Insolvency and Bankruptcy Laws in India: The Hellacious Impact of the Pandemic in The Form of Amendment

Insolvency and Bankruptcy Laws in India

This article is written by Armaan Malhotra a student of BBA LLB (Hons.), First Year, Lovely Professional University. The topic of the article is Insolvency and Bankruptcy Laws in India: The Hellacious Impact of the Pandemic in The Form of Amendment.

Abstract

For a long time, the wisest course of action has always been to conduct business as a corporation since this allows members to set limits on their duties. According to the Corporate Personality Doctrine, a corporation has certain rights and obligations, but if those obligations are greater than its income, the corporation may even go out of business. Various laws gave these businesses a chance to survive, but only one law was necessary for a proper comeback and improved control over issues involving insolvency and bankruptcy.

The Insolvency and Bankruptcy Code (IB Code), which was approved by the Indian parliament in May 2016 and went into effect in December 2016, governs the liquidation process for both individual borrowers and corporate debtors. Also, everyone’s life has been affected by the recent pandemic, from migrant workers to parliament members, from small businessmen to large-scale businessmen. The nationwide lockdown, which was declared on March 25, 2020, undoubtedly interrupted numerous corporate operations. It has impacted a variety of both small and huge enterprises. Many businesses are struggling financially and being forced into the resolution of corporate insolvency.  After seeing the loss of business and hardship brought on by the 2020 pandemic and nationwide lockdown, the central government has revised the principal act of the Insolvency and Bankruptcy Code, 2016 to safeguard firms from corporate disaster.

While current governmental initiatives have temporarily given firms this buffer, many companies across the economy will continue to experience financial hardships brought on by the pandemic for some time to come. A viable, market-based option to serve these businesses and their lenders and an IBC framework that is fully functional and appropriately customized to their needs is the need of the hour. This research paper briefly explains the Terms “Insolvency” and “Bankruptcy”, and the effects of The Pandemic, and contends that many possibilities for improving the operation of the IBC must be properly considered by legislators.

Keywords: Pandemic, Insolvency, Bankruptcy, Recent Amendments, Liquidation

Introduction

To modernize the framework for insolvency procedures in India, the central government established the Insolvency and Bankruptcy Code, in 2016. To encourage entrepreneurship and the balance of all firm stakeholders, the code was created to combine the laws governing insolvency processes in India. In order to simplify the corporate insolvency process and remove corporate complexity, the government has periodically amended the legislation.

The central government revised the insolvency legislation twice in the same year as a result of significant changes in the corporate sector. The Companies Act of 1956, the Sick Industrial Companies Act of 1985, and other complicated legislation governed India’s complex insolvency management system prior to the implementation of the IBC on December 1, 2016. However, none of these regulations alone provided a wholly amicable resolution. Reforms also streamlined and accelerated the insolvency process. A financial circumstance known as insolvency occurs when a debtor is unable to pay back their creditors. Insolvency or bankruptcy filing is legal standing. Because of its rigidity toward debtors, the IBC’s operation had caused displeasure in many quarters. This added unnecessary controversy to its operation. This report suggests adjusting the IBC’s framework to provide debtor enterprises with more flexibility and control. This is especially important in light of the urgently required economic recovery, in which the financial system should assist and encourage businesses that, despite facing financial challenges as a result of the pandemic, are otherwise healthy and productive. These enterprises must be allowed to reform and restructure without being forced into liquidation.

Research questions

There are various controversies related to different laws mentioned in the Insolvency and Bankruptcy code of 2016, this research paper discusses the code and clarifies some of the common questions that arise in the minds of almost every person related to legal studies in the starting stages of learning about this code. Some of these questions include: Difference between Insolvency & Bankruptcy; How many amendments have been there till now in IBC; What is the procedure of filing for bankruptcy under IBC, 2016 and, briefly explaining the 2020 Amendment.

What is Bankruptcy?

An organization can opt for bankruptcy if it doesn’t return the money to its customers. In order to escape any debt-related obligations, it files for bankruptcy. It is regarded as a legitimate procedure. However, after calculating the company’s outstanding liabilities, creditors might ask the court to have the company’s assets used to pay out clients. Non-payment of these debts results in a level of disruption within the company, which needs to be resolved as soon as possible to prevent future business operations from being impacted. It follows Federal court protocol.

What is Insolvency?

An individual or business that is unable to pay back loans, or in other words, fulfil their financial obligations to lenders, is said to be insolvent. Any insolvent organization or person is likely to have reached informal agreements with lenders (creditors) prior to initiating such actions as setting up alternative payment channels. The management of the company may have made poor judgments that resulted in poor cash flow, poor cash management, or a rapid jump in expenses, which can all contribute to insolvency.

History of Bankruptcy and Insolvency in India

The insolvency law in India is heavily influenced by English law[2]. In India’s three presidency towns of Madras, Bombay, and Calcutta, where British corporations had operations, the insolvency rule was first put into place. Insolvency cases in India were previously governed by the Government of India Act of 1800, the Indian Insolvency Act of 1848, and the Presidency-towns Insolvency Act of 1909. The insolvency of a partnership, an entity, or a corporate body was governed by these laws at that time. Only presidential cities are subject to these regulatory systems; non-presidential towns are unaffected. The British government passed this bill to make conducting business operations easier and simpler.

Up to the turn of the century, only the presidency towns of Madras, Bombay, and Calcutta were subject to insolvency rules. However, later in 1920, the Provincial Insolvency Act was established to replace the earlier 1907 law. The privileges granted to presidency towns are now equally available to non-presidency towns, according to the new regulations. Following this action, the number of small-scale firms in the nation increased, and they now rely on the new rules to help them withstand the crisis.

The Companies Act, 1956: The First Act for Insolvency

In 1947, India gained total independence from the British. The terms “insolvency” and “bankruptcy” are defined in the concurrent list of the 1950-enacted Indian constitution[3]. But the union list firmly establishes the authority for regulation and incorporation. The power was mentioned in both lists when the Companies Act was passed in 1956. All legislation governing the operation and establishment of enterprises in India is contained in this act.

The Corporations Act defines the failure to pay debts but does not define “insolvency” or “bankruptcy.” However, the sole just statute in India for handling business insolvency was the Companies Act.

The High Courts eventually established adjudicating powers to handle cases involving this law. A person (the creditor) may ask the court to wind up a business if it has unpaid debts that are more than the threshold. A firm is wound up through the liquidation procedure by an Official Liquidator (OL) chosen by the High Court. Only the Official Liquidator (OL) had the power to amass a company’s assets and oversee sales and distribution by the order laid out in the acts. A corporation or its creditors could attempt to reconstruct some portions of the Companies Act of 1956. Although these regulations do not specifically address insolvency or bankruptcy, they are broad in nature.

The Companies Act (Amendment) 2003 was introduced by the federal government in 2003, and it makes significant revisions to the Companies Act of 1956. However, because of legal issues with the act, implementation was never completed. The Companies Act of 1956 was then changed once again in 2013. The majority of these changes mirrored those that had previously been proposed in 2003. The former act and the current act both have several implementation problems. As a result, it is never put into practice.

Factors Contributing to Insolvency

The following mentioned factors can lead a company or person to be declared Insolvent:

Unable to adapt to the changing needs of customers

When companies find it difficult to modify their goods and services to meet shifting consumer needs, they fail. The business starts spending money and racking up expenditures as clients start purchasing a variety of goods and services from other businesses, which is detrimental to the company’s financial stability.

Lawsuits brought by both customers and business partners

Such lawsuits increase a company’s risk of going bankrupt since the company could have to spend a sizable sum to resolve the cases rather than using the money for ongoing operations. Restrictions on future activities will result in the company’s ability to generate income being reduced or eliminated, which will ultimately increase its debt load.

The employment of unqualified personnel in accounting or human resources

Hiring inadequate and unqualified accounting and human resource managers might lead to insolvency for a business. For instance, a novice accounting manager may abuse the corporate budget, overpaying for financial resources.

Insolvency Vs. Bankruptcy

When a business or individual is unable to repay their debt payments or fulfil other financial responsibilities, it is said to be insolvent. Insolvency, according to the Internal Revenue Service (IRS), occurs when a person’s entire liabilities exceed his or her total assets.

Contrarily, bankruptcy is a court ruling that details how an insolvent party can pay their creditors or how they can do so by using their property. And if it only lasts a short while, a person or business may be insolvent without declaring bankruptcy. If the situation persists, bankruptcy may be an outcome.

Insolvency and Bankruptcy Laws in India

“As announced in the “Gazette of India,” the Insolvency and Bankruptcy Code, 2016[4], went into effect on May 5, 2016. It was presented on December 21, 2015, in the Lok Sabha, the lower house of the parliament, by our former finance minister, Late Arun Jaitley Ji, in an effort to help businesspeople and other organizations in our nation. This law’s primary goal was to create a solid legal structure where all small investors, business owners, and businessmen could feel secure and increase their earnings without getting worried.

The National Company Law Tribunal (NCLT) brought up its first insolvency case in August 2017. In this instance, Synergy Dooray Automotive Limited filed for insolvency on January 23, 2017, and the order was posted on the website of the National Companies Law Assembly on August 14, 2017. It gives you a fixed amount of time to settle or solve the problem. With 255 provisions and 11 schedules, the Insolvency and Bankruptcy Code, 2016, is very comprehensive.

The two goals of insolvency law are as follows (Two-fold purpose):

  1. To provide a proper procedure for the repayment of borrowers who are not protected in loan settlement
  2. To protect debtors from creditors whose demands they did not comply with

It is based on the “Cessio Boborum” philosophy of the Romans, which calls for the debtor to give over all of his assets to his creditors in exchange for immunity from legal action. These rules apply to any corporation, business, or person’s liquidation, insolvency, and bankruptcy.

Evolution of IBC in India

Bankruptcy Law Reform Committee (BLRC), 2014

A committee was established by the Ministry of Finance in 2014 to bring about measures for bankruptcy and insolvency. The Bankruptcy Law Reform Committee[5], which was led by Dr. T.K. Viswanathan, made a considerable effort to improve bankruptcy legislation i.e. BLRC. The BLRC was established to promote the Indian Bankruptcy Code, which would replace India’s current bankruptcy system and apply to all individuals and corporations.

Finally, the committee published its report with a thorough model of the Insolvency and Bankruptcy Code (IBC) in November 2015. The proposed proposal was amended and adopted by the Parliament in May 2016. This means that India now formally has bankruptcy and insolvency laws that supersede all previous debtor and creditor legislation. It is quickly announced in India’s official gazette.

Insolvency and Bankruptcy Code (IBC), 2016

To address corporate insolvency, the Insolvency and Bankruptcy Code, 2016, alters the convoluted legislation already in place. The new framework differs from earlier laws in terms of both design and principle. The IBC was established after taking into account all of the prior suggestions made by the Supreme Court, High Courts, and other committees. Unlike laws like the Companies Act of 1956, SARFAESI 2002, or SICA 1985, it is an integrated insolvency resolution statute that applies to all existences. It gives all creditors, secured and unsecured, permission to participate fully in the insolvency process. It creates a panel that allows for quick recovery and resolution.

The 2016 Bankruptcy and Bankruptcy Code aims to give all parties an equal opportunity to participate in insolvency procedures while still determining the possibility of a company defaulting. Only individual recovery is allowed to obtain financial credit under previous legislation like SARFAESI. When SICA 1985 was declared “sick,” restructuring proceedings weren’t started until it was already too late to salvage any value. With the new IBC 2016, financial distress that manifests as a single default can be reduced through an early settlement process. The new code introduces a plan to establish new institutions to support the implementation of the law, in addition to procedural improvements.

The current system strives to accomplish the goals of a quick settlement time, a quicker rate of recovery, and debt finance from various sources.

The procedure under the bankruptcy and insolvency code, 2016

The Insolvency and Bankruptcy Code of 2016 states that either an operating or financial claimant, as well as the debtor itself, may initiate the settlement method. If the debtor is a corporation, they must also include the application order and a letter of authorization from the board of directors. This code applies to two distinct systems or procedures: the liquidation process and the corporate insolvency resolution process.

During the Corporate Insolvency Resolution Phase, creditors must assess the company’s viability and evaluate if there is even the slightest chance that it will be saved. When the Resolution mechanism falls short, the creditors try to sell the company’s assets to pay off their debts, but the default must be more than 1 lakh rupees to do so.

Resolution Process:

  1. Financial Creditors

            Under Section 7 of the Insolvency and Bankruptcy Code, a financial creditor may begin the Corporate Insolvency Resolution Process when a corporate debtor is unable to make its payments. When submitting an application on their own or in collaboration with other financial creditors, the financial creditor must include the record of the default or all other evidence of the default, as well as the name of the resolution specialist who has been suggested to act as an interim resolution professional.

The Adjudicating Authority will estimate the default based on the IU reports or any information submitted by the financial creditors within 14 days of receiving the complaint.

  1. Operational Creditors

            When a default occurs, the operational creditor may serve a copy of an invoice or a notice of unpaid operational debt on the debtor, asking for payment of the amount at issue. Any litigation, disagreement, or settlement related to the Dispute must be reported by the Debtor to the OC within ten days. The Operational Creditor will submit a CIR application to the National Company Law Tribunal if he is unable to collect the outstanding sum within 10 days.

  1. Moratorium

            After submitting a CIRP application, the adjudicating body may declare a moratorium. No legal action can be brought against the debtor at this time. No wealth transfers are allowed during this time, and the debtor is not entitled to get money back. This moratorium might be continued when the CIRP is over.

  1. Committee of The Creditors (COC)

            The task of identifying the creditors and creating the “Committee of the Creditors” would fall to the insolvency professional. Financial creditors are included in this Committee of Creditors. Operational creditors who have claims that are higher than the minimum amount would be allowed to attend meetings but would not be able to vote. Within 180 days + 90 days, the COC must accept the debtor’s proposals/plans for firm revival and, if they are unworkable, move on with asset liquidation. The decision cannot be resurrected without a 66% vote in favour.

  1. Liquidation

            Liquidation is requested if the plan is rejected by 66% of the total creditors, the IBC rules are broken, or the debtors choose to disregard the settlement. The insolvency professional may appoint a formal liquidator. He would be responsible for verifying the borrowers’ statements, accepting them, and allocating the money recovered for debt repayment.

  1. Fast Track Process

            To ensure that the procedure is completed swiftly and that regular business operations will continue as soon as feasible, the Code frequently has a Fast Track CIR for start-ups. The procedure must be completed in 90 days, but if more time is needed, it may be extended by 45 days.

  1. Voluntary Liquidation of the Corporate Person

            According to Section 59 of the Insolvency and Bankruptcy Code, 2016, any corporate person who has not committed any default but wishes to liquidate himself may do so voluntarily, provided that the majority of Directors submit an affidavit stating that they have made all necessary inquiries and that either no debt is pending, or the debt has been settled.

Insolvency and Bankruptcy (Amendment) Act, 2017

The government is experimenting with various techniques to improve the ease of doing business by easing the position of the RP in the CIRP mechanism so that ineligible debtors or creditors cannot interfere with the insolvency process. The clause was added to prevent some people from taking part in the company’s revival and settlement phase. “If there is a personal guarantor of the corporate, which may involve the promoter, will be covered under Section 14 of the code,”[6] the court said in the case of Sanjeev Shriya v. State Bank of India.

Insolvency and Bankruptcy (Amendment) Ordinance, 2018

One of the most important changes to the legislation was the addition of homebuyers to the description clause. Home sellers shall also be deemed to be financial debtors and shall have the right to recover the amount invoiced in advance. Before, they were instructed to submit a complaint with COPRA, which involved a drawn-out legal process that typically resulted in losses for the buyers.

The amount that home buyers paid as an advance was more than the bank debt owed by the seller, according to the ruling in the case of Chitra Sharma v. Union of India[7] (real estate). Even though the home buyers owed more money, they weren’t given preference, and the bank was in a better position because they weren’t the case’s main financial creditor.

Insolvency and Bankruptcy (Second Amendment) Bill, 2018

The lower house, the Lok Sabha, made it plain on August 10, 2018, that homeowners will also be treated as financial debtors despite there being no explicit reference to their status. The Competition Commission of India would still need to approve the settlement arrangement when the creditors finalized it. This clause was created to reduce the possibility of a CIRP[8] extension submission, or a request for a 90-day extension.

The ultimate goals, as stated in the declaration of objects and purposes, are commendable and essential for changing the bankruptcy, insolvency, and resolution laws that apply to businesses, people, and partnership firms. Due to the unstable environment and corporate stalemate, the parliament will need to make adjustments to deal with any potential company failure.

Insolvency and Bankruptcy Code (Amendment Bill), 2019

The proposal to introduce a bill into Parliament on July 19, 2019, to alter the Insolvency and Bankruptcy Code of 2016, was accepted by the Union Cabinet. These changes are made to the Corporate Insolvency Resolution Framework to close the gap identified in the statute while also maximizing the benefits of the CIRP. Within the stringent time constraints of the Code, the government wants to get the most out of a corporate debtor.

The Insolvency and Bankruptcy Code (Amendment), 2020

The most miserable year in decades was 2020. Numerous people suffered the loss of loved ones, employment, and other things. In the first few days of the shutdown, 15.5 lakh crore companies in India were lost as a result of the virus. As a result, the Insolvency and Bankruptcy Code, 2016, is modified twice in one year.

Following the start of the nationwide lockdown in June 2020, the first amendment was passed. The amendment’s main goal[9] is to prevent any person or corporation harmed by Covid-19 from filing for bankruptcy again for the next six months. Bypassing the law, the government hopes to protect corporate people from going bankrupt and alleviate their distress.

The Amendments Brought up in The Ordinance

According to the first amendment, no person or business may use any default committed by a corporate debtor that occurred after March 25, 2020. (after the official nationwide lockdown).

Section 10A, which prohibits the filing of new applications under IBC sections 7, 9, and 10 against any corporate debtor, has been inserted into the main IBC act. Additionally, it specified that during the lockout, no applications could ever be made against any corporate debtor. Additionally, it is made clear that the provisions of Section 10A do not apply to defaults committed before March 25, 2020.

The second change prohibits the Resolution Professional from applying under the newly introduced Section 10A for cases involving fraudulent trading or default.

The code’s amendment to Section 66 addresses unethical or deceptive dealing. If the company was operated with the intent to defraud the creditors, it allows the resolution specialists to file an application against the director of the corporate debtor. This new amendment sub-section 3 restricts the resolution professional from filing any applications under section 66 of the code and is now a part of section 66. Section 10A will be used to monitor this section.

The Insolvency and Bankruptcy Code (2nd Amendment), 2020

The second amendment to the main act of the Insolvency and Bankruptcy Code was created to strengthen corporate failure in response to the national shutdown and the faltering economy. The law was filed to prevent the filing of any new insolvency cases for at least six months starting on March 25, 2020.

Nirmala Sitaraman, the finance minister, stated in the Rajya Sabha that the IBC is not a law for loan recovery and that saving lives during a pandemic is more important than loan recovery. This code will contribute to the creation of a framework for insolvency resolution that adheres to fairness and equity standards.

The Corporate Insolvency Resolution Process (CIRP), which is mentioned in Chapter 4 of the IBC, 2016, is intended to be preserved by the revised Insolvency and Bankruptcy Code (Second Amendment) 2020. Due to the devastating effects of COVID-19 on commerce worldwide, the World Trade Organization acknowledged two tenets for the bankruptcy provisions:

(1) Preventing potentially successful companies from needlessly filing for bankruptcy,

(2) A rise in the number of companies that won’t be able to survive the downturn until insolvency is addressed.

The following are the key characteristics of the Insolvency and Bankruptcy Code (Second Amendment) 2020:

  • Conflicts between firms cannot be the cause of insolvency proceedings.
  • No bankruptcy procedures by Financial or Operational Creditors will be brought from March 25, 2020, for losses happening over a six-month period that has been extended to one year.
  • This bill holds every associate or director of a corporate debtor accountable for applying their contributions to the company’s assets whenever they commit wrongdoing in certain situations.
  • According to the proposed legislation, Resolution Professionals are not permitted to make any claims for defaults in order to start the already prohibited Corporate Insolvency Resolution Process.

In light of the Covid-19 epidemic, the Insolvency and Bankruptcy Code 2016 has undergone some swift revisions. Additionally, the government has acknowledged the lost revenue and pledged to provide any necessary help to those working in the corporate sector. Notably, the government’s actions have alleviated businesses and assisted in reviving the national economy.

Conclusion and Suggestions

A key step forward in creating a proper and well-structured regulatory framework for bankruptcy, liquidation, and insolvency settlement involving both entities and companies is the 2016 Insolvency and Bankruptcy Code. Parliament placed a new Code into the market to include protection for insolvent corporations and bank failure due to the fact that there were too many separate laws dealing with insolvency and bankruptcy, each of which had various remedies with different stakeholders. Frauds and crimes would be controlled to satisfy the real needs of creditors, employees, and all other stakeholders in the ever-changing market. The Sahara scam, the Punjab National Bank fraud, and countless other corporate failures, as well as a reduction in foreign investors who were previously able to invest in the market, have all been blamed for the collapse of India’s capital market. One of the numerous objectives of the 2016 Insolvency and Bankruptcy Code is to revive corporate debtors, pay back creditors and other lenders, and to a lesser extent, boost foreign direct investment into the Indian market. The 2016 Insolvency and Bankruptcy Code aims to stop the implementation of any “discriminatory and neutral settlement arrangement.”

Also, the problems associated with insolvency and bankruptcy could not be handled under the prior regulations. This led to the requirement for a single, consistent law that is effective and quick to restore the debt.

A preliminary version of the “Insolvency and Bankruptcy Code 2016” was drawn out by the BRLC. This code includes significant updates and new clauses that the previous insolvency regulations did not include. As a result of the BLRC, the “Insolvency and Bankruptcy Code” was passed.

There is no denying the fact that this pandemic has caused a great deal of loss for people. Numerous medium-sized businesses (MSMEs) have failed as a result of overwhelming debts or other financial setbacks. To prevent corporations from losing their identity, the Government of India (GOI) made this measure, which is to be applauded.

The National Company Law Tribunal (NCLT), which is the main body for matters relating to insolvency, has had less work to do as a result of this action. The 2016 Insolvency and Bankruptcy Code was enacted in India to encourage ease of doing business and to spot corporate fraud. Remember that the code is not complete and that only Sections 7, 9, and 10 are now suspended. They should therefore make plans for how they will handle both business and the epidemic. The number of COVID-19 instances is growing every day, but business will continue, as usual, therefore corporations must make plans in accordance with the circumstance to reduce loss. By encouraging ease of doing business, the author believes that these modifications will stabilize the Indian economy.

Bibliography

Articles

(1) Evolution of Insolvency and Bankruptcy Code 2016

(2) IBC an Ongoing Process

(3) The report of the Bankruptcy Law Reforms Committee

Web Sources

(1) https://economictimes.indiatimes.com/topic/Insolvency-and-Bankruptcy-Code-2016

(2) https://ibc.taxmann.com/

(3) https://en.wikipedia.org/wiki/National_Company_Law_Appellate_Tribunal

(4) https://drt.gov.in

Books

(1) Insolvency and Bankruptcy Code 2016

(2) Treaties on Insolvency and Bankruptcy Code

Footnotes

[1]History – Insolvency & Bankruptcy Law & its Implementation Challenges in India (enterslice.com)

[2] Companies Act – Companies Act 1956 – Wikipedia

[3] IBC, 2016

[4] The Bankruptcy Law Reform Committee (BLRC), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf.

[5] Sanjeev Shriya v. State Bank of India WRIT – C No. – 30285 of 2017

[6] Chitra Sharma v. Union of India WP (C) No. 744 of 2017

[7] IBC,2016 Amendments, https://taxguru.in/corporate-law/insolvency-bankruptcy-code-2016-amendments.html

[8] IBC Amendment Ordinance, 2020: Some Questions and (Possible) Answers (barandbench.com)

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