"IBC must stay on, the defaulter's paradise in lost" - Swiss Ribbons SC ruling

The legal framework for matters relating to insolvency and rearrangement process of corporate entities, partnership firms and individuals, in India was very scattered and complex. It was disintegrated into different legislations such as The Sick Industrial Companies (Special Provisions) Act, 1985; The Companies Act, 1956; The Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI) 1993; The Securitization and Reconstruction of Financial Assets and Enforcement of Securities interest Act, 2000 (SARFAESI);

The Indian Partnership Act, the Limited Liability Partnership Act, 2008 and few more This distributed sets of laws made the process of getting relief difficult, complicated and time consuming which often lead to devaluation of the assets, making the procedure convoluted. This issue needed to be addressed, for which the insolvency and Bankruptcy Code, 2016 was introduced.

The bill for this code was introduced in the Lok Sabha by Finance Minister, Arun Jaitley in 2015. The Code received the green signal by Parliament in May, 2016 and finally became effective in December, 2016. This Code aims to provide a comprehensive and collective mechanism for resolution of matters relating to insolvency and bankruptcy within a reasonable time frame. The Code sets up various bodies and institutions including the Insolvency and Bankruptcy Board and Adjudicating authorities such as the national company law tribunal (NCLT); which helps in providing easy relief in a time bound manner.

Important Institutions Under IBC

The ground that makes the insolvency and Bankruptcy Code consolidating regarding the insolvency laws in India is the diverse ecosystem of bodies and institutions created and managed by it.

• National Company Law Tribunal (NCLT)

  The National Company Law Tribunal which was constituted by the central government under the Companies Act, 2013[i] is considered as the 'Adjudicating Authority'[ii] under the Code. This body is empowered to deal with cases regarding the resolution of insolvency or liquidation of sick companies. The jurisdiction of the tribunal extend over to the companies and other limited entities. Appeals regarding the orders of NCLT can be filed in National Company Law Appellate Tribunal (NCLAT).
   

• Debt Recovery Tribunal (DRT)

  The Debt Recovery Tribunal was initially created under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 for efficient recovery of bad debts. But due to the risk in complexity in remedies for non performing assets and deficit companies, the government by amending the old fashioned and lacking laws, inserted provisions relating to the jurisdictions[iii] and powers of Debt Recovery Tribunal under the insolvency and Bankruptcy Code, 2016. According to the court the Debt Recovery Tribunal shall be the adjudicating authority for Individuals and Partnership firms. Appeal regarding the orders passed by the Debt Recovery Tribunal can be filed in Debt Recovery Appeal Tribunal (DRAT).
   

• The Insolvency and Bankruptcy Board of India (IBBI)

  The Insolvency and Bankruptcy Board of India is considered the peak body that looks into the governance and administration of the insolvency and Bankruptcy Code. Under section 188 of the Code, the Insolvency and Bankruptcy Board of India is constituted. The board[iv] consists of a Chairman, three members (ex officio) that shall each represent the Ministry of Finance, the Ministry of Corporate Affairs and the Ministry of Law, one ex officio member appointed by the Reserve Bank of India and five other members as nominated by the central government. The board manages and adjudicates the insolvency professionals, information utilities and insolvency professional agencies constituted under the code.
   

• Insolvency Professionals

  For proper enforcement and management of the resolution process the code sets up the Insolvency Professionals that handles affair of the corporate debtors and also collects important information and provide them to the creditors to help them in decision making. According to the Code the Adjudicating Authority within 14 days of the insolvency commencement date shall appoint an Interim Resolution Professional who shall collect all the information relating to the debtor, make public announcement and collect claims of the creditors and constitute the committee of creditors (COC). The committee of creditors within seven days from their formation shall appoint the interim resolution professional as resolution professional or appoint another one as they deem fit.
   

• Insolvency Professional Agencies

  Insolvency professional agency constituted under the Code, certifies the insolvency professionals and maintains their code of conduct and also manages their duties and performances.
   

• Information Utilities

  Information Utilities are personnel that are registered under the insolvency and bankruptcy board of India. They act as depository of information (financial and credit) of the debtors. They basically accept, store and authenticate financial data given by creditors. [v]

The Corporate Insolvency Resolution Process

The essence of the Insolvency and Bankruptcy Code, 2016 is the corporate insolvency resolution process. This process is initiated when any person who is a financial creditor or an operational creditor or even a corporate debtor submits an application regarding the default[vi] in payment to the NCLT.

The NCLT within 14 days of such submission either rejects or accepts the application. Once accepted moratorium is declared and an interim resolution professional is appointed by NCLT who makes a public announcement regarding the default committed by the corporate debtor and collect claims of various creditors. After final collection of claims Committee of Creditors is formed who selects a Resolution Professional whose function is to administer the resolution process.

With all the information collected an information memorandum is created which helps in the formation of a resolution plan. If the plan receives approval of the COC (by minimum 66%) the resolution plan is then presented before the NCLT who either rejects or accepts it. If rejected the company or entity in question goes into liquidation. If accepted the resolution plan is carried out and if restructuring is possible NCLT shall pass such order. The time limit of the CIRP is 180 days from the date application is accepted by the NCLT and an extension of 90 days can be allowed by an application to the Adjudicating Authority.

Why IBC?

The prior Indian framework of insolvency laws were like a mosaic of pieces that didn't really fit together. The insolvency and Bankruptcy Code brought uniformity and provided a single head to the insolvency and bankruptcy laws of the nation. The credit goes to the easy and prompt insolvency resolution process, quick reconstructing and maximization of value of assets that the code provides The Code focuses in creating a 'creditor in control' mechanism. IBC have certainly played a role in changing the lender-borrower dynamics.

According to the Economic survey by the National Company Law Tribunal:
The ecosystem for insolvency and bankruptcy is getting systematically built out with recovery and resolution of significant amount of distressed assets as well as palpably improved business culture. [vii]

It was noticed that debtors have been settling their debts before the application is admitted by the NCLT; the study says that 28,2019,609 cases having total value of rupees 2.84 lakh crores were withdrawn before the cases were admitted under the provisions of IBC. The fast-track insolvency resolution process has heightened the pace of remedy seeking of sick entities, which in return, not only saves the entities that can be saved but also lowers the burden of the creditors and improves the economy of the nation. Since the implementation of IBC, the workload of the civil courts have also lowered as all the insolvency and bankruptcy matters are now handled by the tribunals empowered by the Code.

Conclusion
The Insolvency and Bankruptcy Code is one of the reforms formulated by the government which aimed at providing Ease of Doing business in India. It is well known that:
The foundation of any developing country is a well- functioning credit system, and resolution of distress is an integral part of the ecosystem of credit extension and recovery [viii].

Which the Code very well maintains. The importance of IBC lies in the fact that it not only provides for easy entry and smooth operation but also provides an easy exit. A business failure is one of the inevitable consequences that may result while running a business however, previously there was no easy way out to insolvency and the creditors mainly Banks suffered a huge loss since the implementation of the Code, the entire process have become much easier, time saving and economically sound. The IBC have definitely provided a headway against the lacking, old laws relating to insolvency.

End-Notes:

1. The Companies Act, 2013, s. 408.
2. The Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016), s. 5(1).
3. The Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016), s. 179.
4. The Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016), s. 189.
5. Available at: https://www.drishtiias.com/loksabha-rajyasabha-discussions/in-depth-insolvency-and-bankruptcy-code-act
6. The Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016), s. 3.
7. Available at: https://www.indiabudget.gov.in/budget2019-20/economicsurvey/doc/vol2chapter/echap03_vol2.pdf
8. Megha Mittal (ed.), IBC: Ushering in a new era (Vinod Kothari & Company, Kolkata, 2019).