Help! I have got heaps of debt. What's the simplest option? Bank consolidation or Bankruptcy?

So, if this question is bothering you, then take a look at this article to solve all of your doubts related to insolvency and bankruptcy. Before declaring ourselves as insolvent, first, we should always check whether its insolvency or bankruptcy because both these terms are widely different. One can be insolvent without being bankrupt however cannot be bankrupt without being insolvent.

It is smarter to have one systematized enactment than varied ones to manage the defaults of a corporation under one umbrella. This is often the precise explanation behind the presence of the insolvency and Bankruptcy Code in India which has been put to effect since 2016. The Insolvency and Bankruptcy code took birth by repealing SICA (Sick Industrial Companies Act), SICA was revoked with impact from December 2016.

The purpose behind the code
Without an insolvency law, if an organization defaults on an advance to a creditor (for example becomes financial gain indebted), every claimant would need to race to induce heaps of the organization's edges. This battle among its claimants might drive the organization into liquidation despite of whether it has, in any case, a sound plan of action. This might prompt superfluous demolition of the organization's hierarchical value and cause work misfortunes. The winner-grabs-it-all situation would create the business of extending credit riskier from the creditors' perspective.

There has been a store of laws on indebtedness preceding the IBC that has reached every possible way however patently neglected to resolve the mind-boggling insolvency problems. The laws were starting from The Presidency Town Insolvency Act, 1909 to Provincial Insolvency Act 1920, The Sick Industrial Companies Act 1985 and many more.

The code additionally amended various acts just like the Indian Partnership Act, 1932.Limited Liability Partnership Act 2008, The Companies Act 2013, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 etc. The journey was swift and packed with potholes that unreservedly began, anyway later neglected to stick to the very reason that they were designed up.

As a result of absence of needed institutional and legal setup, the defaulters began considering India as a secure haven for such exercises that clearly delineate incompetence with relation to our nation once contrasted with worldwide gauges.

Therefore, a sound structured Insolvency and bankruptcy law was created in 2016 which is able to aid in erasing these issues.

The actual purpose of this law will provide:

1. A combination of strategy for indebtedness goals, and
2. Rules to regulate the expedient conduct of investors and administrators in the region of indebtedness.

In simple words IBC is:

• The Code aimed towards establishing time-bound processes and sorting out a resolution to save the companies from going bankrupt. The consolidation of laws governing Insolvency had become a necessity due to the piling of the cases and delays in debt resolutions.
• The Insolvency and Bankruptcy Code claims to facilitate the benefit of doing business in India due to its quick, easy and time-bound resolution method.
• Individuals, and organizations, can also apply for insolvency under the Code. It's known as corporate insolvency in the case of a company and bankruptcy in the case of an individual. Not only the creditors but also the individual will initiate the recovery proceedings against one another under the Act.
• IBC intends to shield the interest of all the stakeholders within the company and to help revive the corporate in an exceedingly time-bound manner.

Why is it difficult to interpret IBC

It's been four years since the Insolvency and Bankruptcy Code has been introduced. In these four years, it's seen several ups and downs. The Code has been amended five times and there are various judicial pronouncements interpreting the Code, the most recent one being the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 (with effect from June 5, 2020).

The rules and laws governing are amended from time to time. The Supreme Court and the high courts have pronounced landmark cases deciphering the clauses of the Code, questioning its constitutional validity, and subsiding grey areas in the Code. It is a challenge to implement the Insolvency and Bankruptcy Code effectively. There are dozens of changes created to the restrictive framework under the Insolvency and Bankruptcy Code. These amendments and ordinances are passed to facilitate the sleek functioning of the processes.

In order to fully perceive the Insolvency and bankruptcy code, one has to study the latest and amended versions of the Act, circulars, orders, allied rules, and rules, that are put on the website of IBBI (Insolvency and Bankruptcy Board of India) along with the judicial interpretations of the code. It is safe to mention that the Insolvency law in India is nonetheless developing; it's still a bit raw. The constant changes within the evolving law make it tough to interpret and perceive.

Major shortcomings

1. Time limit:
   
   • IBC provides for a time-bound mechanism for creditors to recover their debts. It's called the company Insolvency Resolution Process (CIRP). Once an organization defaults in paying its debts to the creditor, the creditor will apply to CIRP to initiate a recovery action.
      
   • Corporate Insolvency Resolution Process may be a time- bound method under the Code. Wherein Section 12 of the Code mandates the method to be completed within 180 days from the date of admission of such application.
      
   • The period for completion of such a method could also be extended by the adjudicating authority provided that at the meeting of creditors a resolution is passed having a vote of 66% of the voting share. In spite of the resolution, the period to complete the Corporate Insolvency Resolution Process shall not be extended on the far side of 90 days.
      
   • The method must be mandatorily completed with 330 days together with the extensions granted. The Section further provides for an extension of 90 days for proceedings that transcend 330 days due to inescapable delays.
      
   • The proportions of NCLT benches to the high range of cases are unbalanced and to feature that the closing date of 330 days to complete CRIP is proving to be terribly troublesome. For firms having an outsized number of creditors will have hindrances within the smooth functioning of the creditor's committee.
      
2. Lack of sufficient infrastructure:
   According to the Minister of State for Finance and Corporate Affairs Anurag Singh Thakur in an exceedingly written reply to the Rajya Sabha, there have been 10,860 cases unfinished before the NCLT as of September 2019. The lack of sufficient NCLT benches and therefore the quantity by that the cases under IBC are rising. The increasing pendency of the cases can defeat the aim of the fast resolution process.
    
3. Resolution Professionals:
   At present, there are solely 897 registered insolvency professionals. So as to be an insolvency professional's one should either be a Company Secretary or a Chartered Accountant or Cost Accountant or an associated Advocate with ten years of experience or a graduate with fifteen years of experience. One should additionally pass the insolvency examination conducted by the IBBI.
   
   Therefore, a resolution professional might not have experience in handling or managing a corporation. Due to the dearth of need for minimum experience in handling and managing a corporation, one may question the power of the resolution professionals.
    

Judicial interpretations of Insolvency and Bankruptcy Code of 2016

The judicial interpretations are vital for understanding particularly the evolving law of insolvency and bankruptcy. The interpretations of the code by the national company law court, the Supreme Court, and therefore the high courts offer clarity to many procedural and conceptual considerations.

We shall currently try to perceive insolvency and bankruptcy with the assistance of various judicial pronouncements and landmark judgments. We shall have the tendency to study how the courts have understood the provisions of the insolvency and Bankruptcy Code, so as to eliminate the problems and challenges.

1. Timeline:
   According to Section 4 of the Insolvency and Bankruptcy Amendment Act of 2019, CRIP was mandatorily to be completed within these 330 days from the commencement of the resolution process the 330 days time- limit date would conjointly embody the extension of the time granted and therefore the time spent within the legal proceedings. Failing to finish the method inside the aforementioned time-limit date would result in the corporate debtor being referred for liquidation.
   
   The resolution process should be completed within 330 days but the facts of the case in mind and also the time occupied in the legal proceedings, the NCLAT, or the NCLT will grant an additional extension of time ( in exceptional cases).
    
2. Committee of creditors:
   In the landmark case of Committee of Creditors of Essar Steel India Limited through Authorized Signatory vs. Satish Kumar Gupta & Ors, 2019, the Supreme Court reinforced the role of the Committee of creditors. The Hon'ble court commanded that the committee of creditors (CoC) is the principal authority when deciding whether or not to rehabilitate the corporate debtor or not by the approach of accepting the resolution set up.
   
   The resolution should be approved by a minimum vote of 66% of the selection shares. Whereas approving the resolution set up the CoC takes under consideration the viability and practicability of the resolution set up. So CoC has the ability to suggest alterations and modifications in the resolution set up.
    
3. Role of resolution professionals:
   The applicant should submit a resolution plan on receipt of such set up, the resolution professional shall examine the set up in accordance with Section 30(2). After that in keeping with Section 30(3) the plan is to be given to CoC for its approval.
   
   Once the resolution plan is approved by the CoC, the set up is then forwarded to the adjudicating authority by the resolution professionals.
   
   The role of resolution professionals is to examine all the resolution plans submitted to him by completely different candidates, before submitting the plans to the CoC. He should not build any call of opinion concerning contravention to law is to be placed before the committee of creditors. A resolution professional doesn't have the ability to determine whether the resolution plan is offensive of any provision.
   
   Thus, the role of a resolution professionals is to look at the resolution plan, conduct the mandatory due diligence, make sure that the set up is complete and report it to the CoC no matter whether the set up is in contravention or not.
    
4. Financial and operational creditors:
   In the case of Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India & Others [(2019) 4 SCC 17], it had been contended that distinction created between the financial creditor and operational creditor was offensive of Article 14 of the Constitution. Furthermore, the difficulty of exclusion of the operational creditors from the committee of creditors was conjointly raised before the Hon'ble Supreme Court.

The Supreme Court with the assistance of the Insolvency Law Committee (ILC), and the BLRC Report, made a transparent distinction between financial creditors and operational creditors. The court held that there's an intelligible distinction between them. The foremost important difference between them is that the involvement of financial creditors in assessing the viability of the corporate debtor.

As for the problem of discriminatory treatment of operational creditors on the committee of creditors, the court held that the first responsibility of the committee of creditors is to judge the viability and feasibility of any resolution plan. Financial creditors are banks and financial establishments, they're well equipped to conduct the desired study of the market to judge the viability and feasibility of the resolution plan.

Whereas on the opposite side, operational creditors are solely involved in recovering the cash paid for provided products and services. So they will not be equipped to assess the viability and feasibility of the resolution plan. The Supreme Court, therefore, held that neither the operational creditors weren't being discriminated against on the committee of creditors nor was it offensive of Article 14.

Way Forward

• The government may ask the Supreme Court to border rules to confirm that NCLT judges are in charge of delays and set up a system to evaluate the potency of judges within the bankruptcy courts.
• Non-judicial commercial consultants in NCLT ought to be increased and more NCLT benches to be created.
• IBC law should differentiate between Financially distressed" companies and Economically distressed" companies.
• A financially distressed firm ought to be sustained either by restructuring it among existing claimants or by restructuring it to new investors.
• In the event of a restructuring of a financially distressed firm, a brand new professional board should be in place.
• If the corporate is turned the losses of the banks would be so much less than through the distress sales that are currently taking place.
• As banks are getting 30-40% of their outstanding dues through the NCLT route.
• This is a win-win scenario for all stakeholders.
• The company that is economically distressed ought to be liquidated.

The old saying that justice delayed is justice denied is even more relevant for IBC cases, the elemental factor that must change at the judicial end, together with the quasi-judicial part of the NCLT appellant processes, is that judgments should be delivered in commercial time and not judicial time.

What is pre-packaged IBC scheme?

A pre-packaged scheme is an arrangement under that stressed company and the purchaser negotiate the sale of all or a part of a company's business or assets before the appointment of insolvency professionals as administrator. The completion of such a transaction is conditional on the scrutiny of details by the insolvency professionals appointed and untills he offers a nod for the sale to be settled, the thought by the purchaser is held in written agreement account.

The main objective of bringing this idea is to assist the insolvency framework, avoid outlaying of time and cash in court proceedings & legal battles and directly move to obtaining a good resolution for the corporate that was the very objective of the IBC within the initial place.

Challenges and drawbacks of the scheme
Though pre-packaged IBC Schemes have their own share of supporters, it brings with itself many a challenges and disadvantages that can't be simply unnoticed, a number of them are listed herein below:

1. The biggest issue that pre-pack schemes can face at the start is that when the choices are being evaluated by the corporate, they'd not have capital lenders lending cash to them. This can be as a result of a risk concerned within the recovery of the money and where lenders already know that the company is stressed, they'd not want to take the monetary risk. If the corporate does not have enough cushions go on for weeks/months where the scheme is put in place, the concept may fail altogether.
    
2. Another major concern which will arise by the pre-pack scheme implementation is that it'd not have the shield of moratorium like it is there once a case is admitted under the Section 7 or 9 of IBC. Therefore, creditors might enforce their rights and remedies where the corporate is negotiating for a pre-pack theme. This could be a large hurdle that the scheme would face in its implementation.
    
3. One major criticism of pre-pack schemes is that it is a lot in favour of secured creditors and neither do the operational creditors have much say within the negotiation nor they're given a good share. This challenge must be overcome if pre-pack schemes are to be enforced in India.
    
4. Transparency would even be a huge hurdle since the present management would be in-charge of alienating the assets to keep the corporate afloat and so, there would invariably be apprehensions regarding the correctness of the whole process. This might cause creditors, particularly unsecured, to approach the NCLT and filing cases against the corporate debtor.
    
5. It is even argued that since the corporate is pushed into insolvency by its own management (be it operational mismanagement or worst business decisions), it's not wise to permit same management to alienate the assets of the corporate and this insolvency framework might end up to be damaging to certain stakeholders.
    
6. The role of IRP would be another grey area where the implementation of pre-pack scheme would face challenges in the maximum amount as in the normal CIRP method, the IRP is appointed as soon as the application is admitted. However, in an exceedingly pre-pack scheme, the IRP is appointed once the scheme is already finalized and given before the NCLT and also the NCLT offers a nod to the same.
    
7. Section 29A would act as a significant hurdle in the introduction of pre-pack scheme in India as in a pre-pack scheme, the debtor would be in-charge of the method and not the IRP and this would go against the fundamental essence of Section 29A.
   
   Since the legislature of the general assembly has already introduced Section 29A with much stress and importance and therefore the the same has also been analyzed & reiterated in the Supreme Court decision of Essar Steel, it'd be tough to move far from the availability or produce an exception for pre-pack schemes. It'd stand as one of the biggest obstacles for pre-pack schemes.
    
8. It is conjointly being contended against the introduction of the pre-pack scheme is that it's too soon to bring such a drastic modification because the insolvency law in India continues to be a nascent change. There are apprehensions that it should contribute to burdening the NCLTs even more because the schemes may be challenged at any stage and there would be huge scope of accelerating the judicial proceeding. In addition, the outgoing management might not be very cooperative with the incoming management and this might produce disputes.

Conclusion
With the present Pandemic creating havoc in almost all the business, it's almost certain that a lot of corporations would be pushed into insolvency in the up coming times and there this scheme of pre-packaged deals, if introduced, might act as a catalyst in serving to those corporations survive.

However, the system comes with its own set of challenges and disadvantage that cannot be shrugged off. The Indian system is completely different from the USA and UK and a comprehensive study should be conducted so as to make sure that the issues are eliminated and a stronger mechanism is put in place. Therefore, it's necessary to strike a balance between the existing and the new system.

It is expected and emphasized that if the pre-pack system is enforced well, it might create smooth implementation of resolution plans, would promote growth and keep the corporate as a going concern whereas retaining jobs and ensuring certain creditors receive the funds because of them. Particularly during these tough financial times, it's imperative that such a system would solely yield fruitful results and would have more pros than cons.