Help! I have got heaps of debt. What's the simplest option? Bank
consolidation or Bankruptcy?
So, if this question is bothering you, then take a look at this article to solve
all of your doubts related to insolvency and bankruptcy. Before declaring
ourselves as insolvent, first, we should always check whether its insolvency or
bankruptcy because both these terms are widely different. One can be insolvent
without being bankrupt however cannot be bankrupt without being insolvent.
It is smarter to have one systematized enactment than varied ones to manage the
defaults of a corporation under one umbrella. This is often the precise
explanation behind the presence of the insolvency and Bankruptcy Code in India
which has been put to effect since 2016. The Insolvency and Bankruptcy code
took birth by repealing SICA (Sick Industrial Companies Act), SICA was revoked
with impact from December 2016.
The purpose behind the code
Without an insolvency law, if an organization defaults on an advance to a
creditor (for example becomes financial gain indebted), every claimant would
need to race to induce heaps of the organization's edges. This battle among its
claimants might drive the organization into liquidation despite of whether it
has, in any case, a sound plan of action. This might prompt superfluous
demolition of the organization's hierarchical value and cause work misfortunes.
The winner-grabs-it-all situation would create the business of extending credit
riskier from the creditors' perspective.
There has been a store of laws on indebtedness preceding the IBC that has
reached every possible way however patently neglected to resolve the
mind-boggling insolvency problems. The laws were starting from The Presidency
Town Insolvency Act, 1909 to Provincial Insolvency Act 1920, The Sick Industrial
Companies Act 1985 and many more.
The code additionally amended various acts
just like the Indian Partnership Act, 1932.Limited Liability Partnership Act
2008, The Companies Act 2013, Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 etc. The journey was swift
and packed with potholes that unreservedly began, anyway later neglected to
stick to the very reason that they were designed up.
As a result of absence of
needed institutional and legal setup, the defaulters began considering India as
a secure haven for such exercises that clearly delineate incompetence with
relation to our nation once contrasted with worldwide gauges.
Therefore, a sound structured Insolvency and bankruptcy law was created in 2016
which is able to aid in erasing these issues.
The actual purpose of this law will provide:
- A combination of strategy for indebtedness goals, and
- Rules to regulate the expedient conduct of investors and administrators
in the region of indebtedness.
In simple words IBC is:
- The Code aimed towards establishing time-bound processes and sorting out
a resolution to save the companies from going bankrupt. The consolidation of
laws governing Insolvency had become a necessity due to the piling of the
cases and delays in debt resolutions.
- The Insolvency and Bankruptcy Code claims to facilitate the benefit of
doing business in India due to its quick, easy and time-bound resolution
- Individuals, and organizations, can also apply for insolvency under the
Code. It's known as corporate insolvency in the case of a company and
bankruptcy in the case of an individual. Not only the creditors but also the
individual will initiate the recovery proceedings against one another under
- IBC intends to shield the interest of all the stakeholders within the
company and to help revive the corporate in an exceedingly time-bound
Why is it difficult to interpret IBC
It's been four years since the Insolvency and Bankruptcy Code has been
introduced. In these four years, it's seen several ups and downs. The Code has
been amended five times and there are various judicial pronouncements
interpreting the Code, the most recent one being the Insolvency and Bankruptcy
Code (Second Amendment) Act, 2020 (with effect from June 5, 2020).
The rules and laws governing are amended from time to time. The Supreme Court
and the high courts have pronounced landmark cases deciphering the clauses of
the Code, questioning its constitutional validity, and subsiding grey areas in
the Code. It is a challenge to implement the Insolvency and Bankruptcy Code
effectively. There are dozens of changes created to the restrictive framework
under the Insolvency and Bankruptcy Code. These amendments and ordinances are
passed to facilitate the sleek functioning of the processes.
In order to fully perceive the Insolvency and bankruptcy code, one has to study
the latest and amended versions of the Act, circulars, orders, allied rules, and
rules, that are put on the website of IBBI (Insolvency and Bankruptcy Board of
India) along with the judicial interpretations of the code. It is safe to
mention that the Insolvency law in India is nonetheless developing; it's still
a bit raw. The constant changes within the evolving law make it tough to
interpret and perceive.
- Time limit:
- IBC provides for a time-bound mechanism for creditors to recover their
debts. It's called the company Insolvency Resolution Process (CIRP). Once an
organization defaults in paying its debts to the creditor, the creditor will
apply to CIRP to initiate a recovery action.
- Corporate Insolvency Resolution Process may be a time- bound method
under the Code. Wherein Section 12 of the Code mandates the method to be
completed within 180 days from the date of admission of such application.
- The period for completion of such a method could also be extended by the
adjudicating authority provided that at the meeting of creditors a
resolution is passed having a vote of 66% of the voting share. In spite of
the resolution, the period to complete the Corporate Insolvency Resolution
Process shall not be extended on the far side of 90 days.
- The method must be mandatorily completed with 330 days together with the
extensions granted. The Section further provides for an extension of 90 days for
proceedings that transcend 330 days due to inescapable delays.
- The proportions of NCLT benches to the high range of cases are unbalanced and
to feature that the closing date of 330 days to complete CRIP is proving to be
terribly troublesome. For firms having an outsized number of creditors will have
hindrances within the smooth functioning of the creditor's committee.
- Lack of sufficient infrastructure:
According to the Minister of State for Finance and Corporate Affairs Anurag
Singh Thakur in an exceedingly written reply to the Rajya Sabha, there have been
10,860 cases unfinished before the NCLT as of September 2019. The lack of
sufficient NCLT benches and therefore the quantity by that the cases under IBC
are rising. The increasing pendency of the cases can defeat the aim of the fast
- Resolution Professionals:
At present, there are solely 897 registered insolvency professionals. So as to
be an insolvency professional's one should either be a Company Secretary or a
Chartered Accountant or Cost Accountant or an associated Advocate with ten years
of experience or a graduate with fifteen years of experience. One should
additionally pass the insolvency examination conducted by the IBBI.
Therefore, a resolution professional might not have experience in handling or
managing a corporation. Due to the dearth of need for minimum experience in
handling and managing a corporation, one may question the power of the
Judicial interpretations of Insolvency and Bankruptcy Code of 2016
The judicial interpretations are vital for understanding particularly the
evolving law of insolvency and bankruptcy. The interpretations of the code by
the national company law court, the Supreme Court, and therefore the high courts
offer clarity to many procedural and conceptual considerations.
We shall currently try to perceive insolvency and bankruptcy with the assistance
of various judicial pronouncements and landmark judgments. We shall have the
tendency to study how the courts have understood the provisions of the
insolvency and Bankruptcy Code, so as to eliminate the problems and challenges.
According to Section 4 of the Insolvency and Bankruptcy Amendment Act of 2019,
CRIP was mandatorily to be completed within these 330 days from the
commencement of the resolution process the 330 days time- limit date would
conjointly embody the extension of the time granted and therefore the time spent
within the legal proceedings. Failing to finish the method inside the
aforementioned time-limit date would result in the corporate debtor being
referred for liquidation.
The resolution process should be completed within 330 days but the facts of the
case in mind and also the time occupied in the legal proceedings, the NCLAT, or
the NCLT will grant an additional extension of time ( in exceptional cases).
- Committee of creditors:
In the landmark case of Committee of Creditors of Essar Steel India Limited
through Authorized Signatory vs. Satish Kumar Gupta & Ors, 2019, the Supreme
Court reinforced the role of the Committee of creditors. The Hon'ble court
commanded that the committee of creditors (CoC) is the principal authority when
deciding whether or not to rehabilitate the corporate debtor or not by the
approach of accepting the resolution set up.
The resolution should be approved by a minimum vote of 66% of the selection
shares. Whereas approving the resolution set up the CoC takes under
consideration the viability and practicability of the resolution set up. So CoC
has the ability to suggest alterations and modifications in the resolution set
- Role of resolution professionals:
The applicant should submit a resolution plan on receipt of such set up, the
resolution professional shall examine the set up in accordance with Section
30(2). After that in keeping with Section 30(3) the plan is to be given to CoC
for its approval.
Once the resolution plan is approved by the CoC, the set up is then forwarded to
the adjudicating authority by the resolution professionals.
The role of resolution professionals is to examine all the resolution plans
submitted to him by completely different candidates, before submitting the plans
to the CoC. He should not build any call of opinion concerning contravention to
law is to be placed before the committee of creditors. A resolution professional
doesn't have the ability to determine whether the resolution plan is offensive
of any provision.
Thus, the role of a resolution professionals is to look at the resolution plan,
conduct the mandatory due diligence, make sure that the set up is complete and
report it to the CoC no matter whether the set up is in contravention or not.
- Financial and operational creditors:
In the case of Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India & Others
[(2019) 4 SCC 17], it had been contended that distinction created between the
financial creditor and operational creditor was offensive of Article 14 of the
Constitution. Furthermore, the difficulty of exclusion of the operational
creditors from the committee of creditors was conjointly raised before the
Hon'ble Supreme Court.
The Supreme Court with the assistance of the Insolvency Law Committee (ILC), and
the BLRC Report, made a transparent distinction between financial creditors and
operational creditors. The court held that there's an intelligible distinction
between them. The foremost important difference between them is that the
involvement of financial creditors in assessing the viability of the corporate
As for the problem of discriminatory treatment of operational creditors on the
committee of creditors, the court held that the first responsibility of the
committee of creditors is to judge the viability and feasibility of any
resolution plan. Financial creditors are banks and financial establishments,
they're well equipped to conduct the desired study of the market to judge the
viability and feasibility of the resolution plan.
Whereas on the opposite side,
operational creditors are solely involved in recovering the cash paid for
provided products and services. So they will not be equipped to assess the
viability and feasibility of the resolution plan. The Supreme Court, therefore,
held that neither the operational creditors weren't being discriminated against
on the committee of creditors nor was it offensive of Article 14.
- The government may ask the Supreme Court to border rules to confirm that NCLT
judges are in charge of delays and set up a system to evaluate the potency of
judges within the bankruptcy courts.
- Non-judicial commercial consultants in NCLT ought to be increased and more
NCLT benches to be created.
- IBC law should differentiate between Financially distressed" companies
and Economically distressed" companies.
- A financially distressed firm ought to be sustained either by
restructuring it among existing claimants or by restructuring it to new
- In the event of a restructuring of a financially distressed firm, a
brand new professional board should be in place.
- If the corporate is turned the losses of the banks would be so much less
than through the distress sales that are currently taking place.
- As banks are getting 30-40% of their outstanding dues through the NCLT route.
- This is a win-win scenario for all stakeholders.
- The company that is economically distressed ought to be liquidated.
The old saying that justice delayed is justice denied is even more relevant for
IBC cases, the elemental factor that must change at the judicial end, together
with the quasi-judicial part of the NCLT appellant processes, is that judgments
should be delivered in commercial time and not judicial time.
What is pre-packaged IBC scheme?
A pre-packaged scheme is an arrangement under that stressed company and the
purchaser negotiate the sale of all or a part of a company's business or assets
before the appointment of insolvency professionals as administrator. The
completion of such a transaction is conditional on the scrutiny of details by
the insolvency professionals appointed and untills he offers a nod for the sale
to be settled, the thought by the purchaser is held in written agreement
The main objective of bringing this idea is to assist the insolvency framework,
avoid outlaying of time and cash in court proceedings & legal battles and
directly move to obtaining a good resolution for the corporate that was the very
objective of the IBC within the initial place.
Challenges and drawbacks of the scheme
Though pre-packaged IBC Schemes have their own share of supporters, it brings
with itself many a challenges and disadvantages that can't be simply unnoticed,
a number of them are listed herein below:
- The biggest issue that pre-pack schemes can face at the start is that
when the choices are being evaluated by the corporate, they'd not have
capital lenders lending cash to them. This can be as a result of a risk
concerned within the recovery of the money and where lenders already know
that the company is stressed, they'd not want to take the monetary risk. If
the corporate does not have enough cushions go on for weeks/months where the
scheme is put in place, the concept may fail altogether.
- Another major concern which will arise by the pre-pack scheme
implementation is that it'd not have the shield of moratorium like it is
there once a case is admitted under the Section 7 or 9 of IBC. Therefore,
creditors might enforce their rights and remedies where the corporate is
negotiating for a pre-pack theme. This could be a large hurdle that the
scheme would face in its implementation.
- One major criticism of pre-pack schemes is that it is a lot in favour of
secured creditors and neither do the operational creditors have much say within
the negotiation nor they're given a good share. This challenge must be overcome
if pre-pack schemes are to be enforced in India.
- Transparency would even be a huge hurdle since the present management
would be in-charge of alienating the assets to keep the corporate afloat and
so, there would invariably be apprehensions regarding the correctness of the
whole process. This might cause creditors, particularly unsecured, to
approach the NCLT and filing cases against the corporate debtor.
- It is even argued that since the corporate is pushed into insolvency by
its own management (be it operational mismanagement or worst business
decisions), it's not wise to permit same management to alienate the assets
of the corporate and this insolvency framework might end up to be damaging
to certain stakeholders.
- The role of IRP would be another grey area where the implementation of
pre-pack scheme would face challenges in the maximum amount as in the normal
CIRP method, the IRP is appointed as soon as the application is admitted.
However, in an exceedingly pre-pack scheme, the IRP is appointed once the scheme
is already finalized and given before the NCLT and also the NCLT offers a nod to
- Section 29A would act as a significant hurdle in the introduction of
pre-pack scheme in India as in a pre-pack scheme, the debtor would be
in-charge of the method and not the IRP and this would go against the fundamental essence of
Since the legislature of the general assembly has already introduced Section 29A
with much stress and importance and therefore the the same has also been
analyzed & reiterated in the Supreme Court decision of Essar Steel, it'd be
tough to move far from the availability or produce an exception for pre-pack
schemes. It'd stand as one of the biggest obstacles for pre-pack schemes.
- It is conjointly being contended against the introduction of the
pre-pack scheme is that it's too soon to bring such a drastic modification
because the insolvency law in India continues to be a nascent change. There
are apprehensions that it should contribute to burdening the NCLTs even more because
the schemes may be challenged at any stage and there would be huge scope of
accelerating the judicial proceeding. In addition, the outgoing management might
not be very cooperative with the incoming management and this might produce
With the present Pandemic creating havoc in almost all the business, it's almost
certain that a lot of corporations would be pushed into insolvency in the up
coming times and there this scheme of pre-packaged deals, if introduced, might
act as a catalyst in serving to those corporations survive.
However, the system comes with its own set of challenges and disadvantage that
cannot be shrugged off. The Indian system is completely different from the USA
and UK and a comprehensive study should be conducted so as to make sure that the
issues are eliminated and a stronger mechanism is put in place. Therefore, it's
necessary to strike a balance between the existing and the new system.
It is expected and emphasized that if the pre-pack system is enforced well, it
might create smooth implementation of resolution plans, would promote growth and
keep the corporate as a going concern whereas retaining jobs and ensuring
certain creditors receive the funds because of them. Particularly during these
tough financial times, it's imperative that such a system would solely yield
fruitful results and would have more pros than cons.