankruptcy Code- Not just a brittle framework – By Yash Dhikle

Insolvency and Bankruptcy Code- Not just a brittle framework

 Abstract:

 A reform which was termed as one of the biggest economic reforms, the IBC. The sole bankruptcy law of the country, which was made by merging a number of laws and was applauded worldwide for making the entire insolvency process faster and easier has received its fair share of criticism. In his new book, Overdraft: Saving the Indian savior, even the former RBI Governor Urjit Patel termed the regime as “vulnerable and brittle” and further criticized the government alleging that it watered down the IBC and RBIs powers. Could a law which completely changed the insolvency process along with the hassle whilst empowering the investors and creditors, really be termed as ‘brittle’? The report aims to find out.

Introduction:

 The insolvency process pre-IBC was extremely fragmented, no clear codification existed. Due to the lack of a single law, the powers of creditors and debtors existed across a number of different laws making it a tedious process. This led to lack of jurisdiction clarity (Companies act, SARFAESI Act, SICA, RDDB etc. Gave different jurisdiction at different stages involving a number of institutions) and made the process extremely lengthy and expensive as decisions were frequently appealed against or were contradictory to another forum.

To solve such problems, in 2000 the Justice V.B Eradi committee recommended setting up of a National Company Law tribunal. In 2002 the Companies (Second Amendment) Act was altered to set up NCLT and NCLAT. Following this in the year 2015, the Banking Law reforms committee submitted its report recommending a significant change in the insolvency law of India, it even suggested constitution of a regulator.

The government was unhappy with the country’s performance in the Ease of doing business report and believed that SICA and Board for Industrial and Financial Reconstruction had failed in achieving its objectives.¹

Hence in 2016 the Indian Bankruptcy code was enacted and passed which merged a number of laws into a single legislation to govern all the Insolvency matters of the country. The NCLTs were constituted and the Insolvency and Bankruptcy Board of India (IBBI) was set up as the regulator. The law aimed to balance the interests of all the shareholders equally in a time bound manner².

February Circular

 Due to a rise in the number of NPAs and to address the timely identification of stressed assets and Independent Advisory committee was set up in 2017. The IAC identified 12 accounts totaling about 25% of the current gross NPAs of the banking system to be referred to NCLT³

Further due to the Banking Regulation (Amendment) Act, 2017; the insertion of section 35AA and 35AB gave the RBI powers to issues directions to deal with the issue of stressed assets. The RBI released the February Circular, 2018. The 12 identified accounts; “Dirty Dozen” constituted 25% of the total NPAs. Some of the 12 companies in the RBI list 1 were Bhushan Steel, Monnet Ispat, ABG Shipyard etc. The circular required a resolution of the stressed assets, which was to be agreed by all the lenders. The circular required that in a case of a default, after 180 days from the default date the lender within 15 days should initiate a CIRP.

In the Report of the parliamentary standing committee on the impact of the circular on NPAs, it was submitted that it was impossible to reach the consensus of the 100% lenders and also the time period of 180 days was very less.

Further in Dharani Sugars Vs. Union of India [2019] ibclaw.in 11 SC, the constitutionality of the sections 35AA and 35AB was challenged.

-Constitutionality of 35AA and 35AB: Court submitted that the provisions are not excessive in any way nor do they suffer from want of any guiding principle. As a matter of fact, these amendments are in the nature of amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act, and are not different in quality from any of the Sections which have already conferred such power. Thus, 38 Section 21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular. Similarly, under Section 35A, vast powers are given to issue necessary directions to banking companies in public interest, in the interest of banking policy, to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company, or to secure the proper management of any banking company. It is clear, therefore, that these provisions which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary. In the view above, sections 35AA and 35AB are not unconstitutional (Page 38 para 26).

– Validity of the Circular: The court held that the RBI can only direct banking institutions to move under the Insolvency Code if two conditions precedent are specified, namely, (i) that there is a Central Government authorisation to do so; and (ii) that it should be in respect of specific defaults. The Section, therefore, by necessary implication, prohibits this power from being exercised in any manner other than the manner set out in Section 35AA (Page 66 Para 31). But the circular applied to Banking and Non-Banking institutions alike, hence the circular was declared as ultra vires section 35AA of the Banking Regulation Act.

This ruling will give the promoters of stressed assets an opportunity to renegotiate their debt with lenders without going through the insolvency process.⁴ In the initial part of 2018, the number of cases filed by financial creditors was 345. But in Oct-Dec 2019; after the courts decision the number of cases rose to 1145.

Brittle or not?

India jumped from 136^th rank in 2016 to 63^rd 2019 in the World Ease of doing business. Till 31 March, 2020, 221 companies have been rescued through resolution plans. Out of these 221 resolved companies, the creditors realized 183% of the liquidation value of these companies.⁵

“About 1,300 cases have been admitted and out of that, in about 400 cases, corporate insolvency resolution process has been completed… in 60 cases resolution plans have been approved, in 240 cases liquidation orders have been given, 126 cases are in appeal. These cases which have been resolved have led to recovery of Rs 71,000 crore as of now,”- Injeti Srinivas (then Corporate Affairs Secretary).

One of the main goals of IBC was to make the entire process faster. The insolvency process post IBC was made time bound. The code mandated that once an application is admitted then the process had to be completed within 180 days. If the CoCs file an application demanding an extension, then maximum 90 days are provided in the case of such delays. Hence the entire process had to be completed in 270 days. The very nature of IBC shifted from “debtor in possession” to a “creditor in control” model.

IBC gave investors the advantage of being able to recover some part of their sum if the institution goes bankrupt. This helped the distressed companies to attract more investors. Dr. Patel believed that due to the striking down of the February circular the government gained more power to decide who is a defaulter. But the number of cases filed by FCs have been continuously rising after June 19, with a small dip due to COVID-19. Hence the right to initiate CIRP has been given to many creditors and thus the power is diffused and not concentrated in any single hand as is it made out by Dr. Patel.⁶

According to the Ease of Doing Business report, the average time taken for insolvency closures was earlier 4.5 years. Which was much higher than other countries (1.7 years in China, 1.5 years in the US, 0.8 years in Singapore and 0.6 years in Japan). This time of 4.5 years came significantly down after IBC to a shocking 1.6 years. The recovery rate which was earlier 26% rose to 49% and 43% for operational creditors and financial creditors respectively.

Keeping up-Major Amendments

IBC, even though a fairly new legislation has kept up with the world by making sure it achieves the goals it was made for. There have been some very important amendments to the act.

• Insolvency and Bankruptcy Code (Amendment) Act, 2017: Insertion of Section 29A barred promoters from bidding during an CIRP. This was a huge reform as this instilled fear into promoters as now they could lose the companies if the debt is not Under section 29A debtors whose loans were classified as NPAs for a period of 1 year were not allowed to be resolution applicants. Its intent was to stop people who contributed to the failure from getting their assets at a significant discount back.
• Insolvency and Bankruptcy Code (Second Amendment) Act, 2018: Section 12 of the Act was amended to reduce the requirement of 75% majority approval to 66% for extension of time or other major decisions. Section 14(3)(b) provided that the moratorium will not be applicable to guarantors, this allowed creditors to initiate CIRP against guarantors
• Insolvency and Bankruptcy Code (Amendment) Act, 2019: The code was made binding on all stakeholders. 330 days was set as the upper limit for completion of the CIRP, making the delays
• Insolvency and Bankruptcy Code (Amendment) Act, 2020: To protect the CD undergoing CIRP from criminal action, section 32A was introduced. It ensures that the CD’s valuations are not affected and prospective resolution applicants are not scared away by the fear of unnecessary litigation.⁷

To strengthen the code further judiciary laid down various landmark judgements

• In Binani Industries Limited v/s Bank of Baroda [2018] ibclaw.in 06 NCLAT, it was held that interests of all stakeholders are to be taken into account and maximisation of assets of debtors cannot be
• Home buyers are financial creditors: The supreme court held in the matters of Jaypee Infratech Ltd. that home buyers would be recognised as financial creditors. Under section 7 of the act home buyers can hence initiate CIRP against developers and can also are eligible to be the part of CoC
• It was also held in various judgements like Commissioner of Income Tax Vs. Monnet Ispat and Energy Ltd [2018] ibclaw.in 30 SC, that the code shall have an overriding effect. In case of a clash, legislations like RERA and income tax act shall give way to IBC. This means that other laws inconsistent with the code shall not be applicable to that extent where the IBC is applicable.

• In Arcelormittal India Private Limited Vs. Satish Kumar Gupta & Ors [2018] ibclaw.in 31 SC, it was held that it is mandatory to follow the timeline given under IBBI Regulations 2016. As time is of the utmost

Recently even the government has issued an ordinance to protect the COVID affected MSME defaults of not more than of 1 crore by allowing “Pre-Packs” as a resolution. Due to this the government does not expect a rise in MSME proceedings.

Conclusion

Time and time again, the Insolvency Law committee, Insolvency and Bankruptcy Board of India, the judiciary and also the Government; all have made active effort to make sure the relatively-newly formed legislation is up to date and consistent with the changing times.

Leaving no room for arbitrariness and vulnerability. Although the countries problem of NPAs has not been completely solved, the IBC has certainly made a huge difference. The code has made the process faster and has also empowered the investors to make sure there is no disbalance of power and interests. Hence calling such a legislation “Brittle”, is precisely far from the truth and the claim that it has been “watered down” to give government more power to interfere is definitely false.

Reference

1. BUDGET SPEECH- UNIOUN BUDGET 2015-16

2. THE INSOLVENCY AND BANKRUPTCY CODE, 2016 ,

https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jun/Insolvency%20and%20Bankrutpcy%20code,%202016%20(31%20of%202016)_2018-06-08%2020:06:32.pdf

3. RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC) – Reserve Bank of India – June 13, 2017 –

https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40743

4. SUPREME COURT STRIKES DOWN RBI’S FEB 2018 ORDER ON STRESSED ASSETS @BUSINESSLINE, https://www.thehindubusinessline.com/money-and-banking/sc-holds-ultra-vires-rbis-february-12-circular- mandating-insolvency-proceedings/article26709699.ece (last visited Jun 4, 2021)

5. INDIA LAW JOURNAL, https://indialawjournal.org/the-insolvency-and-bankruptcy-code.php (last visited Jun 4, 2021)

6. INDIA LAW JOURNAL, https://indialawjournal.org/the-insolvency-and-bankruptcy-code.php (last visited Jun 4, 2021)

7. INDIA LAW JOURNAL, https://indialawjournal.org/the-insolvency-and-bankruptcy-code.php (last visited Jun 4, 2021)