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Legal Chronicle

January 2025

Legal Chronicle - Navigating the Corporate Insolvency Resolution Under IBC - 2016

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Dear Reader,

The Legal Department at UJA is delighted to impart certain legal knowledge as construed under the Legal Chronicle to keep the readers aware of the recent updates and developments that revolve around various aspects of the law. Our ultimate goal is to enable our readers to develop a sense of familiarity with the complexities of Indian as well as international law.

In this edition of Legal Chronicle, we navigate the Corporate Insolvency Resolution Process Under IBC, 2016. We will also examine the legal framework of IBC, the benefits of CIRP, and key legal precedents that highlight the significance of having such legislation.

We hope that this edition creates a sense of enthusiasm for our readers and successfully delivers the plethora of legal knowledge as intended. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at legal@uja.in

Introduction

The CIRP is mandatorily structured as a recovery mechanism, and this can be initiated by a financial creditor, an operational creditor, and a corporate debtor as well, wherein a corporate debtor can file an application of insolvency against itself if it foresees that its business is getting affected. A corporate debtor also interprets for a company or a Limited Liability Partnership which owes a debt to their creditors. The IBC lays down various provisions that are related to insolvency or bankruptcy. The benefit of having such a process under IBC is that, if there is a default committed by a corporate debtor, then the CIRP is initiated by filling in an application. This is filed before the Adjudicating Authority for the same. Hence, this ensures that any default that is committed is resolved over a reasonable period. 

Evolution of Insolvency and Bankruptcy Laws in India

Before pre-independence, India was facing a huge influence of the colonial rule associated with the British. The country had a framework of bankruptcy laws that mirrored the common law system. Hence, they were not suitable for the socio-economic conditions of India. The post-independence period for India was significantly better, as the country faced various changes. However, there were still many issues with the insolvency and bankruptcy laws, as they were insufficient and outdated. This triggered the need to have adequate legislation that could bring about a comprehensive reform and that could specifically regulate these aspects. The laws that were enacted are as follows:

  1. Indian Insolvency Act, 1848
  2. The Bankruptcy Act, 1869
  3. The Indian Companies Act, 1913
  4. The Companies Act, 1956
  5. The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
  6. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act)
  7. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
  8. The Companies (Amendment) Act, 2013
  9. The Insolvency and Bankruptcy Code, 2016 (IBC)

Therefore, IBC, 2016 stipulated to be a uniform law, wherein all the previous legislations and enactments that are concerned with insolvency and bankruptcy were to be taken under the frame of a single legislation. Further, the Code (IBC, 2016) abrogated a few laws and even modified various regulations that dealt with insolvency and bankruptcy. The Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 had been abrogated. Later, the Companies Act of 2013, the Limited Liability Partnership Act of 2008, the SARFAESI Act of 2002, the RDDBFI Act of 1993, and the Indian Partnership Act of 1932 were also modified with the passing of the IBC, 2016.

The main objective of IBC, 2016, is to solve and settle any issue; further, it also aims to balance the chaos that exists between a creditor and a debtor. The Code tries to ensure that all concerns are resolved by providing the below provisions:

  1. Insolvency Professional and Insolvency Resolution Process:
    An Insolvency Professional can be determined as a qualified individual who is responsible for managing the insolvency and bankruptcy resolution process. Further, it even plays an important role in the liquidation process of a distressed company. In addition, the Insolvency Resolution Process, also known as the “Corporate Insolvency Resolution Process” (CIRP), is a procedure that is structured to resolve corporate insolvency. The whole process lasts for 180 days, and you can get an extension of 90 days as well.
  1. Adjudicating Authority:
    The adjudicating body is basically responsible for overseeing the whole process of insolvency and bankruptcy. Wherein, it ensures that all legal procedures are done accordingly over matters of corporate and individual insolvencies. Therefore, the main adjudicating body under the IBC is the National Company Law Tribunal (NCLT).
  1. Resolution Plan for Corporate Debtors:
    This is a proposal brought ahead by the resolution applicant that can revive or also restructure a particular corporate debtor who is facing insolvency. Hence, this plan aims to give a solution related to the financial distress of a debtor. The resolution provides a restructuring proposal. Further, an approval of the Committee of Creditors also must be taken for a resolution plan as well. Lastly, the CIRP provides a timeframe that helps the plan to be approved and completed.
  1. Moratorium Period:
    This period can be referred to as a temporary suspension for some legal actions that can take place against the corporate debtor during the Corporate Insolvency Resolution Process (CIRP). In addition, there is no enforcement of security interest, termination of contracts, or transfer of assets that can take place against a corporate debtor.
  1. Cross-Border Insolvency:
    IBC has provided two provisions that completely assist with the cross-border insolvency disputes, and they have been defined under Section 234 and Section 235 of the Code. Hence, there is an adequate framework that has been provided to deal with these situations.
  1. Fast Track Insolvency Resolution Process:
    This is a fast-track version of the CIRP, which has been designed to resolve smaller insolvency cases. The process is defined under Section 56 of the Code, wherein the timeframe of this process is even shorter. Therefore, the whole process is supposed to be over in under 90 days, along with a one-time extension that can be given of 45 days. Hence, this process provides a quicker and more effective resolution for businesses.
  1. Liquidation Process:
    This can be considered as the final process, which is to resolve the financial distress of a corporate debtor, especially when the approval of a resolution plan fails. Further, this process is also used when an adequate solution is not found. In addition, the process also ensures that a company goes through an orderly closure, along with its distribution of all assets to the creditors.

Understanding CIRP

  1. Pre-Admission Process:
    This is the stage where an application can be filed before the NCLT and later then initiate the process of CIRP. This is a process that mainly focuses on the identification of all defaults that have taken place and later focuses on the filing of the insolvency application.
  2. Post Admission Process:
    After the NCLT has admitted the application of the CIRP, the resolution process is initiated, wherein the main objective is to revive a company by using the resolution plan. NCLT therefore has the discretion to accept or reject an application. Also, the whole process must be completed in under 180 days and an extension of 90 days can be given. In addition, only a single extension can be made eligible by the NCLT.
  3. Liquidation Stage:
    This is the stage where the resolution plan is not approved, or a particular company cannot be revived. So, the CIRP proceeds ahead with the liquidation stage wherein the assets of the company are sold so that the creditors can be paid off.

Benefits of CIRP

  1. Time-Bound Resolution:
    The procedure involved in the CIRP must be completed within 180 days, or it can be done under the 90-day extended period. Furthermore, it must be completed within 330 days. This therefore helps with the avoidance of prolonged uncertainty, and it even provides an adequate timeline for decision-making that must be done. Hence, it is beneficial for both the creditor and even the distressed company as well.
  1. Protection from Creditors:
    At the moment, there is the initiation of the CIRP; there is a moratorium that is imposed, which mainly protects a company from any kind of legal action or suits by the creditors. Therefore, it allows the corporate debtor a fresh opportunity wherein the whole focus can be on resolving their financial distress. Further, this can also be done without there being any pressure from constant creditor actions.
  1. Enhanced Transparency:
    CIRP under IBC promotes proper transparency towards the insolvency resolution, wherein all the steps and decisions are always overseen by the NCLT, also by the CoC, and the Resolution Professional as well. This process also helps in providing legal clarity over the timelines and rights of stakeholders, and it even helps to minimize all uncertainties.
  1. Maximum Value for Creditors:
    This process has its complete focus on maximizing the value of all the assets of a corporate debtor. The process has been designed to make sure that creditors are able to recover the highest amount possible from a distressed company. Hence, this can be done by a resolution plan or by liquidation as well.
  1. Debt Restructuring and Financial Relief:
    This process can facilitate debt restructuring by giving the distressed company an adequate opportunity. This is where they can renegotiate their debts, extend the payment timelines, and reduce all the outstanding liabilities. This process further eliminates the financial burden of the company.

An Important Precedent for Interpreting the CIRP Process Under IBC,2016

Case:
Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Vs. Satish Kumar Gupta & Ors [2019] 16 S.C.R. 275

Petitioner:
Committee of Creditors of Essar Steel India Limited Through Authorised Signatory

Respondent:
Satish Kumar Gupta & Ors.

Date:
15 November 2019

Brief Facts:
This case was related to the validity of the Resolution Plan that was submitted by ArcelorMittal which was for Essar Steel India Ltd. Further, the role of the Committee of Creditors was also questioned as to whether they can approve or reject plans. It also examined the decision of the CoCs and whether it was final.

Issue:
The Committee of Creditors had accepted the resolution plan of ArcelorMittal, wherein the proposed payout had to be done towards the financial creditors, and a minimal payment for the operational creditors. This decision of the CoC was challenged by the operational creditors before the NCLAT and was approved. Hence, the CoC claimed the decision to modify the distribution of amounts by the NCLAT was incorrect.

Decision:
The Hon’ble Supreme Court held that the final say will be of the Committee of Creditors (CoC), where they can approve and reject a resolution plan. The court further stated that the CoC has complete discretion wherein they can decide the best resolution plan. But the plan needs to meet all the legal criteria. Hence, the court ruled that the commercial decisions of the CoC cannot be override unless there are any violations of the statutory provisions.

This case has therefore reinforced the whole importance of the CoC role under the CIRP. Further, the court even underscored that all decisions related to the future of a corporate debtor have to be left with the business judgment of the CoC. Also, it was even confirmed that the commercial wisdom of the CoC will never be questioned, but only if it goes against the law or with the principles of fairness and justice.

Conclusion

In conclusion, the Corporate Insolvency Resolution Process under IBC, 2016 completely stands as a pillar of India’s financial ecosystem and corporate governance. Further, it even provides for a time-bound, transparent and effective mechanism that can resolve corporate insolvency. It also balances the interests of the creditors and debtors as well. This is done by providing distressed companies with an approach to restructuring and reviving all operations. Hence CIRP not only helps to preserve businesses, but it even maximizes the asset value for all creditors. This process also fosters ahead accountability and even enhances financial discipline along with market confidence as well. CIRP hence has proven to be an important tool for recovery of a business or even economic stability as well. It ensures that the insolvency cases are handled adequately, wherein it can benefit all stakeholders.

References

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