The Insolvency and Bankruptcy Code, 2016 popularly known as IBC was made due the immense legal delay and piling up of cases with regards to commercial bankruptcy. It was made to resolve the issue of non-payment/ insolvency of any company or an individual by giving powers to the creditors to take charge over the assets of the defaulter or opt for a resolution plan. It is a time bound statute and provides for a period of limitation for completion of resolution, disposal of cases and liquidation.
The Code provides for immediate suspension of the powers of the promoter or the Board of Directors of the company and vests power with the insolvency professional/ resolution professional to take any decisions of the corporate debtor. One of the major provisions is that it provides for a ‘stand-still’ period, whereby all the stakeholders shall discuss and come to an agreed common resolution plan. It also provides for a waterfall mechanism in the event of liquidation.
The 2019 bill has introduced few key amendments to the act of 2016, which are explained briefly.
- Provision for corporate restructuring through merger, demerger and amalgamation under a resolution plan.
- The debtor(corporate/operational) has the authority to file a resolution application in any NCLT (National Company Law Tribunal) and provides for a statutory period of 14 days to either accept or reject the said application. However, it was held that the said period is not mandatory and the NCLT has the authority to extend it and provide reasons for such delay.
- Initially the time period for completion of a Corporate Insolvency Resolution Plan was 180 days with additional 90 days. However, with the amendment, the time period has been extended to 330 days and it a mandatory period.
- It provides for a simplified voting process by the Committee of Creditors and also allows an authorized person to vote on behalf of a class of creditors. Further, it provides that if more than half of the creditors are present and vote in favor of the plan, it shall be deemed that the entire class of creditors have approved the same.
- The amendment also provides for a change in inter-creditor distribution process. It also provides for commercial consideration within the powers of CoC.
- The resolution plan shall be binding on all its stakeholders including the Government and local authorities.
- It provides for liquidation by the CoC even prior to the confirmation of the resolution plan including the time before making the information memorandum.
- It provides for explicit rights of the financial and operational creditors who haven’t taken part in the voting process. It states that they shall be paid out of the liquidation or proceeds of sale as per the hierarchy. It has a retrospective effect i.e, where the resolution plan has not been finalized yet or appealed against.
Challenges to IBC:
- While on one hand the operational creditors have been given an equal right of access to minimum payouts, on the other end, the financial creditors may be affected by the same thus making a few of the financial creditors wary of further issue of loans.
- The new deadline of 330 days is not applicable to the court and hence not viable.
- The code provides for funds but is ambiguous regarding the manner it shall be utilized.
- With vesting of more powers on the creditors, they may often opt for liquidation rather than restricting since the former results in immediate relief.
- Many a times there is an overlapping or ambiguity in judicial jurisdiction and decisions are often overlapped or stayed by judicial forum either with concurrent or overlapping jurisdiction.
- The pro-revival mechanism envisaged in the code may sometimes just delay the shutting down of a non-viable company.
- Adding to all this, the absence of adequate data with regards to the credibility of the assets makes it difficult for the purposes of accounting.
Key highlights from the recent Essar Steel judgment:
- It has held that the financial and operational creditors (secured and unsecured) can’t be put on the same footing and they are not equal.
- The court also held that the Adjudicating Authority shall not have any power to interfere with the commercial decisions of the CoC and can only exercise judicial review within the scope of Section 30(2) and the Appellant Tribunal within the scope of Section 32 along with Section 61(3) of the code.
- The court has struck down ‘mandatory’ from it’s provisions relating to the completion of resolution plan-330 days and held that the same can be extendable upon reasons for such delay.
- More importantly, the CoC has no power to delegate its authority to and sub-committees other than ministerial and administrative acts. The main purpose of ratification and approval shall be by CoC.