Reviving Failing Corporates: An Analytical Study of CIRP under IBC, 2016
Maanvi Trivedi
Final Year, B.B.A. LL.B.(Hons.), Symbiosis Law School, Hyderabad
Introduction
For any business establishment to function efficiently, it is essential to have a robust mechanism providing not only for a seamless entry mechanism, but also the flexibility and convinience to exit or discontinue the business, if required. Prior to the introduction of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC/the Code”), the mechanisms governing insolvency and restructuring were shattered across several legislations like the Companies Act, 2013 [1], the Sick Industrial Companies Act, 1985[2]( hereinafter referred to as “SICA”), The SARFAESI Act, 2002 [3]etc. The governing authorities were the Board for Industrial and Financial Reconstruction (hereinafter referred to as “BIFR”) and the Appellate Authority for Industrial and Financial Reconstruction. The BIFR’s SICA-compliant restructuring procedure had been condemned for allowing existing management to retain control of the corporation. In the light of such shortcomings, the Code was introduced in India to modernize and evolve the exit- mechanism for companies.
The present insolvency legislation in India, the Insolvency and Bankruptcy Code, 2016 elaborates on the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) which lays down the detailed procedure for a timely and efficient exit. The Code lays down a professional- resolution based mechanism to deal with corporate insolvency in India. CIRP evolved from traditional insolvency practices by focusing on a time-sensitive and creditor led resolution model. CIRP greatly influenced the relationship between borrowers, creditors, and regulatory authorities. The CIRP in the IBC balances the interests of stakeholders to provide a fair and efficient resolution of insolvency.
During the initial stages, there was a considerable apprehension revolving around the implementation and use of the process considering that matters had to be handled by newly appointed professionals, like the Adjudicating Authorities. Another reason for such hesitation was also the previous poorly executed mechanisms which were in place, prior to the introduction of the Code. However, such a situation was handled well by the Tribunals – National Company Law Tribunal (hereinafter referred to as “NCLT”), National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) and the Hon’ble Supreme Court (hereinafter referred to as “the SC”) by actively providing the necessary clarifications and filling in the gaps of the legislation, to ensure smooth implementation of the Code.
CIRP is laid down in the second part of the Code and is a mechanism which addresses the insolvency of the corporate debtor through a systematic resolution process. It establishes a regulatory structure for the in-time early detection of companies in financial crisis, the commencement of procedure for insolvency and the preparation of resolution plans to resuscitate struggling business enterprises. The idea aims to optimize the valuation of assets and retain firms, encouraging economic advancement. It broadly details the initiation, moratorium, public announcements, constitution of a Committee of Creditors (hereinafter referred to as “CoC”), appointment of resolution professional etc.
In the course of this paper, the researcher would primarily begin analysing the efficiency of the CIRP procedure in India, by firstly understanding and evaluating the role of the adjudicating authorities- the NCLT and NCLAT, followed by a thorough analysis of the various aspects of the procedure like financial creditor, interim resolution, resolution plan, moratorium etc. Lastly, the researcher will also dwell into some of the major aspects which still require attention of the legislators for a smooth and efficient functioning of the CIRP procedure in India.
Research Methodology
The present research paper requires the use of a doctrinal methodology of research to facilitate a better comprehension of the topic. In the course of making this research paper while deploying the doctrinal method the researcher has referred to secondary sources such as several research papers, articles, case comments, books, legal precents etc. so as to provide an in-depth understanding of the topic. Hence, the researcher proposes doctrinal research as it best fits the analysis of the current subject.
Research Objectives
In the current research paper, the research objectives are as follows:-
- To understand the underlying factors and circumstances that necessitated the introduction and implementation of the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code,2016.
- To critically examine the role of the adjudicating authorities in the Corporate Insolvency Resolution Process.
- To comprehensively explore and analyse the framework and procedural aspects of Corporate Insolvency Resolution under the Insolvency and Bankruptcy Code, 2016.
- To identify and evaluate the shortcomings inherent in the process and the Insolvency and Bankruptcy Code,2016 and suggest the way forward to deal with these shortcomings.
Chapter-I – The Pillars of Corporate Adjudication: NCLT and NCLAT’s Command in Insolvency Proceedings
Adjudicating authorities play a very essential role in the smooth implementation of the modern corporate insolvency regime. The NCLT, NCLAT and the SC have addressed the legislative obstacles surrounding the Code and have evolved swiftly to the transformed mechanism of insolvency and resolution procedure.
To begin with, the Apex Court while deciding on the first few cases under the Code i.e. in the case of Innoventive Industries Ltd. [4], referred to several reports, bills, statement of objects etc. to establish an understanding of the factors which led to the implementation of the Code. While doing so, the SC also made a note of the pragmatic shift in authority and influence from the debtor to the creditor.
The encounters of the past have shown that a disintegrated, scattered and inconsistent structure with diverse legislations is detrimental to the insolvency resolution procedure. Moreover, the authorities empowered with the role of resolving the insolvency proceedings may lack the requisite knowledge, experience to adjudicate on the same. This could further result in delays, prolonged hearings and increase the burden on the authorities with the aggrieved getting no or extremely delayed relief. In the light of these and as a result of the Madras Bar Association Case, [5]the NCLT and NCLAT were established and recognised as adjudicating authorities under IBC,2016. Their recognition was further upheld by the Hon’ble SC in the Swiss Ribbons Case[6].
In the case of Anthony Raphael Kallarakkal v National Company Law Tribunal[7], the SC specifically opined that, while the NCLT and NCLAT have jurisdiction, the high courts also have the authority of judicial review over the decisions and acts administrative in nature, especially the ones in relation to public law. To further clarify the position, the court in the case of Embassy Property Developments (P) Ltd. [8] , it discussed and bifurcated the jurisdiction restricted to IBC.
The SC in the case of Gujarat Urja Vikas Nigam Ltd. v Amit Gupta[9], further reiterated the far-reaching jurisdiction and powers of the NCLT and NCLAT to resolve disputes under IBC. However, it opined that, they have jurisdiction only when a matter of insolvency relates to corporate debtors and while adjudicating the same, it shall not deprive other legitimate courts and tribunals of their jurisdiction in other relevant matters in relation to the case in hand.
In a recent case of 2021, the SC discussed on the primary factors which led to the introduction of the Code, followed by the role and significance of the legislation . It further highlighted that considering that the legislation is thoughtfully crafted , the requirement of intervention by the NCLT/NCLAT should be minimum to ensure that the core principles of the Code are undisturbed. [10]
Therefore, drawing from the previous instances, the NCLT and NCLAT have been recognised as the deciding authorities in IBC, along with the High Courts and SC. Furthermore, to avoid any issues or overlap of jurisdiction or powers, the SC has also specified the scope of the authorities for a smooth functioning and resolution.
Chapter-II – A Detailed Examination of the CIRP under IBC
The CIRP, as detailed in IBC, is governed by specified timelines at each stage, with the overall procedure taking 330 days at the most to get completed. However, while discussing the aspect of timelines, the Hon’ble SC in the case of Essar Steel (India) Ltd.[11], opined that while it is not compulsory to adhere to the timeline, it is essential that the authorities try to adhere to the same as closely as possible to ensure smooth implementation of the Code.
When a corporate person fails to pay debt(financial/operational) whether in whole or part when the amount becomes due and payable, CIRP can be initiated by Financial Creditors, Operational Creditors and a Corporate Debtor .The process is said to commence from the date on which the application is accepted and the adjudicating authority is convinced that a default of debt has taken place.[12] The commencement is marked by the appointment of the Resolution Professional, followed by the procedure of claim collection, approval to constitute CoC. This is followed by the drafting of Resolution Plan basis which if is successful then CIRP continues, else the matter is considered for liquidation. At this stage, the Insolvency Professional can be witnessed playing varied roles and responsibilities- for instance prior to the involvement of CoC as an Insolvency Resolution Professional accountable to the NCLT, further accountable to the CoC until the Plan is confirmed.
- Financial Creditor and the Default
For the purpose of initiating CIRP, it can be done either by the financial creditor whether secured or unsecured individually or jointly or on representation by authorised representative by filing an application along with the necessary documents to the adjudicating authority in case of default of debt payment. The procedure pertaining to the financial creditor has been detailed out under Section 7 of the Code[13]. In the light of initiation of CIRP under Section 7, the SC stated that the failure to pay debt to any financial creditor is sufficient to file the application, it is not mandatory that the debt should be outstanding to the financial creditor filing the application.[14] The adjudicating authorities have the power to either accept or reject such application within a time period of fourteen days of receiving such an application. Initially the focus was on understanding the concept of ‘default’, financial creditor and the aspect of notice which had to sent by the financial creditor to the corporate debtor. In the case of Chitra Sharma v Union of India[15], the SC upheld the claim of home buyers to be recognised as financial creditors to builders who could thereby initiate the resolution process. This position was further strengthened by an amendment in the legislation to recognise the same and by the landmark case of Pioneer Urban Land and Infrastructure Ltd. v Union of India[16], wherein the court took the same stand.
- Operational Creditor and CIRP
The initial procedure for initiation of CIRP is the same for both the Financial Creditors and Operational Creditors i.e. when the Corporate Debtor fails to pay the debt. The creditor in this case, has two options, either make an application to the Tribunal[17] or directly issue a demand notice to the Corporate Debtor. [18] In the case of M/S Krystal Integrated Services Pvt.Ltd.,[19] the court held that without the issuance of demand notice under Section 8 to the corporate debtor by the operational creditor, an application by the latter under Section 9 of IBC [20]could not be accepted by the adjudicating authorities. However, if the Corporate Debtor does not reply to such notice within a time period of ten days, then in that case a direct application to the Tribunal can be accepted.
Withdrawal of CIRP: One of the most prominent questions arising with regards to CIRP was whether the application could be withdrawn on the ground of mutual settlement between Financial Creditor and Corporate Debtor. In this regard, the Apex Court in the case of Impex Ferro Tech Ltd. [21]recognised the settlement by invoking Article 142 [22]of the Indian Constitution. To resolve this pertaining issue with regards to recognition of settlement between financial creditor and corporate debtor, the legislators introduced Section 12-A in the Code. [23]This provision was explained and elaborated upon by the Apex Court in detail in the case of Arun Kumar Jagatramka. v Jindal Steel and Power Ltd.[24], wherein the court clarified the stance that an application filed under the section is not to be considered as a step to resolve the resolution, rather it is one of the early options available wherein as a result of mutual settlement the parties return back to their original position, as before the initiation of CIRP.
- The Interim Resolution
In the process of resolution under the CIRP, the Insolvency Professional as assigned by the NCLT, plays the dual-role of an agent and adjudicator and is empowered with varied roles and responsibilities such as legal compliances, categorization of assets and liabilities of the debtor unable to repay the debt and other linked management responsibilities. They are also allocated with core functions such as gathering relevant information about the firm from the debtor, due diligence, constitution of CoC, assuming control of the company(management and operations), collection of claims etc. Section 15 of IBC [25]also entrusts them with the responsibility of publishing a notice to the public with requisite details as mentioned in the code. However, one of the biggest tasks before the professionals is to keep the firm as a going concern.
- Moratorium
It is a cooling off period wherein all the recovery process is paused against the Corporate Debtor’s business and the firm continues as going concern and at the same time the interests of the creditor are safeguarded. This act aids the Resolution Professional to carry out his duties without any interventions.[26] In relation to moratorium, the NCLT in the case of Canara Bank v Deccan Chronicle Holdings Ltd, [27]was encountered with the question of whether the constitutional provisions would prevail over the moratorium . Here, the court took the stand that the moratorium will not have any implication or effect upon the powers of the HC, on proceedings going on in the SC under Article 32 of the Constitution.
- Committee Of Creditors
The involvement of CoC is an important aspect of the resolution process which indicates the smooth functioning of the insolvency proceedings. Post the verification of all the claims against the Corporate Debtor, the CoC is formulated with a combination of financial and non-financial creditor by the Resolution Professionals. As a result of formulation of CoC and post the Resolution Plan being provided to the board of directors of the Corporate Debtor, the board of directors gets suspended. [28]
- The Resolution Plan
The most essential aim of the CoC is to formulate an appropriate Resolution Plan such that the firm can continue as a going concern. In relation to this, the Resolution Professional is also assigned with the responsibility of drafting an ‘Information Memorandum’ which has the requisite information about the Corporate Debtor in relation to the resolution plan. [29]Furthermore, in order to assess the fair value of the assets of the Corporate Debtor, a ‘Registered Valuer’ is also appointed to ensure an effective recovery rate basis the cost, time and other factors. In order to avoid conflict on the aspect of who could be a resolution applicant, the legislators introduced Section-29A in the Code, it detailed out the factors which could lead to the disqualifications of resolution applicant[30]. Clarifications were further issued by the Apex Court on the provision in the case of Arcelormittal India (P) Ltd. v Satish Kumar Gupta[31] and then upheld in the Swiss Ribbons case. The acceptance or rejection of the Resolution Plan is dependent on two main pillars firstly the CoC and their knowledge and secondly, upon the adjudicating authorities who ensure the compliance of the plan with Section 30 of IBC. [32]In the case of Municipal Corpn. Of Greater Mumbai[33], the adjudicating authorities rejected the plan on the grounds that Corporate Debtor had failed to fulfil his contractual obligations. This case is an illustration of how the adjudicating authorities ensure compliance of the plan with the necessary provisions of the Code. From the date when the resolution plan is accepted, the Corporate Debtor is safeguarded against any of the offences he committed prior to the commencement of CIRP.
Chapter-III- Conclusion and Suggestions in the light of Unfinished Agendas
A detailed study of CIRP under IBC shows that while the Code has achieved a lot there still exists certain loop holes which need urgent attention of the legislators.
In the 16th meeting of Parliament, the Joint Committee opined that without a proper mechanism to govern cross-border insolvency, the IBC is an incomplete Code. This led to the introduction of Section 233 and 234 in the Code and the Committee on Insolvency also submitted a detailed report for framework on the same, but it still has not been implemented. In the case of Pre-Packed/Arranged Insolvency, the Resolution Plan is formalised prior to the initiation of the proceedings and one of the main aspects of such mechanism is the recognition of out of court settlements. While the legislators have recognised the latter, the mechanism still has not been dealt with by the legislators in detail. While in the case of Videocon,[34] the court permitted to combine proceedings of 13 out of 15 companies, the Code does not provide for a mechanism to harmonise insolvency proceedings of companies in a group.
To conclude, a critical analysis of the process emphasizes that it has made a substantial progress in reviving businesses but there still exists certain aspects which need the attention of the legislators. Further, while over the past few years, India has been considered as one of the most favourable countries for investment worldwide, a detailed look at the above-mentioned unattended agendas could further get the existing mechanism in the nation to be in line with the global standards. This will not only ensure smooth exit and functioning of the Code but would also majorly instil trust of the investors in the country. It is very essential that the Code gets updated from time to time to ensure that all the requisite changes are adopted in the legislation along with the evolving practices in the world of business and economy. Further, one of the most essential factors for efficient functioning of the Code is also the active participation of the Creditors as well as legislators. Therefore, the primary aim should always remain to celebrate honest business failures, revive companies, instil a culture wherein the legislation is so stern that it demotivates and warns the creditors from providing loans with extreme risks and uncertainties and at the same time do the likewise with the debtors to ensure smooth functioning and success of the business.
References:
[1] Companies Act, 2013, No.13, Acts of Parliament,2013 (India).
[2] The Sick Industrial Companies (Special Provisions) Act, 1985, No. 1 , Acts of Parliament, 1986 (India).
[3] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No. 54 , Acts of Parliament,2002.
[4] Innoventive Industries Ltd. v ICICI Bank, (2017) ibclaw.in 02 SC.
[5] Union of India v Madras Bar Assn., (2010) 11 SCC 1 and Madras Bar Assn. v Union of India, (2015) 8 SCC 583.
[6] Swiss Ribbons (P) Ltd. v Union of India, (2019) ibclaw.in 03 SC.
[7] Anthony Raphael Kallarakkal v National Company Law Tribunal, (2018) ibclaw.in 96 HC.
[8] Embassy Property Developments (P) Ltd. v State of Karnataka, (2020) ibclaw.in 12 SC.
[9] Gujarat Urja Vikas Nigam Ltd. v Amit Gupta (2021) ibclaw.in 44 SC.
[10] Arun Kumar Jagatramka. v Jindal Steel and Power Ltd., (2021) ibclaw.in 46 SC.
[11] Essar Steel (India) Ltd. v Satish Kumar Gupta, (2019) ibclaw.in 07 SC.
[12] The Insolvency and Bankruptcy Code, 2016, § 3(7), No. 31, Acts of Parliament, 2016.
[13] Id. §7.
[14] Supra Note 4.
[15] Chitra Sharma v Union of India (2018) ibclaw.in 37 SC.
[16] Pioneer Urban Land and Infrastructure Ltd. v Union of India, (2019) ibclaw.in 13 SC.
[17]The Insolvency and Bankruptcy Code, 2016, § 9, No. 31, Acts of Parliament, 2016.
[18] Id., § 8.
[19] Krystal Integrated Services Pvt. Ltd v. India on time Express Pvt. Ltd. NCLT CP 223/16.
[20] Supra Note 17.
[21] Impex Ferro Tech Ltd. v Agarwal Coal Corpn. (P) Ltd, (2017) ibclaw.in 12 SC.
[22] India Const. art. 142.
[23] The Insolvency and Bankruptcy Code, 2016, § 12-A, No. 31, Acts of Parliament, 2016.
[24] Arun Kumar Jagatramka. v Jindal Steel and Power Ltd., (2021) ibclaw.in 46 SC.
[25] The Insolvency and Bankruptcy Code, 2016, § 15, No. 31, Acts of Parliament, 2016.
[26]Id. § 14.
[27] Canara Bank v Deccan Chronicle Holdings Ltd., (2017) ibclaw.in 25 NCLAT.
[28] Vijay Kumar Jain v Standard Chartered Bank, (2019) ibclaw.in 24 SC.
[29] The Insolvency and Bankruptcy Code, 2016, § 29, No. 31, Acts of Parliament, 2016.
[30] Insolvency and Bankruptcy Code (Amendment) Ordinance 2017 issued on November 23, 2018.
[31] Arcelormittal India (P) Ltd. v Satish Kumar Gupta, (2018) ibclaw.in 31 SC.
[32] The Insolvency and Bankruptcy Code, 2016, § 30, No. 31, Acts of Parliament, 2016.
[33] Municipal Corpn. of Greater Mumbai v Abhilash Lal, (2019) ibclaw.in 28 SC.
[34] SBI v Videocon Industries Ltd., (2018) ibclaw.in 291 NCLT.
