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The Indian Bankruptcy Laws and how are they different from UK and US

Bankruptcy refers to a legal position where a Company, Individual, or a Partnership Firm is unable to repay their outstanding debts to the Creditors. Once a Company, Partnership Firm or an Individual is in such a situation, wherein he is unable to pay his dues and/or his liabilities have multiplied much more than his assets; an Insolvency Proceedings are Initiated. Failure to pay debts creates a sickness that needs to be rectified as early as possible for the proper future working of a company and for the rights of such those who provide debt.

For a debt to be rectified, stress must be quickly detected so that a solution or resolution can be done for such sickness. The debts can be Financial, in form of goods, services, employment, or dues to any Government under any Law. The sole object of Insolvency Law is to ensure that the Creditors are in a position to secure their amount without closure of the Industry.

Insolvency Law has a two-fold purpose:

  1. to give relief to the debtors from the harassment of his creditors who's claim he is unable to meet &
  2. to provide machinery by which creditors who are not secured in the payment of their debts are to be satisfied

It is based on the Roman Principle 'Cessio boborum' i.e. surrender by the Debtor of all his goods for the benefits of his creditors in return for the immunity from the court process.1

History of Insolvency and Bankruptcy Laws in British India and Independent India

The Law of insolvency in India owes its origin to English Laws. Before the British came into India there was no indigenous law of insolvency in India.2 The statutes passed in the 16th Century and subsequent years contained only rudimentary provisions as to bankruptcy.

British Parliament has subsequently passed Bankruptcy Acts in 1849, 1869, 1883, 1914. In India, the necessity of Insolvency law first felt in towns where major trade was carried out by the British i.e. in Bombay, Calcutta, and Madras. In 1828 when Statute 9 (Geo IV c. 73) was passed in India and it is said to be the beginning of the Insolvency Legislation in India. The enactment was originally intended to last for 4 years but was eventually extended till 1848. Under this Act, the first insolvency court presided by Judge of the Supreme Court was established in the Presidency towns for relief of insolvent debtors.

The insolvency court used to sit as and when required. In 1848, the Indian Insolvency Act was passed on the lines of Bankruptcy Statutes then in force in England to solve the dispute of Insolvent debtors and find out ways for amicable resolutions. After the enactment of The Indian High Court Act, 1861 all presidency towns were abolished and the present High Courts were set up and these HC had the jurisdiction of Insolvency cases.

While there was separate Insolvency legislation for the Presidency towns there were no such Legislations for the Mofussil areas. In 1877 an attempt was made and an amendment in form of some rules in Chapter 20 was added in CPC of 1877. This conferred District Court jurisdictions to entertain insolvency petitions and grant discharge. The Provincial Insolvency Act, 1920 is the Act in force for the Mofussil area.3 The 1848 Act was found to be inadequate to meet the changing conditions and The Presidency Towns Insolvency Act, 1909 was enacted for dealing Insolvency and Bankruptcy of an Individual Person & Corporate Person Under this enactment, a jurisdiction was provided to the Single Judge4 of HC of Specific Presidency Towns i.e. Bombay, Calcutta, and Madras.

Presidency Act provided for an appointment for an officer called the Official Assignee in each of the Presidency Towns to whom all the property of the insolvents was vested 5 & under the Provincial Insolvency Act an official receiver u/s57 was appointed and his appointment was not obligatory. Where an Official Receiver was not appointed, a Bar member was appointed on an ad-hoc basis as a Receiver & when no receiver was appointed the property vest in the court.6

Such vesting of was not convenient and it was decided that this system be abolished and system under Presidency towns Act be adopted all over India. There are two relevant provisions under the Indian Acts are Section 7 of Presidency Act and Section 4 of Provincial Act. Calcutta HC in the case7 held that insolvency court should decline to entertain claims against third parties that do not assign to Insolvency. A similar view was taken under Provincial Act by various High Courts.8 These two legislations continued in force until recently and were repealed by the I&B Code.

In wake of sickness in the country's industrial climate in the eighties, the Government of India in 1981 set up a committee of experts under the Chairmanship of Shri T. Tiwari. Based on the recommendations of the committee Sick Industrial Companies Act,1985 was enacted. The main objective of the Act was to determine sickness and expedite the revival. SICA applies to both Private and Public sectors owning Industrial Undertaking as specified in the First Schedule of IDR Act, 1951 The Industries which have existed for five years and incurred a total loss equal to or exceeding its net worth at the end of the financial year were considered to as sick.

This Act was repealed in 2003. Entry 32 of List II deals with ''incorporation, regulation and winding up of corporations, other than those specified in List I. With these powers provided, The Companies Act, 1956 was the first Insolvency Legislation enacted. However, the Act did not refer insolvency or Bankruptcy of Corporate it only referred to its 'inability to Pay'. As and when the time passed different Acts such as the RDDFI Act1993, SARAFESI 2002, and Companies Act, 2013 were passed.

With effect from December 1, 2016, the SICA has been repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (“Repeal Act”). This has resulted in the dissolution of the BIFR and other bodies formed under the SICA. A long journey of the Code started in 1999 when a committee was set up under the chairmanship of Justice V.B. Eradi Committee to examine and make recommendations for changes in existing laws of matters related to winding and Liquidation of companies.

A report was submitted that the Jurisdiction and Powers should be shifted to a separate National Tribunal from the High Courts. In Companies (second amendment) Act, 2002 was passed which lead to setting up of NCLT and NCLAT. As a first step a consultative process, a concept paper in legislative format was published, and many reviews and comments were received on the same.

The Government felt that the proposals contained in the concept paper should be put for evaluation by a separate committee and a new committee was formed under Chairmanship of Dr.J.J Irani.9 The committee suggested that a neutral forum should be formed which shall have expertise in dealing with the commercial and technical aspects of Insolvency Law.10 The committee also suggested that the Insolvency process should apply to all enterprises and Corporate Entities including MSMEs except Banks, Financial Institutions, and insurance companies.

The committee also suggested that sick industrial companies should be replaced by an insolvent company and both the Creditors and Debtors have fair access to the insolvency system upon showing proof of default.11 After the amendment in the Companies Act in 2013 provisions were laid down for the constitution of NCLT and NCLAT.

In 2015, Bankruptcy Law Reforms Committee was set up under the Chairmanship of Dr. TK Viswanathan and the committee main focus was to examine the existing policy in place and create a uniform framework of Insolvency and Bankruptcy of Individuals and all Legal entities.

The committee submitted its report in Nov 2015 to the then Finance Minister Late Shri Jaitely. Shri Jaitely introduced the code on 21st Dec 2015 before the Loksabha which was placed before the Joint Parliamentary Committee on 23rd Dec 2015 & the committee submitted the report to the Loksabha and the code was passed in Loksabha on 5th May 2016. Further, the code was placed before the Rajya Sabha on 11th May 2016 and the code was passed with the Majority.

The code received the President assent on May 28th, 2016 and the code became an Act thereupon. The IBC, 2016 came to effect on December 1, 2016. The Constitutionality of the code was upheld by the Apex Court. 12

Process under Insolvency and Bankruptcy Code, 2016

Under the IBC, 2016, the resolution process can be initiated by any financial or operational creditor, as well as the Debtor itself. The Debtor while filing an application has to file the consent of the Board of Directors. There are two processes provided under this code which are Corporate Insolvency Resolution Process and Liquidation. In CIRP, the Creditors are required to assess the worthiness of the business as to whether a business can be revived or not. When the resolution process fails, then the creditors decide on selling the assets of the company to recover their share of dues. The value of default should be more than 1Lakh rupees.

Insolvency Resolution Process

Financial Creditors: When there is a default in payment of dues by the Corporate Debtor, the Financial Creditors can initiate a Corporate Insolvency Resolution Process u/s 7 of IBC. The initiation can be by a way of filling of an application by the Financial Creditor itself or jointly with other Financial Creditors. It shall be the duty of the Financial Creditor that along with the application to submit a record of the default recorded with the information utility or such other record or evidence of default and the name of the resolution professional proposed to act as an interim resolution professional.

The Adjudicating Authority shall, within 14 days of the receipt of the application ascertain the existence of a default from the records of an IU or based on other evidence furnished by the financial creditor. On satisfaction of the NCLT that the default has occurred, it shall admit the application and the CIRP shall commence of such admission. On admission when an IRP is appointed he takes over the place of the management and the Directors are suspended. The IP has to administer the business of the Corporate Debtor and come to a solution of reviving it. The IP is immune from any criminal proceedings for any acts done in good faith for the benefit of such.

Operational Creditors (OC): On the occurrence of a default, OC may deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in the default to the corporate debtor. It shall be the duty of the Corporate Debtor that within 10 days of such demand notice to inform the OC about any pending dispute, litigation, arbitration proceedings in regards to such dispute.13 After 10 days if the OC does not receive the amount pending, then he can file Application for CIR process before the NCLT.14

Moratorium: After the admission of an application for CIRP a moratorium shall be declared by the Adjudicating Authority. During this process, no judicial proceedings can be initiated against the debtor. During this period no transfer of Assets can be made and recovery can be claimed from the debtor. The moratorium shall continue till completion of CIRP.

COC: It shall be the duty of the IP to identify the Creditors and form a committee of them known as 'Committee of Creditors or COC'. The Financial creditors are part of this COC. OC who have a claim beyond the threshold shall be allowed to take part in the meetings with no voting rights. The COC has to consider the proposal/ Plan of the revival of debtors business and if not feasible then move to the liquidation of Assets within 180 days +90 days. The decision of revival requires a 66% majority vote.

Liquidation: If 66% of the Creditors do not approve the plan, or if, there is no adherence to the provision of IBC, if the resolution is disregarded by the debtor then the liquidation is ordered. The IP may be appointed as an official liquidator. His duty shall be to verify, admit the claims of the creditors, and distribute the recovery for payment of a debt.

Fast Track Process: Code has also provided for Fast Track CIR for startups so that the process is completed soon and normal business activities can be started as soon as possible. The process needs to be completed within 90 days + 45 days (Extended).15

Voluntary Liquidation of Corporate Person: Section 59 provides that any Corporate Person who has not committed any default and intends to liquidate itself voluntarily can do so condition being an affidavit of the majority of Directors stating that they have conducted the inquiry and either there is not debt pending or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation.

Part III of IBC,2016 (S.79-187)
Part III deals with the provisions relating to Insolvency for Individuals & Partnership firms. The provisions are yet not notified & not in force. Under this part, there are 2 processes:
  1. Fresh Start
  2. Resolution Process.
These are followed by Bankruptcy order. DRT is the Adjudicating Authority. The ‘Fresh Start’ shall apply to people having income less than Rs. 5000/- and debt not exceeding Rs. 35000/-. Insolvency Profession shall be administering all the work. In the case of firms, the process is similar to Corporate Persons.

Insolvency resolution Process shall be initiated and a repayment plan shall be finalized with help of COC. On payment, the firm or the Individual shall receive discharge order which shall be registered with the Board in a register maintained for it.16 In case of failure, the estate shall be sold and dues shall be recovered.

No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which the DRT or the DRAT has jurisdiction under this Code.17 An appeal from an order of the DRAT on a question of law under this Code shall be filed within 45 days+ 15 (Extendible) before the Supreme Court.18

IBC ( Amendment) Ordinance, 2020 - 05/06/2020 Covid-19 has impacted many businesses due to the Lockdown. To save the stressed business from the default beyond their control the Govt. suspended S.7, 9, & 10 of the code. The pecuniary jurisdiction has also been increased to 1Crore Rupees. Section 10 A has been introduced which bars filing of new proceedings for default starting 25th March 2020 for a period of 6 months not exceeding 1 year.

Proceedings initiated before 25th March shall have no impact. Non-payment could lead to loses to the creditor for which he can approach the civil court for recovery proceedings under CPC. The Ordinance though saves the debtor from becoming insolvent but the Ordinance being silent can end up having the Creditor in Financial strain.

Insolvency in the US and UK and How it is different from India
United States: In the United States, insolvency laws are generally the subject matter of the State but once a bankruptcy process is initiated to resolve insolvency, only federal laws are applicable.19 In the US, the bankruptcy code is codified as Title 11. The code is fairly balanced. Under this code, the Debtors have the right to be on possession of its existing board and the management which is different as compared under the Indian Code. The moratorium under Indian code is similar to the US code, where on the admission of application for CIRP an automatic moratorium is invoked.

Under the US code, the Debtor and its management continue to be in possession, whereas under IBC IRP is appointed to complete the Resolution process. Under the US law, the debtor shall have the same power as before of disclaiming, adopting, or assigning any new or old contract, whereas, under the IBC, IRP cannot make any changes in the contracts without permission of COC.20Under the US code, the resolution plan requires at least 2/3 members voting to a majority where IBC requires 66%. The resolution once voted needs be approved by NCLT.

United Kingdom: It is a fact that the majority of our legal system is based on English Common Law. The UK is known for its established creditor in the control regime globally. Indian code is somewhat similar to the Insolvency code of UK. Some of the key similarities that can be witnessed are: Both Creditors and Debtors can initiate the Insolvency Process, a moratorium period, payment of liquidation cost before making payment to the creditors. As in India, IBBI is the self-regulating body to bring consistency in functioning. A person who wants to become and Ip needs to pass an exam by the Board.

Same way in the UK, there are self-regulating bodies. Eg: ICAEW, ICAS, ACCA. Some of the key differences between the two codes are as follows: (1) In the UK the IP is the officer of the court and once appointed he is under no obligation to take any approvals from the Creditors, whereas under Indian Code, Approval of certain actions is to be taken from the COC.21 (2) Financial, as well as Operation Creditors, have the right to vote under UK Code, whereas in India, only Financial Creditors can vote.

A simple majority is required under the UK code, whereas, a 66% majority is required under the IBC. (3) The Indian Code provides for a time frame of 180 + 90 days whereas under the UK code time frame is 12 months + 6 months (Extendible).

A time frame must be set to complete such process because a large amount of money is stuck of the creditors and timely solution of the same shall help both the Debtors & the Creditors. On the other hand, if we see the negative side of the timeline, it calls for liquidation on failure to complete the CIRP within the time. The IP under the UK code has the power to sell any Asset without prior permission of the court, whereas under IBC permission has to be taken from COC.

What can India Adopt from foreign Insolvency Laws & Suggestions
Every country prepares the draft of the law in their country taking into consideration the domestic Aspects. IBC, 2016 was enacted with the prime object to amend, consolidate & reorganize law relating to Insolvency in a timely manner for the better interest of Business and the stakeholders. All 3 codes are business-centric and well balanced. The main motives of the code have been to benefit the business by its revival and payment of dues to the creditor. Resolution Plan is always acceptable as it helps the business revival and payment of dues to the creditors.

As in India and UK, there are stringent rules as to taking over the business by an IRP on the admission of application for Insolvency, whereas in the US the Debtor still has control over the management after the admission of an application.

In my opinion, India should adopt the same part and along with the RP, the MD of the company who is aware of the business should be allowed to make decisions for the revival of the company. Another aspect is the time frame which is 180 + 90 days in India. If in case the process is not completed within the time frame, the NCLT can order for liquidation of Assets.

This needs to be reconsidered as discussions for the revival of Big Business may take more time. More time can lead to better opportunities for sick business. In my opinion, during the Insolvency Process if there is an acquisition of the shares of the company the acquirers should be given some benefits eg: Tax. This will lead to early resolution as more acquisition will take place. The IBC overall is a balanced code to revive the sick business and solving the grievances of the creditor and some changes if considered may make the code balanced to the fullest.

End-Notes:
  1. AIR 1947 All 383 District Board, Bijnor v. Mohammad Abdul Salam; Re Krishnendu Sircar & Rekha Sircar, Cal. HC
  2. Mulla, Law on Insolvency in India (1958), pages 1, 2, para 2.
  3. 26th Report of the Law Commission on Insolvency Laws
  4. Appointed by the Chief Justice of Presidency Towns
  5. S 77, Presidency Act.
  6. S. 58, Provincial Insolvency Act
  7. Jnanendra Bala Devi vs. Official Assignee A.I.R 1925 Cal. 597
  8. Naginlal Chunilal vs. Official Assignee I.L.R. 35 Bom. 473; D.Iyer vs. Official Assignee 42 MLJ 41
  9. J.J Irani Report, 31 May 2005
  10. J.J Irani Report, Para 7
  11. Akshay Jhunjhunwala & Or vs. UOI
  12. Section 8, IBC, 2016
  13. Section 9, IBC, 2016
  14. Section 56, IBC, 2016
  15. S.196,IBC,2016
  16. S.180(1), IBC,2016
  17. S.182,IBC,2016
  18. Goldberg,1927 and Ponoroff, 2015
  19. Section 28(1)(l), IBC,2016
  20. S. 28, IBC, 2016
Written By: Harshal Sadhwani
Email: [email protected], Ph no:+91-9922004688

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