Changes that are needed in IBC 2016 with reference to Covid-19 Pandemic

Introduction

The insolvency and Bankruptcy code of 2016 is the single law which deals with the insolvency laws in India. Before 2016 the cases regarding the insolvency and bankruptcy (IB) was solved with the help of various laws. The Presidential Towns Insolvency Act, 1909 (for presidential towns like Bombay, Madras, Culcatta) and the Provincial Insolvency Act, 1920 (for the rest of the country) were used for the insolvency related issues, this laws were age old which not even amended after enacting. So there is need of a single law that will deal with the IB issues. So in 2016 the Insolvency and Bankruptcy law was enacted but due to certain loopholes in the code it get amended in 2017, 2019. But even after this amendments there are certain loopholes which have to consider and which will affect after the end of this pandemic. The loopholes have taken into consideration are as follow:

1. Limited benches of National Company Law Tribunal:

At present there are a total of 11 benches of NCLT[1] in different parts of India. It includes the total of 48 members[2]. Keeping in mind the situation which will occur after the effect of the pandemic there is a high need of more benches of NCLT. As said by the finance minister that if the situation continues till 30/4/2020, then there will be a suspension of Sections 7, 9 and 10 of the Code for the period of 6 months. If this suspension takes place then there will be a higher number of applications after the end of the 6 months. So, there is a need of more benches and members for better management of the cases.

2. Market for secondary assets:

India does not have an active market for the secondary assets. This is limiting the ability of the possession of secured assets in case of the insolvency. An active secondary market and funding from banks could faster entrepreneurial interest helping faster redeployment of the assets and ensure better price discovery. So, the flexible secondary market is important in India.

3. Number of Information Utilities:

The information utility is an authorized to carry out a business as IU under the Code[3]. The certificate of registration is also provided for the same. The main work of the IU is to provide the high-quality information about debts and default. It plays an important role as it stores a financial information of register users. It plays such crucial role in insolvency process as it will act as an evidence in bankruptcy process. But currently only one IU is registered with the IBBI and that is National E-Governance Service Limited (NSeL). In the absence of the IUs it is not possible to form the creditors committee. Delay in formation of creditors committee will lead to delay in further process due to which the time span of 270 days may extend further as being a single IU there is a huge load on NSeL to provide the services. So, after this pandemic gets over, there will a higher number of applications for insolvency resolution. As IU can be used as an evidence so its duty of NSeL to provide the quality information to all. Being a single IU, the time taken by it to form a creditors committee will be high which may cause delay further in process. So, taking into consideration the situation going to occur after the COVID-19 pandemic, there is a high need of more IUs.

4. Creditors classification and prioritizing their claims:

“Once the liquidation is done then the assets shall be distributed in order of priority[4]”. The Section 53 of the Code talks about the same. But there is limited clarity about the creditor’s classification on basis of the charge distribution. Also, the section only talks about the liquidation process so there is need of more clarity regarding the CIRP process. Even though the minimum threshold ratio is raised to Rs. One Crore, still financial creditors are able to file a CIRP application jointly. So, the default amount should be distributed according to default occur to them. So, there is need of clarity upon the prioritizing the claims of creditors under CIRP process.

5. Ability of financial creditors to file a joint application:

The Section 7 of the Code talks about financial creditors who can file an application against the defaulter for recover of debt. Under this section the minimum threshold limit to file an application is Rs. One Lakh which can be extend till Rs. One Crore by notification by the central government[5]. But the ode itself allows the financial creditors to file a combined application so even if the threshold ratio is raised then also the financial creditors are allowed to file an application. So, in time of emergency like today (COVID-19), suspension of this section, is the last option to stop the filing of CIRP application. Keeping in mind such situation there is need of improvisation in this section of the Code as: “once the central government increases the threshold limit from 1 lakh to 1 crore then the right of financial creditor to file an application jointly shall be suspended”.

6. Individual Insolvency Processes:

The CIRP application can be filed not only against the company but also against an individual. For filing CIRP application against an individual or a firm the minimum threshold limit is Rs. One Thousand and this can be increased up to Rs. One lakh by notification of the central government but not more than this[6]. So, once the central government declares the minimum threshold for CIRP application against company raised up to Rs. One Crore then there is high possibility that the CIRP application can be filed against the individual person. The threshold limit of Rs. One Thousand is so low that the CIRP application can easily be filed.  So, keeping in mind the situation going to be occur either by notification central government should raise this threshold limit up to Rs. One Lakh, and also there a high need that this minimum threshold limit should be raised between Rs. Twenty Thousand-Rs. Fifty Thousand. The same suggestion is provided in round table conference held at Mumbai and Calcutta[7]. Also, matters up to Rs. Ten Thousand should first go under mediation[8].

7. Section 29A:

Section 29A of the IBC, which prevents the present management and promoters from proposing a resolution plan in insolvency resolution proceedings. This section will unfairly prevent existing promoters who may have defaulted due to the conditions caused by Covid-19, from retaining control of the debtor while taking benefit of the formal resolution mechanism offered by the IBC [9]. Further, given the pressure on the economy due to the pandemic, it would mean that in many cases, other persons in the market may not be willing to propose a resolution plan for companies in the near term. Restricting the applicability of Section 29A, potentially only to wilful defaulters, would go a long way towards ensuring that the distress of firms will get resolved in an orderly and efficient manner, and not impose burdens on promoters who are victims of the economic downturn.[10]

8. Committee of Creditors – (Monopoly of Financial Creditors???)[11]

Section 21(2) provides that the committee of creditors shall consist solely of financial creditors. The Code also lays down that each creditor shall vote in accordance with voting share assigned and the resolution plan can be implemented only if it has been approved by 75% of creditors.

Further, only operational creditors having aggregate dues of at least 10% of the total debt shall be given the notice of the meeting[12]. It is to be noted that, an operational creditor (irrespective of the claim size) is not allowed to be a member of the committee. Thus, IBC limits the right of an operational creditor to only attending the meeting of CoC subject to the above mentioned threshold.

It is to be noted that a resolution plan can be proposed by any category of creditors. However, it must be stressed that the same needs to be approved by the committee which is controlled by financial creditors. Therefore, unlike financial creditors, the rights conferred on the operational creditors are subject to certain conditions which resultantly gives more weightage to the concerns of financial creditors by giving them total monopoly over the entire resolution process. So it is easy for the financial creditor to recover debt easy as compare to operational one.

9. Financial Creditors V.S Operational Creditors

Section 7 of IBC provides that a financial creditor can directly approach NCLT and the only condition that needs to be satisfied is that the creditor must show that the corporate debtor has defaulted in the payment of a due debt.

On the other hand, Section 8 of IBC lays down that for an operational creditor to succeed in initiating the resolution process, it must satisfy the adjudicating authority by demonstrating

Therefore, if a debt is not admitted by the corporate debtor and is disputed within the meaning of Section 5(6) or Section 8(2), it is a sufficient ground to reject the insolvency application made by an operational creditor. On the other hand, a financial creditor is allowed to initiate the resolution process even in case the debt is disputed by the corporate debtor.

Conclusion

India is currently suffering from Covid-19 pandemic so badly. Even the recent data says that the cases in India has crossed the number compared to the China. Also due to this pandemic the factories and working units are closed due to the lockdown and as result of which the economic situation of the companies and partnership businesses is getting worst. So keeping in mind the situation going to be occur after the pandemic there are some changes which are needed in Insolvency and Bankruptcy code 2016. Such as, position of financial creditor to file CIRP application, flexible secondary market, judicial infrastructure, change in the structure of committee of creditors which will give equal rights to both operational and the financial creditors etc. The number of Information Utilities (IU) is a main problem as even after the enactment of Code is going to complete 5 years in 2020. Only a single information utility is registered with IBBI. So, for effective implementation of the Code, there is need of change in Code for better economic condition of country during and after the COVID-19 pandemic.

 

 

 

[1] https://nclt.gov.in/content/national-company-law-tribunal-benches (lastly accessed on 14/04/2020 at 19:15 PM)

[2] https://nclt.gov.in/profile-of-member (lastly accessed on 14/04/2020 at 19:20 PM).

[3] Section 210 of the Insolvency and Bankruptcy Code, 2016.

[4] Section 53 of the Insolvency and Bankruptcy Code, 2016.

[5]Section 4 of the Insolvency and Bankruptcy Code, 2016

[6] Section 78 of the Insolvency and Bankruptcy Code,2016.

[7] https://ibbi.gov.in/Agenda301122017.pdf (lastly accessed on 15/04/2020 at 00.34 AM).

[8] Ibid.

[9]https://www.theweek.in/news/biz-tech/2020/04/09/covid-19-lockdown-triggers-amendments-to-insolvency-and-bankruptcy-code.html (lastly accessed on 16/04/2020 at 14:15 PM).

[10] Ibid.

[11] https://taxguru.in/corporate-law/critical-issues-insolvency-bankruptcy-code-2016.html (lastly accessed on 16/05/2020).

[12] Section 24(c)(3) of Insolvency and Bankruptcy code 2016.

Author: Amey Jadhav,
Maharashtra National Law University, Aurangabad