The Insolvency and Bankruptcy Code, 2016, is a law bringing together various earlier laws and regimes whereby a company in financial distress or difficulty could be admitted into Corporate Insolvency Resolution Process (CIRP) upon a case filed by an operational (typically unsecured trade creditor) or financial creditor (banks, NBFCs, lenders) or by itself. The insolvency resolution process is time-bound and was originally to be completed within 270 days; it was extended by an amendment to 330 days on August 6, 2019.
During this period, the board of the company remains suspended, the promoters technically lose their position/influence and the company is under the administration and management of an Insolvency Professional (IP) (a key stakeholder created by this law) in a creditor-driven regime. The lenders constitute a Committee of Creditors (CoC) replacing the Board of Directors and becoming the key decision-making body in this period. The IP collates all information about the company into an information memorandum, calls for expression of interest from interested parties/investors into the company, and makes attempts to revive the company based on new debt/equity infusion or in some other way as long as it satisfies the financial creditors and gets the support of 66 per cent of the CoC (reduced from per cent when the law was introduced).
The promoter typically being red-flagged due to the NPA position is barred from proposing a resolution plan based on certain parameters (there are exceptions for Micro, Medium and Small Enterprises [MSMEs]). Either the company is successful in receiving resolution plans from potential investors/owners/funds/asset reconstruction companies or if it fails to do so, it is pushed towards liquidation wherein once again it is given a chance to be liquidated as a going concern or through a scheme of arrangements under the Companies Act, 2013.
In the liquidation process, there’s slightly more decision-making freedom for the liquidator even though the CoC shall function as the stakeholder’s consultation committee with the same voting rights till the constitution of the said consultation committee. However, the consultation committee’s views are not binding on the liquidator provided that he records reasons for not adhering to the committee’s views and duly informs the NCLT of the same. However, a more active role of CoC members and lenders in the liquidation process ought to be considered for accountability. Irrespective of resolution or liquidation, the waterfall mechanism of distribution of funds or assets provided under Section 53 of the Code is followed. Typically, the entire process of liquidation is supposed to be completed within one year (originally it was two years).
The evolution of insolvency for personal guarantors is a matter of concern for various Indian promoters who have given personal guarantees towards corporate loans obtained by their companies. While the aforementioned is a mere bird’s-eye view of the Code, it is important to set this context for the reader to understand certain terms used in this book and their impact better.
What change did IBC bring in? Why has there been so much attention to this law?
• It was the first time that a law had deadlines for procedures to be complied within a timeline based on “days”, which was rare in the earlier laws.
• A completely new and active ecosystem was created with varied stakeholders such as IPs, CoC, regulator being the Insolvency and Bankruptcy Board of India (IBBI) and so on.
• Adjudicating authorities, namely, the NCLT’s hearing and disposing of corporate insolvency cases at the speed prescribed was a rarity in India.
• The law evolved on a daily basis due to amendments through circulars, notifications, ordinances and, of course, judicial pronouncements.
• The Hon’ble SC was very proactive in settling many issues under the new Code which was being interpreted simultaneously.
• The Indian promoters had started accepting the fact that lenders had a strong weapon against them and could go all out to put the corporate entity through an insolvency resolution or liquidation process, and financial default shall not be taken casually anymore.
• It is being instilled in lenders every now and then that this is not a mere recovery law and that resolution also has to be given emphasis. This element, however, will require further understanding in the subsequent chapters.
• Mergers and acquisitions rates in India has gone up due to this Code, and the availability of details of several Indian companies in a transparent manner in the public domain has increased due to the enforcement of this law.
Challenges with the IBC and the way forward
Change is the only constant – IBC is no exception!
Many legal issues had to be decided as the level of challenges involving interpretations and practicality problems weren’t anticipated. Also, there is scarce awareness of the law in smaller cities/towns where industries are widely present. Despite the work done by the Government and various agencies involved to reach out to various industries, stakeholders, and professionals on this subject, the resulting reach was delayed, as the damage had already been done. Further, the short-sightedness of the stakeholders in failing to see beyond their own limited interests has many times resulted in the purpose of the law being lost.
Additionally, there are infrastructural and bandwidth challenges, resulting in clogging up thousands of cases before the insolvency courts across India.
The list of challenges can constitute a chapter in itself but for the benefit of the reader, a select few are mentioned here.
1. The weak position of Operational Creditors;
2. The CoC failing to act responsibly and to exercise commercial wisdom;
3. Preference of recovery at any cost leading to adverse results rather than resolutions of stressed companies;
4. Misuse of the law by several creditors as a shortcut to bypass other remedies;
5. Difficulties faced even by viable companies when multiple creditors file cases at the same time leading to liquidity crunches and even possible insolvencies;
6. Challenges and limitations faced by the IPs at various stages due to various stakeholders; and
7. The promoters’ expertise in running the business sometimes being ignored and promoters being completely sidelined, even in scenarios where their aid would facilitate the resolution process of the corporate entity.
The law has evolved to a certain extent as of March 2023. Of course, legal issues are cropping up even now on a day-to-day basis and would take a few more years for the Hon’ble Supreme Court to settle them. At this point, the focus would be to utilise the coming few years and work towards the real objective of this Code thereby allowing companies in distress to achieve resolutions rather than liquidations.
Excerpted with permission from Defaulter’s Paradise Lost: Demystifying the Insolvency and Bankruptcy Code, 2016, Anant Merathia, Thomas Reuters.