Bankruptcy and Insolvency Framework in India

WHAT ARE INSOLVENCY AND BANKRUPTCY?

In the field of finance and business, insolvency and bankruptcy are comparable concepts with distinct meanings. An individual, firm, or organization that is unable to perform its monetary obligations is said to be insolvent. Or, to put it another way, it describes a situation when a person or entity’s liabilities outweigh their assets or their cash flows are insufficient to cover their debts. Plenty of variables, such as inadequate financial management, economic downturns, excessive debt, or unexpected revenue losses can lead to insolvency. In essence, it is a financial predicament. A legal procedure called bankruptcy is created to address insolvency. When one person or entity is unable to pay their debts, they formally declare that fact.

HISTORY OVERVIEW:

English law is where India’s insolvency laws got their start. In India, there was no native insolvency law before the arrival of the British. In 1849, 1869, 1883, and 1914, the British Parliament subsequently passed bankruptcy acts. India saw the necessity for insolvency legislation for the first time in cities where the British had major commercial activity, like Bombay, Calcutta, and Madras. The insolvency laws in India are claimed to have started when Statute 9 (Geo IV c. 73) was passed in India in 1828. Originally meant to continue for 4 years, the enactment was ultimately prolonged until 1848. The first insolvency court presided over by a Supreme Court judge was formed under this Act in the Presidency towns to provide relief for insolvent debtors.

This Act was repealed in 2003. As when the years passed, various Acts were passed, including the RDDFI Act of 1993, the SARAFESI 2002, and the Companies Act of 2013. The Bankruptcy Law Reforms Committee was established in 2015, and its primary goal was to assess the current framework for insolvency and bankruptcy for both individuals and all legal entities. In December 2015, the Lok Sabha first discussed regarding the 2015 Insolvency and Bankruptcy Code. the Lok Sabha on May 5, 2016, passed the code

FRAMEWORK OF INSOLVENCY AND BANKRUPTCY CODE, 2016

The key objectives of the Code are:

Setting deadlines for the law’s execution in a time-limited insolvency resolution (180 days). to increase the worth of interested parties’ assets. To increase the availability of credit. To balance all stakeholder’s interests (including alteration). Any financial or operational creditor, as well as the debtor itself, may start the resolution procedure under the IBC, 2016, which is now in effect. The Board of Directors’ approval must be included with the debtor’s application. This code offers two procedures: liquidation and the corporate insolvency resolution process. In the CIRP, the Creditors are expected to determine whether the enterprise is worthy of being revived. When the settlement process is unsuccessful, the creditors opt to liquidate the company’s assets to recoup their respective debts. The amount of the default should exceed one lakh rupees.

THREE KINDS OF APPLICANTS CAN FILE AN INSOLVENCY RESOLUTION PROCESS:

1. Financial Creditors – According to Code Section 5(7), a financial creditor is any person, or corporation that legally owns financial debt.

2. Operational Creditors (OC) – section 5(20), an operational creditor is any person or corporation that is legally owed operational debts

3. Corporate applicant – section 5(5) of the code, a corporate applicant is a corporate debtor or person who is a partner or member of managing the corporate debtor.

INSOLVENCY RESOLUTION PROCESS

Post-Admission Process (Sections 12 to 32A)

It is up to NCLT to decide whether or not to accept an application after receiving one. The full CIRP process must be completed within 180 days of the acceptance date; NCLT will only allow one 90-day extension of this deadline. However, CIRP must be completed no later than 330 days after the insolvency’s start date. If this was not the case, the Company would begin the liquidation process in line with Sections 33 to 54.

Liquidation Stage (Sections 33 to 42 and Sections 52 to 54)

Liquidation is required if the plan is rejected by 66% of the creditors, if the IBC requirements are not followed, or if the debtor disregards the decision. Appointing the IP as a formal liquidator is possible. His responsibility is to ascertain, accept, and distribute the recovery for the repayment of a debt.

RECENT AMENDMENTS AND DEVELOPMENTS:

The Indebtedness and Chapter 11 Code (Revision) Bill, 2021, was introduced to the Lok Sabha on July 26, 2021. The Indebtedness and Liquidation Code of 2016 has been changed. The IBBI has released the Insolvency and Bankruptcy Board of India (Inspection and Investigation) (Amendment) Regulations, 2022. If the Board concludes that the service provider has broken the Code’s rules, the Amendment gives the Disciplinary Committee the power it needs to take the proper action. The minimum criterion for starting the pre-packaged insolvency resolution process is specified as not exceeding Rs. 1 crore. It provides for the disposal of simultaneous applications for initiation of the insolvency resolution process and pre-packaged insolvency resolution process, pending against the same corporate debtor. Penalty for fraudulent or malicious initiation of pre-packaged insolvency resolution process or with intent to defraud persons, and for fraudulent management of the corporate debtor during the process. Punishment for offenses related to the pre-packaged insolvency resolution process.

The Bill introduces:

-Pre-packaged insolvency resolution

-Minimum default amount

-Debtors eligible for PIRP

-Approval of financial creditors

-Proceedings under PIRP

-Moratorium

-Management of debtor during PIRP

-Initiation of CIRP

LANDMARK CASES:

1. Essar Steel vs. Satish Kumar Gupta on 15 November 2019

 This much-expected ruling made several points regarding the Corporate Insolvency Resolution Process (CIRP) clear. This case was brought up as a result of various appeals that disputed the NCLAT’s ruling on Essar Steel’s insolvency and a few other writ petitions that disputed the legality of the Amendment that was approved in 2019.

2. Vijay Kumar V. Iyer vs. Bharti Airtel Ltd.

The key question on the Tribunal’s agenda was whether the respondents could assert a set-off claim for sums owed to them while the corporate bankruptcy resolution procedure was ongoing and the moratorium was in effect. The tribunal found in favor of the plaintiff and stated that once the moratorium period has begun, the financial creditor does not have the right to direct any funds toward its obligations. The appeal tribunal decided about the fairness of the borrower’s setting off obligations during the moratorium period and the corporate insolvency settlement procedure. In determining the matter, it was noted that the rules of the I&B Code have an overwhelming effect on any other law which is contradictory.  

CONCLUSION:

The Indian Bankruptcy Code is what the Indian bankruptcy system urgently needs. It has brought about a sizable number of improvements to the current system, which undoubtedly assisted the Indian judiciary in resolving conflicts between the parties. IBC is still being developed, and numerous additional laws must yet be implemented before it can be considered a fully matured law with over 11 amendments.