Features and Impacts of the Insolvency and Bankruptcy Code, 2016
Introduction
The
Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the IBC) was
introduced to provide framework for resolving any issues relating to insolvency
and bankruptcy. It applies to various entities including individuals, firms,
LLPs), etc, but excludes entities like societies, trusts, and boards. While
insolvency and bankruptcy may seem similar, they entail distinct concepts.
Insolvency pertains to situations where an entity's charges exceed its possessions,
rendering it unable to meet its debts. Bankruptcy involves a court decree
declaring an entity insolvent upon its application. The code is applicable in
cases of voluntary closure or liquidation of a company.
Summary
Procedure for ascertaining existence of debt default
by NCLT
◦
Section
7(4) of the IBC sates
that NCLT must first ascertain the existence of any default by way of provided records
or on the basis of any other such evidence furnished by the financial creditor
within “fourteen days” of the receipt such an application.
◦
Section
7(5) of the IBC speaks
of basis to decide, that being that NCLT must be satisfied that (i) “a
default has occurred”, (ii) “no disciplinary proceedings are pending
against the proposed resolution professional”.
◦
The
abovementioned Section has a proviso which states that NCLT must give the
applicant a notice to rectify their mistakes within “seven days” before
they reject the application.
When can NCLT reject application?
o If
they find out that default has not occurred
o Application
made by financial creditor is incomplete
o Disciplinary proceeding is pending against proposed resolution professional
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- In the Innoventive Industries Limited vs ICICI Bank Ltd[1] case, the scope of the NCLT's powers under Section 7 was examined. It was then held that as per Section 7, NCLT holds the power vide the act to ascertain whether a default has occurred or not. Further, vide Section 7(5), NCLT is granted the discretion to either accept or reject the application of insolvency submitted to them.
- oIn the Pratap Technocrats Ltd and Ors. v. Monitoring Committee of Reliance Infratel Limited and Anr[2] case, the Supreme Court ruled that once the NCLT identifies a default, it is obligated to admit the Corporate Insolvency Resolution Process (CIRP) application under Section 7.
- oContrarily,
in the case of E.S.Krishnamurthy vs Bharath Hi Tech Builders Pvt. Ltd,[3] it
was determined that the NCLT does not possess the authority under Section 7 to
compel parties to reach a settlement. Section 7 only provides the NCLT with the
options of either accepting or rejecting an application.
Date of Commencement of CIRP
◦
Section
7(6) of the IBC
provides that the CIRP would commence from date of admission of application.
Such was also stated in the case of Cyriac Njavally vs Union Of India[4].
◦ Section 7(7) of the IBC states that NCLT must communicate the order of admission or rejection to the financial creditor within seven days.
Declaration of Moratorium and Public Announcement
◦
Section
13 of the IBC is
titled declaration of moratorium and public announcement.
◦
NCLT
may (i) “declare a moratorium under Section 14”, (ii) “cause a public
announcement of the initiation of corporate insolvency resolution process
and call for the submission of claims under section 15”, (iii) “appoint an interim
resolution professional in the manner as laid down in section 16”.
◦ Section 14 speaks of moratorium. Moratorium can be said to be a mechanism which protects the worth of the insolvency estate by averting creditors from starting actions to enforce their rights or by suspending any actions already underway against the debtor.
Cases on Moratorium
o In the Ajay Kumar Radheyshyam Goenka v. Tourism
Finance Corporation Of India Ltd[5]
case, it was established that a moratorium provision doesn't erase any
liability, whether civil or criminal. It suspends any kind of ongoing
proceeding against the insolvent and as the moratorium period comes to an end,
so does the suspension of liability.
o In the State Bank of India v. V. Ramakrishnan
and Another[6]
case, it was clarified that Section 14 of the law doesn't aim to
prevent actions against the assets of guarantors for the debts of the corporate
debtor. It was further held that moratorium is only applicable to the assets of
the corporate debtor and does not cover the guarantors’ assets.
Impact of IBC in India
o
The
World Bank's Doing Business Report of 2020 had revealed that India had significantly
grown in the resolving insolvency index and had shifted to the 52nd
place when it was earlier at the 136th place. By way of this growth,
the recovery time for insolvents had also reduced to 1.6 years rather than 4
and the recovery rate also increased to 71.6%.
o
India
had also ranked 100th out of 190 countries, advancing almost 30 ranks compared
to its position in 2017.
o
The
implementation of the IBC has streamlined the process of winding up a company,
reducing it from four years to less than a year. The IBC had also helped grow
the Indian economy by way of strengthening of the credit market, improving
foreign investments and also helping in overall corporate growth.
Conclusion
The (IBC) is a very crucial economic legislation
geared towards mitigating economic distress and facilitating greater access to
credit within the economy. Under the current system, the IBC provides support
to financially distressed companies for both immediate and sustained recovery.
By offering a robust framework for insolvency
resolution, the IBC aims to address financial difficulties faced by companies
efficiently, thereby promoting their turnaround and long-term sustenance.
By way of the IBC, the creditors are also assured and
protected as there is also a mechanism which protects them and helps with debt
recovery even when there are cases of insolvency. Therefore, it can be said
that the IBC has helped in maintaining financial stability, has helped in
business growth and has also maintained a system of easy credit.
[1] Innoventive Industries Ltd. v. ICICI Bank Ltd.,
2017 (11) SCALE 4.
[2] Pratap Technocrats (P) Ltd. & Ors. v. Monitoring
Committee of Reliance Infratel Limited & Anr, (2021) 148 SC.
[3] S Krishnamurthy & Ors. v. M/s Bharath Hi Tech
Builders Pvt. Ltd., Civil Appeal No. 3325/2020.
[4]
Cyriac Njavally vs Union Of India, WP(C) NO. 27636 OF
2020.
[5] Ajay
Kumar Radheyshyam Goenka Vs. Tourism Finance Corporation Of India Ltd, IBC 15
Mar 2023.
[6] State
of Bank of India v V. Ramakrishnan & Anr (Civil Appeal No. 3595 of
2018).
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