What are Bankruptcy laws in India?

THE INSOLVENCY AND BANKRUPTCY CODE (IBC): WHAT IS IT?

A healthy credit flow and the generation of new capital are essential in a growing economy like India, and when a company or business becomes insolvent or “sick,” it begins to default on its loans. It is essential for banks or creditors to be able to recover as much money as they can from the defaulter as quickly as they can in order for credit not to become stuck in the system or turn into bad loans.

The company’s assets can be quickly liquidated or sold off, or, if it is still viable, it can start over with new owners. The value loss of assets can be minimized while fresh credit is pumped into the system.

The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model rather than the debtor-in-possession system. This was done at a time when India’s Non-Performing Assets and debt defaults were increasing and older loan recovery mechanisms like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFA

Under the IBC, insolvency can result in one of two things: liquidation or resolution; The company’s assets are liquidated if all attempts to resolve the insolvency fail, whether through a restructuring plan or a new ownership plan.

• UNDER THE IBC, WHAT STEPS ARE TAKEN?

Under Section 6 of the IBC, either the creditor (a bank or another organization that has lent money for operational purposes) or the debtor can apply for the initiation of a Corporate Insolvency Resolution Process (CIRP) when a corporate debtor (CD) defaults on loan repayment. Previously, a creditor or debtor could only file for insolvency after a default of one lakh yen. However, due to the pandemic’s impact on businesses, the government raised the threshold to one crore yen.

Under the Indian Business Code (IBC), an applicant must approach a designated adjudicating authority (AA), which are the various NCLT benches located throughout India.

An interim resolution professional (IRP) registered with an insolvency professional agency (IPA) is appointed by the AA once the application is accepted. IRPs can be lawyers, company secretaries, experienced and registered chartered accountants, and so on. A CoC, which is made up of all (unrelated) financial creditors of a defaulting company, is the most important business decision-making body in every CIRP because it decides whether the defaulting company is viable enough to be restructured and given a fresh start or liquidated. Once appointed by the Tribunal, the IRP takes control of the assets and operations of the defaulter, collects information about the state of the company from Information Utilities (repositories that keep track of the debtor It also appoints an insolvency professional (IP) to oversee the company’s operations during the CIRP. This IP can be the same as the IRP or a new professional.

The IP solicits and evaluates proposals for a company’s resolution plan, which may include debt restructuring, a merger, or a demerger. It submits eligible plans to the CoC, which has the authority to approve a plan if it receives 66% of the committee members’ voting share. The company goes into liquidation if no resolution plan is approved by the CoC.

The IBC was amended in July of this year to include pre-packs, or the pre-pack insolvency resolution process (PIRP), for Micro, Small, and Medium Enterprises (MSMEs). In a pre-pack resolution, a company’s creditors and owners agree to sell the company to an interested buyer outside of court. The buyer could be a third party or a company employee. The pre-pack resolution mechanism is restricted by the current law to defaults that do not exceed Rs. 1 million

• WHAT OBSTACLES DOES THE IBC FACE?

The first goal of the IBC, according to its regulator, the Insolvency and Bankruptcy Board of India (IBBI), is resolution—saving a company as a going concern through reorganization, change of ownership, mergers, and other methods. The second goal is to maximize the value of the corporate debtor’s assets, and the third goal is to encourage entrepreneurship, make credit available, and strike a balance between the interests of both parties. According to the Code, these goals’ order is “sacrosanct.”

When this order is kept in mind, the IBBI data for the 3,400 cases admitted under the IBC over the past six years show that half of them, or more than 50%, ended in liquidation, and only 14% were able to find a proper resolution, which is the first goal. Even though things were better in 2016 and 2017, most cases have ended in liquidation since 2018, while cases for which resolution plans were approved range from 15% to 25%.

• FUTURE

The Code has come a long way and helped lenders in some way, but there may still be a lot more to be done. The adoption of the United Nations Commission on International Trade Law model for cross-border insolvency protocol and the signing of treaties with other nations to establish formal procedures to be followed when a debtor has assets in those nations are the next significant steps that must be taken as soon as possible. By partially instilling credit discipline, the Code has strengthened the position of creditors and influenced promoters of non-performing companies’ behaviour.

In addition, in August 2021, the Standing Committee on Finance of the Indian Parliament requested a review of the Code’s design and implementation in order to possibly identify viable solutions to the issues of low recovery rates, prolonged resolution process delays, the Committee of Creditor’s commercial wisdom, and the high number of Tribunal vacancies.

Treatment of operational creditor’s recovery under the Code, as well as less priority being given to applications filed in respect of avoidable transactions such as extortionate, preferential, undervalued, and fraudulent transactions, are some of the issues that remain under the Code.

In conclusion, a less well-known achievement is that the Code has strengthened an entire ecosystem in India. The Code has undoubtedly had an effect on India’s recovery system, and stakeholders will continue to have faith in it in the future.

• HOW CAN AN INDIVIDUAL AND COMPANY FILE BANKRUPTCY IN INDIA?

Application for insolvency Creditors can recover debt from debtors by filing recovery suits or an application under two colonial-era laws: the Presidency Towns Insolvency Act of 1909, which applies to the presidency towns of Kolkata, Mumbai, and Chennai, and the Provincial Insolvency Act of 1920, which applies to individual insolvency (also known as “old enactments”). These can be filed in the District Court of the debtor’s home or place of business for the past year.

Under the old laws, debtors and creditors can both file for individual insolvency, with a debt to be paid of Rs. 500. The Court has been given the discretionary authority to appoint an interim receiver, who takes control of the debtor’s assets. An arrangement for creditors to repay debts is provided by the old laws.

• NEGATIVE SIDE:

The absence of any provision for an interim moratorium at the beginning of the insolvency proceedings is one of the primary issues with the previous enactments. A person who is willing to restructure his debt is put at risk of vexatious legal action during the process. Even though the debtor may be in a position to offer a scheme of arrangement and return the money to the creditors, the debtor’s status is transformed into that of an insolvent under the old enactments by a provision of an Adjudication Order that has a similar effect.

How individual insolvency is redefined by the Insolvency and Bankruptcy Code. The country’s insolvency procedures were revolutionized by the introduction of the Code, which established consolidated procedures for corporate and individual insolvency. A debtor or a creditor, including a financial, operational, secured, or unsecured creditor, as well as a decree holder, may initiate a Corporate Insolvency Resolution Proceedings (CIRP) in the event of an individual insolvency in accordance with the Code. In the event of default, the application can be made by a debtor and a creditor together or individually.

Under the Code, an individual insolvency application can be filed with the Debt Recovery Tribunal (DRT), where the debt threshold of Rs. 1000/- is met. To challenge DRT orders, applicants can also approach the Debt Recovery Appellate Tribunal. In addition, the Code includes a provision for an interim moratorium that begins when an application for insolvency is filed. During this time, creditors are prohibited from taking legal action against the debtor and any legal action aimed at recovering debt is considered to have been stayed.

The Code’s individual insolvency procedure will give honest debtors a timetable for reorganizing their debts and fixing their credit problems. Due to the voluntary nature of the insolvency process, in which the debtor is actively involved in the preparation of the plan that will be presented to the creditors, it will also protect them from getting involved in time-consuming legal proceedings.

Additionally, debtors will be able to negotiate with their creditors if an interim moratorium on application filing is imposed, opening the door to amicable settlements, including reductions in total liability. Additionally, banks may benefit from participating in individual insolvency proceedings because they provide a quicker and more efficient alternative to filing recovery suits, which can last for lengthy periods of time without guaranteeing any recovery.

Keep in mind that a person’s credit history will be affected by any relief granted during the insolvency proceedings. As a result, debtors should avoid rashly invoking the insolvency process because doing so may eliminate future opportunities for credit. In addition, the threshold for initiating individual insolvency may open the floodgates to individual insolvency applications, further prolonging court proceedings.

Individual insolvency provisions of the Code have not yet been communicated. A “fresh start” scheme for individuals with debts up to Rs. 100 is outlined in the Code. 35,000 and a yearly gross income of less than Rs. 60,000 and assets totalling less than Rs. 20,000 people without a home. It will enable people who are unable to pay their debts to be released from their obligations upon notification.

• BENEFITS OF INSOLVENCY

Filing for bankruptcy is one of the most straightforward and efficient methods a creditor can use to recover debts owed to him. One of the biggest benefits of filing for insolvency is that it gives the debtor control over the process of resolution and provides a structured and legal way to deal with a debt crisis.

The debtor had the option of submitting a plan to arrange his financial affairs to the official assignee of the creditors under the old laws. It is considered to be duly accepted by the creditors when the scheme resolves the debt to the satisfaction of the majority of creditors and covers 3/4 of the debt’s value. The insolvent can participate actively in the debt resolution process as a result, increasing the likelihood that the creditors will recover their money. In addition, the debtor is able to restart their financial planning and seek discharge from the pending debt if the insolvency process is successful.

• CASE LAWS

1. Lokhandwala Kataria Construction (P) Ltd. (Corporate Debtor) Vs. Nisus Finance & Investment Manager Llp

The Court determined that the NCLAT was unable to use the inherent authority recognised by Rule 11 of the NCLAT Rules, 2016, in light of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

• Innoventive Industries Ltd. (Corporate Debtor) Vs. Icici Bank & Anr.

Former directors who are no longer in management cannot, of course, continue to support an appeal on behalf of the company once an insolvency professional has been appointed to run the firm.

The Court ruled that former directors who are no longer in control are manifestly unable to sustain an appeal on behalf of the firm after an insolvency professional has been appointed to manage it. – The Insolvency and Bankruptcy Code, 2016 is an Act to revise and consolidate the laws pertaining to corporate person reorganisation and insolvency resolution, among other things. The Insolvency and Bankruptcy Code, a piece of legislation passed by Parliament, provides a comprehensive guide on insolvency as it relates to corporate enterprises.- The Maharashtra Act cannot obstruct the corporate insolvency resolution process under the Code because there would be a conflict between the provisions of the two enactments, according to a reading of section 238 of the code, which makes it clear that the later non-obstante clause of the Parliamentary enactment will also prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act.

• Macquarie Bank Ltd. Vs. Shilpi Cable Technologies Ltd.

The first question is whether the clause in Section 9(3)(c) of the Code is required in connection to an operational debt.

While it is true that the term “initiation” in the marginal note to Section 9 does suggest the direction in which the provision is moving, it is unlikely that this direction would support the claim that Section 9(3) contains required requirements antecedent before the Code may be invoked. The word “must” in Section 9(3) also doesn’t get us very far because it is obvious that situations like this make it impossible to comply with Section 9(3)(c). As a result, Section 9(3)(c) would have to be interpreted as being of a directive nature. This would amount to a scenario wherein considerable general discomfort would be given to innocent individuals, such as the appellant, without much benefiting the goal of the Act.

whether a lawyer acting on behalf of the operational creditor may submit a demand notice of an unpaid operational debt under section 8?

Insolvency and Bankruptcy Code, 2016, Sections 8, 9, and 238 when read with Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, and Section 30 of the Advocates Act – Section 9(3)(c) cannot be interpreted as a threshold bar or a condition precedent, according to a fair construction that is consistent with the goal that the Code should pursue. As there is no conflict between Section 9, read with the aforementioned Adjudicating Authority Rules and Forms, and the Advocates Act, the non-obstante provision included in Section 238 of the Code will not supersede the Advocates Act. It is obvious that both statutes must be interpreted together since there is no obvious inconsistency between the two Parliamentary legislation in the current situation that cannot be remedied by a congruent reading. Remember that the basic right to practise one’s profession is protected by Article 19(1)(g) of the Constitution, which is covered by Section 30 of the Advocates Act. A notification given by a lawyer on behalf of an operating creditor would be appropriate, according to a combined interpretation of Section 30 of the Advocates Act, Sections 8 and 9 of the Code, and the Adjudicatory Authority Rules and Forms thereunder.

• Mobilox Innovations (P) Ltd. Vs. Kirusa Software (P) Ltd.

Whether the word “and” in section 8(2)(a) may be interpreted as “or”?

the adjudicating authority must reject the application under Section 9(5)(2)(d) if the operational creditor has received notice of dispute or if there is a record of dispute in the information utility once the operational creditor has filed an application, which is otherwise complete. The Court held that the word “and” occurring in section 8(2)(a) may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation. The adjudicating authority must deny the application as long as a disagreement actually exists in fact and is not fictitious, hypothetical, or illusory. When there is a genuine disagreement between the parties over payment, the disagreement is deemed to exist according to Section 5’s broad definition of “dispute” (6).

• Surendra Trading Company Vs. Juggilal Kamlapat Jute Mills Company Ltd. & Others

The IBC, 2016-time limit is limited for accepting or rejecting a petition or initiating CIRP in accordance with proviso to sub-sec. (5) of Sec. 9.

The NCLAT was asked if the fourteen days provided by section 9(5) to the adjudicating body to determine the presence of a default and decide whether to accept or reject the application is required or just advisory. According to NCLAT, the requirement of sub-section (5) of section 7 or sub-section (5) of section 9 or sub-section (4) of section 10 is a procedural requirement, a tool to help in the swift administration of justice, and is a directive.

The Supreme Court’s other issue was whether the seven-day window for fixing errors under the proviso to subsection (5) of Section 9 was required or merely advisory. The aforementioned clause stating that problems must be fixed within seven days is advisory rather than required.

• K. Kishan Vs. M/S Vijay Nirman Company Pvt. Ltd.

Operational creditors are prohibited from using the Insolvency Code prematurely, for unrelated purposes, or as a stand-in for debt collection practises.

The Court held that there may be circumstances in which a Section 34 petition contesting an Arbitral Award may be unequivocally and clearly barred by limitation, provided that it can be shown to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired and that either no petition under Section 34 has been filed by the time it should have been or a belated petition under Section 34 has been filed since that time. Only in these obviously obvious instances may the insolvency procedure thereafter be used. Additionally, in other circumstances where a Section 34 petition may have been filed in the incorrect court, the petitioner may argue that Section 14 of the Limitation Act should be applied to overcome the bar of limitation imposed by Section 34(3) of the Arbitration Act. It is evident in such situations as well that the insolvency procedure cannot begin without a decision regarding the applicability of Section 14 of the Limitation Act.

• Jaipur Metals & Electricals Employees Organization Vs. Jaipur Metals & Electricals Ltd.

It is necessary to view amended Section 434 of the Companies Act, 2013, as a component of the Code rather than the Companies Act, 2013.

The NCLT procedures will now resume where they left off, according to the Supreme Court’s ruling. In light of Section 238 of the Code, it is obvious that the corporate petition currently before the High Court cannot be processed any further. Given that actions under the Code must go to completion, it is also necessary to decide the writ petitions that are currently before the High Court. As a result, we accept the appeal and nullify the decision of the High Court.

• Mr. Anand Rao Korada Resolution Professional Vs. M/S. Varsha Fabrics (P) Ltd. & Ors.

Once the IBC proceedings had begun and the NCLT had issued an Order imposing a moratorium, the High Court should not have continued with the auction of the Corporate Debtor’s property.

The Supreme Court overturned the challenged Interim Orders issued by the Odisha High Court on August 14 and September 5, 2019, respectively, holding that given the IBC’s provisions, the High Court should not have continued with the Corporate Debtor’s property auction after the IBC’s proceedings had begun and the NCLT had issued an Order declaring a moratorium. After the CIRP in this matter had begun, the High Court issued the contested Interim Orders dated 14.08.2019 and 05.09.2019. The High Court erred in passing the Orders dated 14.08.2019 and 05.09.2019 for conducting the auction of the Corporate Debtor’s assets before the NCLT because the moratorium had already been proclaimed by the NCLT on 06.2019. The interests of all parties involved will be significantly jeopardised if the Company (Corporate Debtor assets )’s are transferred while the IBC procedures are ongoing. The terms of the IBC will now apply to the sale or liquidation of Respondent No. 4’s assets.