The Insolvency and Bankruptcy Code (IBC), 2016 has been a significant progress in the Indian corporate legal system, with aims to provide a time-bound resolution process for insolvency and bankruptcy proceedings of corporate entities. The IBC has improved the ease of doing business in India by facilitating the quick resolution of bad debts. The IBC provides for the initiation of insolvency proceedings against companies and individuals, the appointment of insolvency professionals and the formation of insolvency resolution plans. The NCLT (National Company Law Tribunal) & NCLAT (National Company Law Appellate Tribunal) constituted under sections 408 and 410 respectively of the new Companies Act, 2013, are quasi-judicial bodies in India that adjudicate issue related to companies. In the case of Swiss Ribbons Pvt. Ltd. vs. Union of India, the Supreme Court held that the IBC is a complete code in itself which provides a time-bound resolution process. The court also held that the Preamble of the IBC does not attempt to liquidate a corporate debtor’s assets therefore the objective of the IBC is to ensure the revival of the corporate debtor and not the recovery of dues, asset liquidation as a last resort.In this blog, we will discuss the important legal provisions illustrated with judicial precedents under the IBC for the bankruptcy proceedings of a company.
Important Legal Provisions for Insolvency and Bankruptcy filing in India:
- Initiation of Insolvency Proceedings:
Under the IBC, a creditor under section 4 of IBC can initiate insolvency proceedings against a corporate debtor if there is a default of at least one crore rupees. Section 7 of the IBC deals with the initiation of insolvency proceedings by a financial creditor, Section 9 deals with the initiation of insolvency proceedings by an operational creditor, and Section 10 deals with the initiation of insolvency proceedings by the corporate debtor itself.
Section 7(5)(a) of the IBC reads: “Where the Adjudicating Authority is satisfied that— a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.“
It must be noted that the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. applied the literal interpretation test and held that the use of the word “may” in Section 7(5)(a) of the IBC gives the NCLT the discretion to admit the application, however, the Section 9(5) uses the word “shall” for the application made by an operational creditor, thereby highlighting a deliberate legislative intent to differentiate between financial creditors and operational creditors.
- Appointment of Insolvency Professional:
The Insolvency Professional is a crucial component of the insolvency resolution process to ensure a fair and unbiased resolution process. After admission of the application for insolvency resolution process the NCLT under Section 16 of the IBC appoints an Interim Resolution Professional (IRP) or a Resolution Professional (RP). It must be noted that IRP/RP has only administrative powers. Section 27 of the IBC provides that in the case the Committee of Creditors (CoC) wants to replace a resolution professional appointed under Section 22 (Appointment of resolution professional) of the IBC, it may replace RP with another resolution professional.
- Moratorium:
Upon the appointment of an IRP, a moratorium period comes into effect prohibiting the initiation or continuation of any legal proceedings or the enforcement of any security interest against the corporate debtor that is no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. Section 14 is clear and the moratorium in favor of the Corporate Debtor is also absolute and the moratorium period lasts for 180 days plus a one-time extension of up to 90 days, which can be extended up to maximum of 330 days. However, in exceptional cases, the said time limit for Corporate Insolvency Resolution Process (CIRP) can be extended even beyond 330 days.
- Insolvency Resolution Plan:
The RP (Resolution Professional) prepares the resolution plan, which is then submitted to the Committee of Creditors (CoC) for approval once the resolution plan is approved adjudicating authority shall not entertain any claim. Section 30 of the IBC deals with the submission and approval of the resolution plan which must be approved by a minimum of 66% of the voting share of the CoC.
- Liquidation:
If the insolvency resolution plan is not approved, or if the corporate debtor defaults during the implementation of the resolution plan, the company goes into liquidation, Section 33 of the IBC deals with the liquidation of the corporate debtor. In such cases, the liquidator is appointed, who is responsible for the sale of the assets of the corporate debtor and distribution of the proceeds to the creditors. It was again reiterated in Mohan Gems & Jewels Pvt. Ltd. vs Vijay Verma by the NCLAT, that “that the Liquidation of the Company is to be seen only as a last resort and every attempt should be made to revive the Company and to continue it as a ‘going concern’.”.
Conclusion and future trends at NCLT to deal with IBC matters:
The IBC provides for comprehensive time-bound resolution process for insolvency and bankruptcy proceedings of corporate entities in India. The apex court also held in catena of judgements that the ultimate objective of the IBC is to maximize the value of the assets of the corporate debtor. The latest judgments by the Supreme Court have further clarified the intent and objective of the IBC.
In the landmark judgment of Essar Steel India Ltd vs. Satish Kumar Gupta & Others, the Supreme Court held that the NCLT and NCLAT cannot interfere in any commercial decisions and matters tackled by the CoC and first consideration should be given to the financial creditors rather than the operational creditors.
In recent updates, the government is planning to draft rules for NCLT to deal with IBC, and also planning to fill all the vacant posts at various NCLT benches. It is also expect new IT enabled with AI will be used for case management in future. The rules under consideration would act as guidelines, to ensure certain matters are expedited.
— Ravindra Vikram
Advocate