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Insolvency And Bankruptcy Code: Economic Growth Along With Balancing Interest Of Stakeholders

A corporation turns insolvent when it no longer has funds and assets to go forward with its business and is earning more losses than profits. At this stage, the company becomes incapable of paying the debts it has taken and even for paying the basic expenses to run a corporation inclusive of employee’s wages. To safeguard the interest of the individuals and other institutions attached to and depended on the corporation, the insolvency process has to be regulated and guided.

The Insolvency and Bankruptcy Code, 2016 is the legislation which guides the insolvency and the bankruptcy process to avoid to an extent injustice to any. In an economy, insolvency is generally given a negative connotation. However, if we look deep into it insolvency laws help in economic growth and the Insolvency and Bankruptcy Code 2016, the legislation which regulates the process of insolvency in India does the same. When there is economic growth it will eventually lead to the best interest of the stakeholders.

The insolvency legislation avoids the rush of creditors of the corporation for protecting their accounts from going vain. The Insolvency and Bankruptcy confirm that there is proper distribution if the company is liquidated, it prevents the accounts of creditors from turning into a non-performing asset, aides in reviving and restructuring the business and the time limit ascertains that the justice is delivered to the stakeholders at the earliest. Working in the best interest of the stakeholders of the company is the duty of the company and its directors not only as per Section 166(2) of the Companies Act 2013 but also as per the Corporate Social Responsibility Rules.

Facets Of The 2016 Code

Who is a stakeholder? Before discussing the various aspects of the Insolvency and Bankruptcy Code, 2016 and how it helps in balancing the interest of the stakeholder, we need to know who is a stakeholder and is stakeholder and shareholder the same? Stakeholders are parties who affect and can be affected by the business of the corporation inclusive of investors, creditors, employees, etc. Furthermore, it even includes communities, governments and trade unions.[1] Stakeholders are people who possess financial, moral or legal rights or other concern related to the business of a corporation.

Shareholders on the other hand are those who own shares of the company and in a way are the owners of the company. Shareholders are mostly concerned with the short-term business of the corporation and only focuses on maximisation of corporate profit, whereas on the other hand, stakeholders are concerned with the company’s overall growth in the long term.

Generally, and in many jurisdictions like the USA and the UK the corporation works on the line of the interest of the shareholders, however, in some jurisdictions such as in Canada, the focus on preserving the interest of the stakeholders are more. In India, although we don’t have a specific provision that works in the interest of the stakeholders there are parts in legislation like Section 166(2) of the Companies Act, 2013 which put a mandate on the director to work in the positive interest of the stakeholders and in other provisions of corporate law in India. Furthermore, there have been judicial pronouncements on this issue as well.[2]

As we have now seen who is a stakeholder and the necessity of taking into consideration the interest of the stakeholders, let us now see the aspects in the Insolvency and Bankruptcy Code 2016 which does not only balance the interest of the stakeholders but also promotes economic growth:
  1. Time Limit Given In The Code

    ‘Justice delayed is justice denied.’
    As per the data available in the World Bank in 2016, the insolvency resolution took on an average 4.5 years which is much higher when compared to the UK whose average is 1 year and the USA in 1.5 years. Due to different legislation and no prescribed time limit in the earlier legislation related to the insolvency and bankruptcy procedure, the liquidation processes continued for years which severely affected the rights of the stakeholders and even the economy.

    The Insolvency and Bankruptcy Code, 2016 under Section 12 has given a prescribed limit of 180 days and if failed to do so within 180 days then an extension of 90 days on the satisfaction of the adjudicatory authority could be granted but not more than that. In the amendment of 2019 of the Code, it set the maximum time limit as 330 days and not more than that. The stakeholders should not be the one suffering for the default and mismanagement on the part of the administrators of the company.

    In the case of the Committee of creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors.[3] [(2020) 8 SCC 531], the Supreme Court held that the general rule is that of an outer limit of 330 days, however, an extension of time can be granted in exceptional cases especially where only a short period is left for the completion of the insolvency resolution process beyond 330 days as it is in the interest of all stakeholders that the corporate debtor is put back on its feet and when the delay is due to the tardy process of the adjudicatory system.

    Even though this limitation is necessary, flexibility is also needed especially in unforeseen circumstances like the COVID -19 pandemic. The good thing is that the government has kept the provision for the same. This year due to the lockdown the Insolvency and the Bankruptcy Board of India had announced that the lockdown period will not be counted in the 330 days limitation period
     
  2. Reviving And Restructuring Business

    Insolvency laws protect the company from losing its potential claimants and to revive the business. The purpose of the legislature is to focus on the revival of the corporate debtor and ensure its existence in the market and not result in the liquidation of the company. After the application for the insolvency, the process has been initiated by either a financial creditor or operational creditor or the corporate debtor itself the adjudicatory authority appoints an insolvency resolution professional who takes over the management from the hands of the director and proceed on to work on reviving the business of the company.

    It searches for a potential buyer who would help in bringing assets which in turn will help in bringing back business at the most to a level where it does not have to bear losses. This process does not only ensure the employees their employment but also the creditors have an interest in their loan and the investors a return to their investment.

    This effort of reviving the business is necessary otherwise if the company goes for liquidation the employment of the employees and their dependents would be hampered, the creditors cannot expect any interest in their credit and the investors will not receive any return on their investment. This process prescribed by the legislation also helps the country to maintain its reputation as when any company becomes insolvent naturally potential investors for any company of the origin of that country hesitates to invest in that country.
     
  3. Preventing Accounts From Turning NPA

    An account becomes a non-performing asset when the debtor does not pay back the amount and the interest which it had taken as a loan. Insolvency laws help to combat the company from diverting its assets to avoid paying the debt. In history, there have been instances where the company had fraudulently declared itself insolvent only to escape the liability of paying debts. This causes huge economic damage especially when the credit amount is large as the company’s accounts become a Non- Performing Asset for the financial creditor and even the operational creditor faces loss.

    The insolvency Code 2016 gives the provision to the company to voluntarily declare insolvency and initiate liquidation process, nonetheless, it must not be to defraud any person and there is a penalty under section 65(2) of the Insolvency and Bankruptcy Code, 2016. It becomes a huge burden on the bank when any account results in NPA. When they receive money as deposits, they use these deposits to give loans and the interest which they get on loans they give as interest on the deposits. Therefore, when they don’t receive the loan amount and its interest it gets difficult for them to pay the deposits. These NPA harms the economy as well because it hampers the flow of money in the economy.
     
  4. Proper Distribution

    When after every effort done by the insolvency professional there is no scope of revival seen the last option is to go for winding up of the company and liquidate its assets. The Insolvency and the Bankruptcy Code 2016 prevents the financial creditors to liquidate all the assets of an insolvent company to get a return on their debt without taking into consideration, the welfare of others and regulates its liquidation and divide the amount received after liquidation among others who have an interest in it. Like Section 53, Insolvency and Bankruptcy Code, 2016 talks about what percentage and amongst whom the assets of the company will be distributed to repay the debts.

    The insolvency code promotes more efficient action by the company’s creditors. If there will be no regulation the financial creditors will act in an inward-looking manner and will liquidate the assets of the company as per their convenience. In this case, the interest of other stakeholders will be at stake. This is avoided by the Insolvency and Bankruptcy Code 2016 wherein an adjudicatory authority is being involved in the process to attempt at first to revitalize the company and with the help of a professional to its optimum.

    If it fails to do the same, then liquidation of the assets of the company will take place in which along with the creditors, the workmen and employees of the company are given the priority which is mentioned under Section53 of the code of 2016. We can see here, that the priority list can be claimed to be unjust and violative of Article 14 of the Constitution of India,1950. Nonetheless, in the case Swiss Ribbons Pvt. Ltd. V. Union Of India & Ors.[4] [(2019) 4 SCC 17] it was held that considering various factors such as the objective of Code, intelligible differentia between financial debts and operational debts, kinds of unsecured debts, priority given to workmen’s dues, etc. Article 14 does not get infracted.


Conclusion
The Insolvency and Bankruptcy Code 2016 has brought a huge change in the insolvency process not only by consolidating all previous provisions which caused chaos in the insolvency process, into one but also simplified the process. The appointment of the Insolvency Resolution Professional has to a large extent combated the issue of laundering of assets by the company and initiated the effort of at least reviving the company for the good of the stakeholders together with the economy as a whole.

The time limit prescribed is also a revolutionary change. Still there exists issues as insolvency and bankruptcy process does not involve solely the right of the company or the individual but also many others attached to. When determining the right of every person the right of one or the other gets compromised. Amendments and orders even till September of 2020, to protect the rights of the company as well as the stakeholders, has been made.

End-Notes:
  1. James Chen, Stakeholder, Investopedia, Stakeholder Definition (investopedia.com
  2. Shubhra Wadhawan, Upholding Stakeholder Interest: What Way is the Best Way- A Comparative Analysis Across Diverse Jurisdictions, 2019 SCC online Blog OpEd 10.
  3. Committee of creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors., (2020) 8 SCC 531 (India)
  4. Swiss Ribbons Pvt. Ltd. V. Union Of India & Ors., (2019) 4 SCC 17 (India)

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