India: Understanding The Indian Insolvency And Bankruptcy Regime

An individual often faces a situation where he is unable to return what he had borrowed. In financial terms, this state of inability to repay is referred as insolvency. When an individual borrows money from the market (financial institutions as creditors) and he fails to repay it within the given time frame, this makes him an insolvent.

Now what triggers the series of events leading to market downfall is one incident of default. If this incident is not reviewed and prevented from reoccurring, the series of defaults leads to collapse of the economy. A nation's economy is an identity card of its progress on all fronts and its economy is often determined by its market. For smooth functioning of market, it is pertinent to have a sound three tier system in place. The first tier involves facilitating the entry in the market, second provides for survival in the market and third opens the exit door. It is only when all the three tiers are in place functioning efficiently that can ensure smooth credit flow and development of the economy.

In India, the Companies Act secured easy entry in the market, while the Competition Act ensured healthy and fair competition in the market. To manage failing enterprises and provide them exit, though there were multiple routes available yet all of them yielded no result. This discrepancy led the financial institutions becoming hesitant in lending the money to the market players. Also, with credit stuck in the market, the amount of non-performing assets and the economic offences kept on increasing. Hence, the government setup Banking Law Reforms Committee (BLRC) to evaluate the real time market situation and draft a law of today to address the problems of today.

The Insolvency and Bankruptcy Code, 2016 (IBC/Code) is the outcome of the recommendations and suggestions made by the BLRC. The Code is an umbrella legislation for all i.e. it covers both Corporate Insolvency and Liquidation as well as Individual Insolvency and Bankruptcy. The notification of the Code is hailed as one of the biggest economic reforms, second to GST. It is a progressive and dynamic piece of legislation that tends to establish a time bound resolution/liquidation mechanism to rescue failing businesses.

The Code is a set of 255 sections divided into V parts. In Part I, we find the objective of the Code as "An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto." Part II establishes procedure of Insolvency Resolution and Liquidation for Corporate Persons, and Part III provides for process of Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms. The Code also establishes a new wing of professionals designated to manage the resolution/liquidation procedure. These are known as Insolvency Professionals. They are monitored by Insolvency Professional Agencies. Part IV of the Code describes the regulation of Insolvency Professionals, Agencies, and Information Utilities. Part V contains miscellaneous provisions of the Code.

To understand functioning of the Code, we must first understand the rationale behind bringing a new law together with the objectives it sought to achieve. The objective of the Code is time-bound reorganisation and insolvency resolution of firms for maximisation of value of assets of the firm concerned, to promote entrepreneurship and availability of credit and balance the interests of all its stakeholders. The first order objective is resolution. The second order objective is maximisation of value of assets of the firm and the third order objective is promoting entrepreneurship, availability of credit and balancing the interests. This order of objectives is sacrosanct. The Code bifurcates and separates the interests of the firm from that of its promoters / management with a primary focus to ensure revival and continuation of the firm by protecting it from its own management and from a death by liquidation¹. It is the mandate of the nation². It is a paradigm shift in the law³.

The Code provides for institutionalised creditor-in-control model for resolution of corporate insolvency and debtor-in-possession for resolution of insolvency of individuals and partnership firms. The provision for time bound resolution and liquidation process is one that makes the Code a unique legislation. It is because of this factor that the law has garnered a lot of attention from the market players and stakeholders. Further, mandatory resolution process provided under the Code aims at providing an opportunity of revival to the failing enterprises. It is only when resolution/revival procedure fails that liquidation is initiated. The operations of the enterprise during Corporate Insolvency Resolution Process are not put to halt rather, the Code facilitates the enterprise as a going concern during resolution process. This provision aims at preventing the value of the firm from getting downgraded.

Another important aspect of the uniqueness of the Code is setting up a close knitted regulatory and monitoring mechanism. For the purpose of monitoring, the Code has established the profession of Insolvency Professionals who are monitored by Insolvency Professional Agencies. The regulatory wing is headed by Insolvency and Bankruptcy Board of India establishing the profession of Insolvency Professionals and Insolvency Professional Agencies.

For the purpose of Adjudication, the Code empowers National Company Law Tribunal as Adjudicating Authority for the Corporate Resolution Procedure. With a separate route to provide easy access to justice, the Code not only promotes time bound resolution procedure, but also⁴ establishes a court monitored procedure.

The role of IBC in the market is that of a gate keeper whose purpose is to trace the occurrence of default, analyse its authenticity (with the help of Adjudicating Authorities), offer smooth resolution/liquidation and close the gates after smooth exit.

‍Footnotes

* Pihu Mishra is a research scholar pursuing her PhD in Insolvency and Bankruptcy. She is currently working as Research Associate at ASL- Legal.

1 Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17

2 DF Deutsche Forfait AG and Anr v. Uttam GalvaSteel Ltd.

3 M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407

4 Binani Industries Limited v. Bank of Baroda & Anr., [CA (AT) No. 82,123,188,216 & 234 -2018]