While the introduction of the insolvency framework has been one of the most significant reforms, it seems that the IBC still needs some more productive amendments as only a few have been able to cross the insolvency path and others are still battling... According to the World Bank's Doing Business Report, 2017, average time taken for insolvency resolution of a Corporate Debtor in India...
While the introduction of the insolvency framework has been one of the most significant reforms, it seems that the IBC still needs some more productive amendments as only a few have been able to cross the insolvency path and others are still battling...
According to the World Bank's Doing Business Report, 2017, average time taken for insolvency resolution of a Corporate Debtor in India is around 4.3 years. The major stumbling blocks contributing towards this were complex structure and multiplicity of laws. Thus, there was an urge to adapt to an insolvency law which could eradicate the presence of multiple laws and provide a single platform for insolvency resolution. Addressing the above issues, the Government on December 01, 2016 promulgated a single-window insolvency law to be called Insolvency and Bankruptcy Code ('IBC' or 'Code') with a view to providing insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner so as to promote entrepreneurship, availability of credit, and balancing the interest of all stakeholders.
Though the establishment of the Code was a well-thoughtdriven process as it took more than three decades for the legislature to frame such a law, however, in the initial stages of its implementation, it faced a lot of challenges, some of them being no classification of homebuyers into financial or operational creditors' category, willful defaulters/delinquent promoters abusing the process of law to the best of their use, and guarantors taking advantage of the moratorium under the Code. To fix these issues, the government, from time to time, amended the Code / Rules / Regulations for effective insolvency resolution.
Amendments
New Form for Homebuyers While Jaypee Infratech was undergoing insolvency, nearly 32,000 homebuyers were left in a lurch as they were neither classified as financial creditors nor as operational creditors in terms of provisions of the Code. The matter came into limelight when a PIL was filed before the Supreme Court which pushed the Insolvency and Bankruptcy Board of India, a regulator, to introduce a new Form for homebuyers for filing their claims before an Interim Resolution Professional/Resolution Professional. However, their categorization into financial or operational creditor was still not decided. Barring errant promoters Taking undue advantage of the provisions of the Code, the promoters of insolvent entities were submitting resolution plans and seeking to reclaim their companies by offering a meagre value to creditors, upon knowing the liquidation value of such entity. In order to prevent such unscrupulous persons from taking advantage of the provisions of the Code, initially, the Government modified the regulations to the extent that it directed a Resolution Professional to get the Fair Value of the Corporate Debtor along with its Liquidation Value and not to disclose it to Resolution Applicants to get a better value for acquiring stressed assets. Thereafter, it issued an Ordinance on November 23, 2017, which later became an amendment to the Code, barring such willful defaulters or entities whose accounts have become NPA from bidding for stressed assets under the Code.
June 06, 2018 Ordinance With a view to having a robust and dynamic insolvency law in India, the regulator and the government are keeping abreast with practical difficulties faced by the Tribunals, Insolvency Professionals, Resolution Applicants, etc. during the corporate insolvency resolution process (CIRP). In order to cope up with issues including but not limited to classification and rights of homebuyers, an Insolvency Law Committee was constituted by the regulator to suggest measures for improvement and effectiveness of the Code.
An Ordinance was issued by the Government on June 06, 2018 which, inter alia, gave homebuyers the status of financial creditors, tweaking Section 29A to benefit promoters of MSMEs in submitting a resolution plan, allowing the withdrawal of an application during the CIRP, making shareholders' approval necessary for filing an application by the Corporate Debtor under Section 10, clarifying the applicability of moratorium on guarantors, reducing the percentage for taking critical decisions by the CoC from 75% to 66%, and for other routine decisions from 75% to 51%, appointing authorized representative for a class of creditors for quick decision-making, and clarifying the applicability of the Limitation Act on the Code.
Challenges
Though the Government has been flexible and has adopted a rational approach in making amendments in order to make the Code more transparent and effective, a smooth insolvency resolution is still a challenge. Tribunals extending timelines beyond 270 days Time is of the essence, and one of the objectives of the Code is time-bound resolution. More a resolution is delayed, more it will have adverse bearing on the revival of a Corporate Debtor and consequently the economy. Though the Code provides for a stringent timeline of 180 days, extendable by another 90 days, for a faster resolution, failing which liquidation is initiated, however, none of the top 12 cases saw an insolvency resolution within the stipulated 270 days' time frame. Some of the pioneer cases admitted under the IBC like Jaypee Infratech, Essar Steel, Bhushan Power, etc. are still struggling to have a structured resolution plan for their revival, despite having completed the extended 270 days' time frame. At the same time, NCLAT, in the matter of Quantum Ltd., held that the time period of the litigation, i.e., from the date of filing of an appeal till the decision on the same, is to be excluded from the CIRP, thereby defeating the objective of the Code, i.e., a time-bound resolution. As a consequence of pending litigations in most of the cases, the resolution is getting delayed. Piling up of insolvency cases with the Tribunals Justice delayed is justice denied. Due to obnoxious fear of losing the company immediately upon admission of the application by the NCLT, Operational Creditors took undue advantage of the provisions of the Code by filing applications against Corporate Debtors since the dues of many of them were settled. As such, IBC was used as a recovery tool by Operational Creditors, which resulted in filing of a large number of applications thereby increasing the workload of the Tribunals. At present, there are only 11 NCLT Benches handling more than 2500 cases and only 1 Appellate Tribunal entertaining all appeals; hence, delay is bound to happen. Ordinance is silent if statutory approvals are not obtained within a year The June 2018 Ordinance provides for a year's time, from the date of sanction of the resolution plan to a resolution applicant to approach statutory authorities for obtaining necessary approvals. However, it does not foresee a situation in case the said approvals are not obtained within the said time frame.
Withdrawal of application not allowed after issuance of EOI
Another area of concern to look at is not to restrict withdrawal of application, with consent, till the issuance of Expression of Interest (EOI). The idea behind withdrawal of a CIRP is that another chance is given to a promoter to settle with creditors and maintain the solvent status of a Corporate Debtor. As such, the option for withdrawal should not be restricted rather it should be open, to give chance to the existing promoter, till the liquidation order is passed.
No clarity on the classification of homebuyers into secured / unsecured Though the June 2018 Ordinance has categorized homebuyers as financial creditors, there is no clarity on their classification as secured financial creditors or unsecured financial creditors in case a company goes into liquidation which has a direct bearing on their recovery in terms of Section 53 of the Code. Cross-border insolvency Another big challenge is the introduction of provisions relating to cross-border insolvency under the present insolvency regime in terms of which, creditors shall be able to enforce their rights on the overseas assets of a Corporate Debtor undergoing insolvency. Though Sections 234 and 235 of the Code contain cross-border insolvency provisions, however, the same are yet to be notified.
Conclusion
No doubt that the introduction of the insolvency framework has been one of the most significant reforms changing the dynamics in India; however, it seems that the IBC still needs some more productive amendments as only a few have been able to cross the insolvency path and others are still battling.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.