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Insolvency and Bankruptcy in India: Problems and Perspectives

Introduction:
It is a fact of economic life that businesses fail and cross-border business failures are new to
neither the business world nor academia.1 The financial distress in international theory has
centered on two competing paradigms, universalism and territorialism. 2 The bankruptcy reform
is sweeping around the world.3 The objective of designing the Insolvency law is to address the
collective satisfaction of the outstanding claims of the creditors from the assets of the debtor,
when the debtor cannot meet its financial obligations as they fall due. Opening of insolvency
procedures will often affect the capacity of the debtor and its pre-existing rights and obligations
with respect to the third parties. It will also affect the third parties’ rights with respect to the
debtor or the debtor’s assets. The Insolvency and Bankruptcy Code, 2016 (IBC)4 set out the
following objectives to resolve the insolvency and bankruptcy of the corporate debtor: time
bound resolution; higher recovery; expected rise of debt finance; ensure certainty and provide
confidence of the rights and enforceability to lenders. The statute intends to provide efficient,
impartial resolution with transparent and predictable law.

The Government of India stated “Less than half of the staggering Rs. 9 lakh crore worth of non-
performing assets (NPAs), or bad loans, accumulated by banks had returned due to the system set
in place by the IBC.5 The Reserve Bank of India (RBI) referred to 12 accounts, which
approximately accounted for about 25% of the gross NPAs, for resolution under IBC. The
increase in NPA is because a corporate person commits certain serious banking frauds or does
not comply with the banking norms, an ailment to any banking system. The Prompt Corrective
Action (PCA) of the RBI scheme to public sector banks has restricted the banking operations. 6
1
Andrew T. Guzman, “INTERNATIONAL BANKRUPTCY: IN DEFENSE OF UNIVERSALISM” Michigan Law
Review, Vol. 98, No. 7, December 6, 2018
2
John A. E. Pottow, “GREED AND PRIDE IN INTERNATIONAL BANKRUPTCY: THE PROBLEMS OF AND
PROPOSED SOLUTIONS TO “LOCAL INTERESTS”, Michigan Law Review, Vol. 104, No. 8, last visited
December 6, 2018
3
Jay Lawrence Westbrook, “A GLOBAL SOLUTION TO MULTINATIONAL DEFAULT” Michigan Law Review,
https://www.jstor.org/stable/1290306 , December 6, 2018
4
IBC is a consolidating statute of existing insolvency laws and amended all legislations including Companies Act.
2013. IBC also has an overriding effect on all other laws relating to Insolvency and Bankruptcy.
5
https://cfo.economictimes.indiatimes.com/news/rs-4-lakh-crore-npas-have-returned-due-to-insolvency-system-
official/63610732, last visited February 17, 2019; Iceberg report identifies Rs. 10.4 lakhs of NPA as on March 2018
of the commercial credit.
6
It lays out the case for structured early intervention and resolution by regulators for banks that become under-
capitalized due to poor asset quality or vulnerable due to loss of profitability. Viral V Acharya, Dy. Governor, RBI,
1
The consequence was that banks were not able to lend on the retail side or raise even short-term
deposits. Post 2008 financial crisis, Indian banks had to face major NPAs. Being the leading
lenders for development works, banks faced difficulty in recovering the dues, as the corporate
debtor’s investment became dormant (as projects were either incomplete or being underutilized).
Previously, the RBI introduced various schemes for recovery of debts, like the Corporate Debt
Restructuring (CDR)7 or the Joint Lenders Forum8, Strategic Debt Restructuring (SDR)9 and the
Scheme for Sustainable Structuring of Stressed Assets (S4A).10 The RBI has discontinued the
schemes and all the matters pertaining to stressed assets of a corporate debtor shall fall within the
purview of IBC.11 Moreover, the NPAs or stressed assets resolution mechanisms put in place are
yet to yield the desired results.12 This is where, the dissection of the IBC’s role and relevance
becomes necessary.

The quarterly report of the National Company Law Tribunal (NCLT) states that about 51.53% of
the CIRP were closed which ended in liquidation. In 13.48% ended with a resolution plan. In
10.75% of cases ended in withdrawal under section 12A, IBC. In 75.16% of the cases of CIRPs
in liquidation were cases of sick industries or defunct companies. 13 Further, at the end of
September 2018, 52 CIRPs had a resolution plan and 17 reported to have attracted resolution
plans. Thirteen CIRPs resulted in a resolution plans with different degrees of realization in
comparison to the liquidation value. Realization by Financial Creditors (FCs) in comparison to
liquidation value in respect of the Corporate Debtors (CDs) is 249%, while the realization by

Prompt Corrective Action: An Essential Element of Financial Stability Framework,


https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1065, last visited February 18 2019
7
Contractual arrangement between the lender and the company approaching under section 391, Companies Act,
1956 with a scheme
8
Wherein at least 75% of creditors by value of the loan and 60% by number of lenders had to agree on the
restructuring plan and was difficult to make the lender agree
9
Converting debt to equity is the approach adopted under the SDR. There would be management change.
10
The scheme provides for financial restricting of large projects and also assists the lenders ability in dealing with
the stressed assets. It determines the sustainable debt level of stressed assets and allows lenders equity participation.
The scheme allows the promoter to continue in management.
11
All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall
be governed by the revised framework, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218., last visited
February 17 2019,
12
Standing Committee on Finance (2017-2018), Sixteenth Lok Sabha, MOF, August 2018,
http://164.100.47.193/lsscommittee/Finance/16_Finance_68.pdf. last visited February 17, 2019;
https://www.pwc.in/assets/pdfs/publications/2018/decoding-the-code-survey-on-twenty-one-months-of-ibc-in-
india.pdf, Last visited February 15, 2019
13
Ibid, Economic value in most of the debtor’s had already eroded before they were admitted into CIRP
2
them in comparison to their claims is 90%.14 As per the RBI directive, resolution of 12 large
accounts was initiated by banks, together having an outstanding claim of Rs.3.45 lakh crore as
against liquidation value of Rs.73220 /- crore. 15 The outcome of four large accounts ended with
resolution plans.

Insolvency and Bankruptcy Law - Problems and Perspectives:


It is said, if a firm benefits from its rival’s financial demise, it is presumably because an insolvent
firm is liquidated.16 Law of the day may provide answers for few issues but may not have
solutions while interpreting a statute. Keeping this in mind, the IBC provides an opportunity to
repay the debts, through a resolution process for corporate persons, limited liability partnerships,
firms and individuals.17 IBC tends to prevent the “value destruction of assets” of a corporate
debtor in distress18 and to provide a time bound resolution process.19 It also promotes
entrepreneurship, availability of credit and balance of interest of the stakeholders. 20 The author in
this paper intends to discuss the issues pertaining to corporate persons.

When a company is unable to pay or becomes insolvent, the problems or issues of recovery of
the debt will arise.21 The IBC in fact, provides some respite for the corporate debtors. IBC strikes
a balance between re-organization of corporate debtor and liquidation. As IBC is at its nascent
stage, few issues and problems may crop up during the implementation. 22 IBC ensures an
equitable treatment for the creditors by maximization of value of the assets. Further, IBC
provides that the insolvency professional 23 shall endeavor to protect and preserve the value of the
property of the corporate debtor.24

14
Ibid,
15
Ibid, Approval has been given to the Resolution plan in respect of The Electro-steel Steels Ltd., Bhushan Steel
Ltd., Monnet Ispat and Energy Ltd., and Amtek Auto Ltd...
16
Julie Hunsaker, “The Role of Debt and Bankruptcy Statutes in Facilitating Tacit Collusion”, Managerial and
Decision Economics, Vol. 20, No. 1, https://www.jstor.org/stable/3108211, last visited December 6, 2018
17
SS 78 – 109, provides for Partnership firms and individual. The jurisdiction is the Debt Recovery Tribunal.
18
it is duty of the 'Committee of Creditors' to ensure that the 'Resolution Plan' is viable, feasible and should
maximize the assets of the 'Corporate Debtor'. Binani Industries Limited Vs. Bank of Baroda & Anr. - Company
Appeal (AT) (Insolvency) No. 82 of 2018
19
180 days and extendable to another 90 days and in case of Fast Track CIRP 90 days extendable to another 45 days
20
Sec. 2, IBC, 2016
21
ASIC v Plymin, (2003) 46 ACSR (Australia), the court has provided the checklist of the indicators of Insolvency.
22
Refer Insolvency Law Committee’s (ILC) report
23
Sec. 3(19) r/w 207
3
The Companies Act, 201325 provided that if a company is “unable to pay debts” or “defaults in
making payments”, the creditor had a right to apply for winding up. 26 The National Company
Law Tribunal (NCLT) may order winding up and the liquidation process will commence. At
times, even when the business is robust, the creditor’s claim would push the company into
liquidation, in few cases affecting or destroying the organizational value and leading to job loss.
The insolvency law strives to balance not only in protecting the creditors but also interest of the
company, shareholders and other stakeholders. The idea is of a “corporate rescue” or a “second
chance” or “fresh start”27 visualized for the debtor without affecting the debtor or the outgoing
owners or promoters. The resolution applicant provides a second chance and rescues the
corporate debtor from the financial risk. In turn, a corporate applicant may expect certainty and
transparency so that he shall focus in protection and utilization of the investment in revival of the
debtor. Preservation and protection of the existing assets prior to the resolution process
commences is also the intention.

The IBC provides a paradigm shift from the existing “Debtor in Possession” to a “Creditor in
Control” regime.28 IBC is creditor driven. 29 The World Bank30 and International Monetary Fund
(IMF) have commended the introduction of IBC. The IMF in fact, encourages the “creditor in
control” instead of “debtor in possession” as it maximizes the value of property and increases the
potential of the corporate debtors to repay the debts. In case of financial distress of companies
mandates a shift of duty from debtor to the creditors.31

Where the minimum amount of the default is Rs. one lakh on repayment of loan or interest (even

24
Sec. 20, IP shall make every endeavor to protect and preserve the value of the property of CD and manage the
operations of CD as a going concern.
25
The Companies Act, 1956
26
Section 433 (1) (a), 1956 and SS 270 r/w 271(1)(a), Companies Act, 2013 now repealed and incorporated into
IBC, 2016
27
John Armour and Douglas Cumming, BANKRUPTCY LAW AND ENTREPRENEURSHIP, Oxford University
Press, https://www.jstor.org/stable/42705535, last visited December 6, 2018
28
Sec. 17 (1) From the date of appointment of IRP - (a) Management of the affairs of CD shall vest in IP; (b) Powers
of board of directors or partners of CD, as the case may be, shall stand suspended and be exercised by IP; R/W 18
29
https://www.pwc.in/assets/pdfs/publications/2018/decoding-the-code-survey-on-twenty-one-months-of-ibc-in-
india.pdf, Last visited February 15, 2019
30
See The World Bank report states that India has hopped to gaining within 100 rank of “Ease of Doing Business”.
World Bank Report of 2018, The World Bank Report in “Ease of Doing Business” (EoDBR), 2019 - India improved
its overall ranking from 100 to 77 among 190 countries. India improved its rank in 6 out of 10 parameters in 2019
report.
31
Henry T. C. Hu and Jay Lawrence Westbrook, ABOLITION OF THE CORPORATE DUTY TO CREDITORS,
Columbia Law Review Association, Inc., https://www.jstor.org/stable/40041737, last visited December 6, 2018
4
with a single default), the jurisdiction of IBC gets attracted. The creditor may not resort to
SARFAESI law but may apply under IBC. 32 IBC provides that a financial creditor (FC)33 and
operational creditor (OC)34 may apply for the corporate insolvency resolution process (CIRP).
Even the corporate debtor (CD) himself may apply.35 When a CD has committed a default, the
corporate applicant may file an application for initiating CIRP before the Adjudicating Authority
(AA).36 Hence, under IBC, the FC or OC shall apply for CIRP and not for winding up, as was the
case under the Companies Act, 2013.37 Only when there is a failure to provide a resolution plan 38
or Committee of Creditors (CoC) does not approve a resolution plan or is not implemented or
implementable, then the FC or OC may apply for liquidation. 39 Time will reveal, whether this
brings economic or financial discipline in the corporate debtor. The corporate debtor shall have
to set in place the cash flow mechanism.

If there is a possibility of the default triggering the IBC, the debtor shall have a restructuring plan
in consultation with the stakeholders including the creditors. The IBC has seen positive changes
and regulators are attempting to plug the loopholes. It is pertinent to analyze, whether IBC has
provided an answer for all insolvency issues. An effective and efficient insolvency law will
intend to provide appropriate remedy to the corporate debtor and curb the shareholders or
directors’ behavior to avoid repayment of the debt. The company law works on the premise of
principle of limited liability of the shareholders. During the insolvency process, they tend to take
additional risk. Because, they do know that if the insolvency process succeeds they are likely to
gain. However, if business fails, they tend to lose their investment. This depends on the available
assets. Shareholder may strategically take this risk. In fact, increasing the risk for the creditors
32
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (banks
and financial institutions auction properties in recovery of loan).
33
Sec. 7 - A FC either by itself or jointly with other FC’s may file an application for initiating CIRP against a CD
before the AA when a default has occurred.; Financial creditor means - persons to whom financial debt is due;
34
Sec. 8(1) After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding
payment - If OC does not receive payment from CD or notice of the dispute U/S 8(2), OC may file an application
before AA for initiating a CIRP; operational creditor may include Trade creditors, employees, etc;
35
Sec. 10, IBC
36
Sec. 10, IBC, the IBC under Sec. 11 also provides that the Persons who are not entitled to make the application for
CIRP. The Adjudicating Authority of the IBC is the NCLT, See Sec. 60
37
Sec. 271(1)(a) and Companies Act, 1956 Sec. 433 (1)(a), was similar
38
S. 5 (26) Resolution plan means -a plan proposed by any person for Insolvency Resolution of Corporate Debtor as
a going concern in accordance with Part II, IBC
39
Sec. 33, IBC (1) Where the Adjudicating Authority - (a) before the expiry of the IRP period or the maximum
period permitted for completion of CIRP under section 12 or the fast track CIRP under section 56, as the case may
be, does not receive a resolution plan… or (b) rejects the resolution plan under section 31 for the non-compliance of
the requirements; However, IBC strangely does not deal with revival of sick companies
5
and reduces the chance of recovery or fail to recover. On the other hand, creditors facing such
situation may overcharge the debts to balance its losses. Conversely, this would affect not only
the borrower making him pay higher interest but also the economy as a whole wherein customer
has to take the burden. In such cases, IBC provides for investigation of any antecedent
transactions for any illegal diversion of assets.

In Mobilox judgment40 the Supreme Court had to decide on interpretation of meaning of


“dispute” and “existence of dispute.” The questions raised were:
a) Whether the dispute in question has to be genuine or not?
b) Whether the AA has the power to look into such genuineness or not?
c) Whether to include ‘dispute’ in any form rather than only disputes that exhibited
merit?
d) Whether the existence of a ‘dispute’ with an OC is covered under IBC?
It court held that there might be genuine dispute regarding the debt by corporate debtor, without
having yet initiated any legal proceedings. An operational debt is usually smaller than that of
financial debts and hence, does not enable OC’s to put the corporate debtor into CIRP
prematurely or for extraneous considerations. The requirement is to strike a balance between the
rights of an OC and the remedy available to corporate debtor.

The CoC shall appoint the insolvency resolution professional (IP). 41 IP shall prepare an
information memorandum containing relevant information for formulating a Resolution Plan.42 A
resolution applicant based on the information memorandum may submit a resolution plan to IP. 43
The majority of 75% voting share (Now 66%) shall take decisions. Hence, provision for
decision-making has been relaxed.44 If AA is satisfied that the resolution plan as approved by
CoC meets the requirements, shall approve the resolution plan. In Arcelormittal case, the

40
Mobilox Innovations Private Limited v Kirusa Software Private Limited, 2017 Indlaw SC 1041, held that a
“dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within
the inclusive definition contained in Sec 5(6). Held that a dispute did exist in fact between the parties holding
NCLAT was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.
41
Sec. 16, An IP appointed to conduct CIRP and includes an Interim Resolution Professional; AA shall appoint an IP
within 14 days from the insolvency commencement date; See Sec. 22 - COC consists of independent financial
creditors; Sec. 21 (1) IRP shall after collation of all claims received against CD and determination of the financial
position of CD, constitute a CoC. (2) CoC shall comprise all FC’s of CD.
42
Sec. 29, IBC
43
Sec. 30, IBC, IP shall examine each resolution plan received by him to confirm that each resolution plan -
provides for the repayment of the debts of OC
44
Amendment has now reduced to 66%
6
Supreme Court has held that resolution applicant has no vested right or fundamental right to have
its ‘resolution plan’ considered or approved.45 The order of AA shall be binding on all including
the CD, its members, creditors, guarantors, employees and other stakeholders. 46 IBC also
provides withdrawal of an application, with the approval of 90% lenders. Hence, IBC provides
an opportunity for CD to have an exit for a better settlement beyond the IBC process. IBC
provides that CoC may, in its first meeting, by a majority vote of not less than 66% of the voting
share of the FC’s, resolve to appoint the IP as the resolution professional. 47 The AA shall forward
the name of the resolution professional appointed by the CoC to Insolvency and Bankruptcy
Board of India (IBBI)48 and after getting the confirmation make such appointment. 49 Creditor
through the IP takes control of the board or the management and the assets of debtor. The
evaluation and viability determination of resolution process shall be complete within 180 days. 50
IBC also provides for a Fast Track CIRP wherein the process is to be complete within a period of
90 days extendable to another 45 days.51

Time bound insolvency procedure:


IBC provides a valuable law reform with an intention of transparency and expeditious resolution
of NPAs. IBC provides for a time bound insolvency process.52 However, whether the security
interest of all the creditors including the unsecured creditors is protected is to be verified. The
object of insolvency law is to protect all the stakeholders without any distortion. Even the
Companies Act shall protect the interest of both secured and unsecured creditors. Indian industry
45
Arcelormittal India Pvt. Ltd. v Satish Kumar Gupta & others, 2018 Indlaw SC 919
46
Sec. 31, IBC
47
Section 22(2), See IBC (Amendment) Ordinance 2018, Approval of a resolution plan; Actions under Section 28 of
IBC, including raising interim financing, issuance of additional securities, undertake any related party transactions,
make any change in the management of the corporate debtor or its subsidiary, etc.; Appointment or replacement of
resolution professional; Decision by CoC to liquidate the corporate debtor
48
Sec. 3(1) r/w Sec. 188 - established as a regulator; all IP’s shall register with IBBI. The Insolvency Professional
Agencies are established to monitor IP. (Sec. 3(20) r/w Sec. 201); “Information Utilities” (IUs) is to provide further
impetus for the efficient implementation of IBC (Sec. 3(21) r/w Sec. 210, Will electronically store facts about
lenders; the National e-Governance Services Ltd. (NeSL) has taken this task)
49
Sec. 22(3)(b), IBC
50
Tata Steel Ltd v Liberty House Group Pte. Ltd. & others, 2019 Indlaw NCLAT 12
51
Sec. 55, (2) An application for fast track CIRP may be made by the CD’s (a) a CD with assets and income below a
level as may be notified by the Central Government; or (b) a CD with such class of creditors or such amount of debt
as may be notified by the Central Government; or (c) such other category of corporate persons as may be notified by
the Central Government
52
Sec. 12, IBC, (1) CIRP shall be completed within a period of 180 days from the date of admission of the
application to initiate such process. (2) RP shall file an application to AA to extend the period of CIRP beyond 180
days, if instructed to do so by a resolution passed at a meeting of CoC by a vote of 75% of voting shares. see also
Sec. 64, Expeditious Disposal of Applications
7
and the world has appreciated the introduction of the time bound CIRP. The positives of the IBC
is that the resolution plan has be submitted before the AA within 180 extendable to 90 days and
in case of fast track, 90 extendable to 45 days. In Arcelormittal case, it was held that the time
limit for completion of CIRP under section 12 is mandatory and it cannot be extended beyond
270 days.53

Once the AA approves the resolution plan, IP shall take charge of the assets of the corporate
debtor. The threat of losing control over the company has prompted a behavioral change within
the promoters and shareholders. Willingness to settle creditor’s dues as early as possible is
visible.54 The investors including foreign investors are willing to acquire valuable assets that may
maximizing their interest and generate higher returns at later stage. IBC provides protection to
all the creditors and thus making a petition representative. IBC provides protection for corporate
debtors if any person initiates CIRP or liquidation proceedings fraudulently or with malicious
intent for any purpose other than for the resolution of insolvency or liquidation, AA may impose
penalty.55

However, the prominent obstacle for NCLT is adhering to this time bound law. NCLT has In
addition, lack of infrastructure and certain procedural inefficiencies. The period of 180 plus 90
days has been breached in many cases. This has resulted in lenders losing interest income.
Hence, the prime objective of ‘time bound’ CIRP has gone into toss. The IBC’s relevancy will be
in question, if this is not rectified. The NCLT also has to be wary of frivolous applications and
reject a prima facie case of harassment of the debtor.

Some issues are raised before the courts. To illustrate, the AA shall provide a corporate applicant
to rectify the defect in the application within seven days. 56 In Surendra Trading Case57 while
interpreting proviso to SS. 7(5), 9 and 10(4),58 the Supreme Court held that rectifying the defects
in an application within seven days was directory and not mandatory. When such an application

53
Arcelormittal India Pvt. Ltd, v Satish Kumar Gupta & others, 2018 Indlaw SC 919
54
“Some of the big 12 companies such as Bhushan Power and Steel Ltd. and Essar Steel India Ltd., in which
realization is expected to be around Rs. 70,000 crore”, Statement of the Finance Minister, Sri, Arun Jaitley made to
commemorate two years of IBC, See https://www.thehindu.com/business/Economy/70000-cr-recovery-likely-by-
march-from-12-big-ibc-cases/article25902892.ece. last visited 17/02/2019
55
Sec. 65 - Which shall not be less than Rs. one lakh, but may extend to Rs. one crore
56
See SS. 7(5), 9 and 10(4)
57
Surendra Trading Co. v Juggilal Kamlapat Jute Mills Co. Ltd. & others, 2017 (11) SCALE 634
58
Makes provision to remove defects on an application filed before NCLT
8
comes for admission or order before NCLT, it may find that such a case is bonafide, only then it
would entertain the application on merits. However, if the objections are not removed within
seven days, without sufficient cause, the AA shall have the right to dismiss the application. In
Macquarie Bank case,59 the Supreme Court held that the section 9(3)(c),60 requirement for an OC
to provide a certificate from a financial institution is only directory and not mandatory. The court
also held that a demand notice of an unpaid operational debt can be issued by a lawyer on behalf
of the OC.61

In addition, IBC provides for a moratorium 62 on all pending litigation. IBC did not provide for
applicability of moratorium to a guarantor of the CD. There was a claim from guarantor, to
extend the benefit of moratorium provision.63 In SBI v V. Ramakrishnan,64 the Supreme Court
held that the statutory moratorium period provided for CD’s facing insolvency proceedings will
not apply to personal guarantors affecting many promoters and directors. These promoters and
directors are personal guarantors of corporate loans, which are the subject of insolvency
resolution. Hence, to recover the bad debts, guarantor’s property may be used. The 2018
amendment states that the moratorium provision shall not apply to guarantors. AA shall declare
moratorium, which is not applicable in case of a guarantee to a corporate debtor.65

Disqualified in bidding for the insolvent corporate debtor


The IBC has redefined the entities who stand disqualified in bidding for the insolvent corporate
debtor.66 IBC (Amendment) Act, 2017 added section 29A, wherein it disqualifies certain persons
to be resolution applicant.67 The section disqualifies a person declared as willful defaulter by RBI
59
Macquarie Bank Ltd. v Shilpi Cable Technologies Ltd., 2017 Indlaw SC 1111
60
OC shall with - Application furnish - (c) Copy of the certificate from FI’s maintaining accounts of OC confirming
that there is no payment of an unpaid OD by CD;
61
Notice sent on behalf of an operational creditor by a lawyer would be in order.
62
legal proceedings be stayed/new proceedings be prohibited; Assets prohibited from being transferred/encumbered;
no enforcement of security interest; no recovery of the property by owner/lessor; continue supply of essential goods
and services
63
Sec. 14 - On insolvency commencement date, AA shall by order declare moratorium
64
State Bank of India v V. Ramakrishnan and another, 2018 Indlaw SC 685
65
See.2nd Amendment to IBC, 2018
66
See IBC (Amendment) Ordinance 2018 of 6 June 2018 (Ordinance) and Sec. 29A, IBC (Amendment) Act, 2017,
Persons not eligible to be resolution applicant
67
Persons not eligible to be resolution applicant - A person shall not be eligible to submit a resolution plan, if such
person, or any other person acting jointly or in concert… (b) is a wilful defaulter in accordance with the guidelines
of the RBI issued under the Banking Regulation Act, 1949; (e) is disqualified to act as a director under the
Companies Act, 2013; (f) is prohibited by the Securities and Exchange Board of India from trading in securities or
accessing the securities markets;
9
or is prohibited from trading by the Securities and Exchange Board of India (SEBI) to bid for an
insolvent company. Conversely, the Companies Act does not disqualify the director. 68 In fact, the
interpretation of IBC along with the Companies Act should have provided consistency. Because
of this inconsistency, IBC disqualifies a person to propose a resolution plan on one hand but not
disqualified to become a director of a solvent company under the Companies Act, 2013. The
possibility of harmonious construction is difficult. Hence, IBC has created a complex
disqualification for companies.69 In this regard, the Companies Act may require amendment for
making a person disqualify and undesirable person and wilful defaulter to become the director
and permit either directly or indirectly control the company. IBC provides for a broader meaning
of ‘related party’. It covers the related party and relative of individual and promoters’ leading up
to fourth generation. Hence, widened the scope of persons who can bid the stressed business. 70
This definition may lead to further litigation.
71
The Supreme Court in Arcelormittal case held that section 29A is a see-through provision, to
arrive at persons who are in “control”, whether jointly or in concert with other persons. The
Court held

“any person who wishes to submit a resolution plan, if he or it does so acting


jointly, or in concert with other persons, which person or other persons happen to
either manage or control or be promoters of a CD, who is classified as a NPA and
whose debts have not been paid off for a period of at least one year before
commencement of the CIRP, becomes ineligible to submit a resolution plan. Any
person who wishes to submit a resolution plan acting jointly or in concert with
other persons, any of whom may either manage, control or be a promoter of a
corporate debtor classified as a NPA, must first pay off the debt of the said CD
classified as a NPA in order to become eligible under Section 29A(c).”

A significant disadvantage exist, when there is a single bidder in a CIRP. The value approved by
the CoC may be much lesser than what the real value. In such cases, CD is bound to be
dissatisfied. In few cases, the lenders may disapprove a single bidder’s resolution plans. Hence,
when the bid value is less than the liquidation value, creditors tend to move CD’s towards
liquidation. The FC’s may also fail to gain as liquidation process is time consuming and by the

68
See Section 164 of the Companies Act, 2013
69
See Section 29A, IBC, 2016
70
S. 5(24), IBC, 2016
71
Arcelormittal India Pvt. Ltd, v Satish Kumar Gupta & others, 2018 Indlaw SC 919
10
time, the amount is realized the value might have eroded. 72 In contrast, IBC in view of promoting
maximization of the value of assets do not restrict the number of bid for offering a resolution
plan. However, this may hamper the time bound CIRP and ultimately overstepping the mandate
of IBC. The maximum time of calling for rebidding and revision of bids may be permitted. This
not only increases the time for resolution plan but also uncertainty within the lenders and the
corporate applicant. In Tata Steel case, the court observed it would not be a disqualification for
having competitive resolution plan and held: “consideration of a resolution plan of another
competitor would advance the object of the Code in maximization of the assets of CD and may
provide better solution in restructuring the stressed assets”.73

The IBC has already seen certain amendments to facilitate the ever-changing economic
environment. For e.g. the homebuyers are treated on par with financial creditors and hence, may
reach the bankruptcy court in case of default.74 This change has equated the homebuyers with
secured creditors, thus far treated outside the insolvency law.75 They can represent in CoC and
provides an opportunity to receive repayment of the investments. IBC under this route would
lead to a negative impact for the secured creditor. They would strategically stay outside the
insolvency law and attempt to recover with the available collateral taking away the collective
action as it may increase the interest rates. This leaves the other secured and unsecured to rethink
on their strategy. The unsecured creditor may be in a wrong position at this stage. The objective
of IBC of “reducing the cost of borrowing” is defeated.

The Companies Act, 2013 provides preferential payment in case of liquidation. Similarly, the
IBC has also provided for payment towards FC’s and OC’s. However, the fact of the matter is, it
depends on the assets remaining with the debtor. Under IBC also the secured creditors has a
preference over the unsecured creditors. At the time of preparing the resolution plan, if the value

72
The Law shall put in place a where decision-making is made with at least one bid is proposed and perceived value
requires certain steps to increase the asset value.
73
Tata Steel Ltd v Liberty House Group Pte. Ltd. & others, 2019 Indlaw NCLAT 12
74
Homebuyers as financial creditor under the code now have the right to invoke Sec. 7, IBC against the defaulting
developer. The home buyer is a consumer and the remedies available exists other laws including the Real Estate
(Regulation and Development) Act, 2016. Sec. 18, RERA gives the allottees the right to demand - refund of the
entire amount paid with interest and interest be claimed for any delayed possession. Instead, the insurance law may
provide a remedy.
75 nd
2 Amendment 2018, In Jaypee Group - amount owed to financial creditors was far less than owed to the home
buyers
11
of the assets remaining is not sufficient to repay even FC’s, then the position of OC’s does not
seem to be better. This is a testing time for the NCLT and we have to wait to see what is in store
for OC’s. IBC makes provision that the dissenting creditors should be paid and the creditors who
agreed for the resolution plan remains to be paid. In fact, the dissenting creditor are more secured
than the acquainting creditor. Hence, the creditor may move strategically than for making the
resolution plan workable. Amount due to OCs under a resolution plan are paid in priority over
FCs, putting OC in safe zone.

The insolvency process in ‘group companies’ has to be set in place. In law, holding and
subsidiary companies are separate legal entities. Hence, if the holding company is the corporate
debtor, the subsidiary companies may not be liable. However, the expectation would be for a
combined resolution plan, to maximize the value of the assets, The Supreme Court held that the
corporate veil can be lifted to ascertain the actual beneficiaries behind the smokescreen. 76 The
CD shall also have clarity of the contingent liabilities like pending litigation, tax or statutory
dues, employee issues and liabilities and other commercial dispute, which may crop up. CD shall
make the risk assessment of such liabilities and determine the existing or current obligation.

The other challenges for restructuring of CD may be:


a) IBC shall align with other statutes. The resolution applicant may not be entitled to
exemptions on taking over the management of CD. For e.g. the market regulator
SEBI has exempted companies under IBC from adhering to prescribed delisting
norms with certain riders.
b) Creditor’s indecisiveness and non-cooperation of the promoters.
c) Whether ‘regulatory dues’ will form part of operational debt or financial debt
d) The application of the Limitation Act to the proceedings under IBC. Section 238A
provides that the provisions of the Limitation Act, 1963 will, as far as may be,
apply to the proceedings or appeals before the NCLT and NCLAT.77
e) MSME promoters can bid for their enterprises, which are undergoing CIRP,
provided they are not willful defaulters78

76
Arcelormittal India Pvt. Ltd, v Satish Kumar Gupta & others, 2018 Indlaw SC 919, SC lifted corporate veil to
ascertain the actual beneficiaries behind the smokescreen created by complex maze of companies and trusts.
77
See M/s Speculum Plast Pvt Ltd v PTC Techno Pvt Ltd, Co. Appeal (AT) (Insolvency) No. 47 of 2017; Sanjay
Bagrodia v Sathyam Green Power Pvt. Ltd., 2017 Indlaw NCLAT 200; Ellora Paper Mills Ltd. and another v
Ajithnath Steels Pvt. Ltd., 2017 Indlaw NCLAT 199; See Sec. 238A, IBC, 2016, which has been inserted in 2018
which applies to proceedings under the NCLT and NCLAT.
78 nd
2 Amendment, 2018
12
f) Non-recognition of Indian laws in overseas jurisdictions, and vice-versa, has
created certain challenges.79 It involves complex cases, multiple proceedings,
subsidiaries, affiliated entities, assets, operations, and creditors in nations80
g) Cross border insolvency has gained prominence because of the flow of foreign
direct investment. The UNCITRAL Model Law of Cross Border Insolvency,
1997, provides for a comprehensive framework. The Insolvency Law Committee
recommended for its adoption.81 It has to ensure that there is no inconsistency
between the domestic insolvency and international law.82 However, there are no
adequate provisions to effectively deal with all kinds of default.83

Conclusion:

The insolvency resolution success depends on the quality of legal system in a country. The
creditor’s recovery rate under the insolvency process decides the quality of the economic system.
The measure is also to check whether internationally accepted principles are in place as to
creditor’s right and the process to recover. The economic and legal systems are better, when the
regulations provide for the “rescue of a viable corporate debtor” is suitably provided and survival
of such companies are given primacy. However, the law may not assist a loss making and
unproductive enterprise burdening the economy and allow the market exit. The balancing act is
has to be made by the insolvency and bankruptcy law. The continuation of business of the debtor
during the insolvency proceedings is a positive step. In addition, the “ease of getting credit” is
also the relevant factor to recognize an economy of having a sound insolvency law.84

The IBC is undergoing a testing time and the biggest challenges are yet to be faced. The cases
filed under IBC against big CD’s and the results are to be testified and analyzed. The evolution
of IBC is now depending on the development of jurisprudence by the NCLT and appellate courts.
79
It also leads to uncertainty amongst foreign investors on recovery procedures. Another major drawback is bilateral
treaties, which result in non uniform approaches to a resolution process
80
Look Chan Ho, “ANTI-SUIT INJUNCTIONS IN CROSS-BORDER INSOLVENCY: A RESTATEMENT”, The
International and Comparative Law Quarterly, Vol. 52, No. 3, https://www.jstor.org/stable/3663333, last visited
December 6, 2018
81 nd
2 Report, October 16, 2018
82
https://ibbi.gov.in/uploads/publication/QUARTERLY_NEWSLETTER_FOR_OCT_DEC_2019.pdf, Last visited
February 17, 2019
83
SS 234 & 235, IBC, Cross border insolvency issues gets triggered under following circumstances: where
creditors of an Indian debtor wish to enforce their rights over the assets of an Indian debtor, which are located
overseas; where the creditors of a foreign debtor wish to enforce their rights over the assets of that foreign debtor in
India; and where Indian creditors to a foreign debtor, wish to enforce their rights over the assets of that foreign
debtor in a foreign jurisdiction. Applicability of The Rule in Gibbs (The scope of this paper do not entitle the author
to further elaborate)
84
The World Bank Report, 2019, India has improved in the rank for parameter in “getting credit” to 22 nd Rank from
29th rank in 2018.
13
The challenges may be like, the transfer of assets and the operation of the debtors business;
expected timelines to close the allocation process of the assets; sector-specific concerns; bidding
interest in certain types of assets are uncertain wherein lenders may still keep it outside IBC
process. The IBC has made positive impact on not only on the recovery process for FC and OC,
but has provided a rescue for a CD. The business may fail for various reasons and providing
second chance provides stimulus to the economy, employee’s rights and avoiding a banks NPA.
However, further steps of harmonious dealing with the other regulatory approvals will make the
working of IBC in the desired line. The increase of NCLT benches and its strength of members to
the Bench will make time bound CIRP work effectively. The NCLT has to take cautious
decisions on fairness of the decision-making rather than on commercial aspects allowing the
“Best Business Management Test” to be in the hands of the corporate debtor.

14

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