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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
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.
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 However, there were still many issues with the insolvency and bankruptcy laws, as they were insufficient and outdated.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:
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:
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.
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.
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