CORPORATE RESTRUCTURING AND INSOLVENCY RESOLUTION: ANALYSIS OF THE INSOLVENCY AND BANKRUPTCY CODE (IBC) IN INDIA

This article is written by Chelcie Agrawal of 5^th Year of BBALLB of UPES, Dehradun, an intern under Legal Vidhiya

ABSTRACT:

The Insolvency and Bankruptcy Code (IBC) enacted in 2016 marked a significant turning point in India’s corporate landscape, providing a comprehensive framework for the resolution of insolvency and financial distress among businesses. The Code was passed with the goal of regulating insolvency, liquidation, or both-related actions. A corporate entity can modify or reorganize its structure with the help of corporate restructuring. Such reorganization is required when an entity is going through a financial crisis. By improving a company’s performance, the corporate restructuring process helps in the eradication and repair of all financial crises. The purpose of the Code is to rescue such sinking businesses or entities that are making losses and are unable to rise up by themselves. Before the enactment of IBC, there were minimal chances of revival of such entities or companies becoming insolvent.   Thus the code was introduced with an aim to determine whether restructuring a company or entity can bring back the company or entity. In order to enable those businesses that have a chance of revival to endure the difficult periods when they are falling apart. Thus this research provides a concise overview to analyze the impact of IBC on corporate restructuring and insolvency resolution in India.

The present article will discuss about the history of insolvency laws in India, relation between corporate restructuring and insolvency resolution, the key provisions and mechanisms of the IBC and their effectiveness in addressing the challenges associated with corporate insolvency, also examines and the legal and regulatory developments that have shaped the IBC’s evolution, including landmark court judgments and legislative amendments. Thus this article will provide an overall analysis of the Insolvency and Bankruptcy Code in India.

Keywords: Corporate restructuring, insolvency resolution, Company, insolvency and bankruptcy.

INTRODUCTION:

“In order to create a strong framework for corporate bankruptcy resolution, debt collection, and the revival of distressed businesses, India established a comprehensive piece of legislation in 2016 called as the Insolvency and Bankruptcy Code (IBC). Its main objectives are to expedite the bankruptcy resolution process, protect creditors’ rights, promote ethical business practices, and ease doing business in India.”[1]In general, the definitions of insolvency and bankruptcy are extremely similar. The term “insolvency” refers to situations where an organization cannot pay its own debts or is essentially unable to cover its debts with its own assets. The legal position of a person or business that is unable to pay its debts to creditors is referred to as bankruptcy, on the other hand. The entire legal process must be launched against the business in order to declare someone bankrupt. In times of a financial crisis, the restructuring process is essential. Corporate Insolvency Resolution Process, or CIRP, is the name of the restructuring process. According to this procedure, the management team of the business undertaking a restructuring process chooses a financial and legal specialist to rebuild the entire company. Such professionals seek assistance with transaction agreements and in negotiations. Altering the company’s ownership structure is another type of corporate restructuring, for example, Mergers, acquisitions, takeovers, and other similar restructuring strategies.

India has recently witnessed a rise in demand for an efficient corporate restructuring and debt recovery process as a result of an increase in stressed assets and non-performing loans in the banking industry. The delayed debt recovery and inadequate dispute resolution processes were attributed to the outdated, complicated, and time-consuming insolvency and bankruptcy legislation. This limited economic expansion, created significant challenges for debtors, and decreased investor confidence. Thus, to address these issues and modernize India’s insolvency and bankruptcy regime, the IBC was established in 2016. Specialized adjudicatory bodies, such as the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI), were established to supervise and regulate the insolvency proceedings. Additionally, existing law was consolidated and rationalized.

With the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC), India’s insolvency and bankruptcy laws have experienced a substantial overhaul. Through streamlining the resolution process for struggling businesses and individuals, this comprehensive legislation signified a fundamental shift in the nation’s strategy for addressing insolvency and bankruptcy issues.

HISTORY AND EVOLUTION

“In India, the first insolvency restructuring method to be used was the Scheme of Arrangements. The Companies Act of 1956 authorized the implementation of this technique. A hybrid mechanism known as a “scheme of arrangement” is an agreement between the firm and its members (shareholders) or creditors to repay debt or restructure the business that has been approved by a court.”[2] But due to the lengthy approval and court approval processes included in this technique, there used to be a significant delay. As a result, on August 23, 2001, RBI announced the launch of the Corporate Debt Restructuring Programme. According to these criteria, the CDR mechanism requires 75% of the creditors to approve the resolution plan before it can be implemented. It is a non-statutory mechanism, and in order to use it and restructure the business, it needs the consent of both the debtor and the creditors. When the business is experiencing financial difficulties, either internally or externally, this approach is implemented. Then, the SARFRESI Act established the idea of asset reconstruction corporations, in which the firms attempt to restructure the non-performing assets (NPA) by purchasing them for less than the debt owing to the banks.

Thus a complex web of regulations, including the Companies Act, the Sick Industrial Companies (Special Provisions) Act (SICA), SARFRESI Act, and numerous other statutes, characterized India’s prior insolvency and bankruptcy regime. These laws, often contradictory and cumbersome, failed to provide a coherent and efficient mechanism for resolving corporate insolvency. As a result, in December 2015, the Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha which came into effect in 2016. With the introduction of IBC, insolvencies may now be resolved quickly and affordably, which was formerly a time-consuming, long procedure. The goal of the code is to safeguard the interests of small investors and streamline the transactional process. It sought to achieve a balance between safeguarding creditors’ interests and assisting in the turnaround of struggling companies, so fostering economic development and stability. Thus with a defined and time-bound framework for the settlement of corporate insolvency, the IBC was created to simplify and modernize the insolvency process.

“The RBI in 2018 repealed all of the other mechanisms it had implemented, like the Strategic Debt Restructuring Programme and Corporate Debt Restructuring Programme, etc. Currently, the RBI encourages the Corporate Insolvency Resolution Process provided by the 2016 IBC code.”[3]

Corporate Restructuring and Insolvency Resolution

Corporate restructuring and insolvency resolution are related since they both aim to resolve financial problems within a firm, but using different methods and achieving different results.

Corporate restructuring typically involves internal changes within a financially distressed company to enhance its financial health and viability. This may include changes in the company’s ownership structure, management, operations, or capital structure. The ultimate aim of corporate restructuring is to improve the company’s financial position and ensure its long-term sustainability without resorting to insolvency. While, insolvency resolution tries to alleviate financial distress by either rehabilitating the business (via a resolution plan) or selling off its assets to pay off creditors. Objective of Insolvency resolution is maximizing creditor recovery while either recovering the business or closing it down in a controlled manner.

 When a business is having financial problems, the first thing that is done is frequently a corporate restructuring. To increase financial stability, it may involve actions like debt restructuring, mergers, acquisitions, divestitures, and cost-cutting initiatives. The goal is to prevent the company from becoming insolvent. The corporation may go on to the insolvency resolution stage if corporate restructuring plans are unsuccessful. During this stage, the emphasis switches to a formalized procedure under the supervision of insolvency experts, creditors, and adjudicating authorities to choose the best course of action, which may be resolution or liquidation.

Moreover, the IBC 2016 in India acknowledges how corporate restructuring and insolvency resolution are intertwined. It provides a structured process for both cases. According to the IBC, a firm may start the official insolvency resolution procedure if it is unable to manage its financial crisis through corporate restructuring. The IBC further encourages investors to submit resolution plans as a kind of corporate restructuring to save struggling companies. Also there may be cases where mix aspects of both corporate restructuring and insolvency resolution are possible. For example, as part of the firm’s rehabilitation plan, a resolution plan under the IBC may call for a change in the management or capital structure of the company. This shows how adaptable the insolvency framework is in incorporating features of business restructuring to get the greatest results for all parties involved.

Core provisions of IBC

Legal Framework:

IBC is a full code in and of itself for the purpose of resolving insolvency as well as the liquidation process, including the norms and regulations. Under IBC there is Insolvency and Bankruptcy Board of India which is responsible for overseeing the code’s implementation. In terms of the CIRP procedure, NCLT, or the National Company Law Tribunal, is the adjudicating body under the code, and NCLAT, or the National Company Law Appellate Tribunal, is the appellate authority. Banks and other financial institutions are not covered by the legislation because it is covered under another act called the SARFAESI Act of 2001.

The Insolvency ad Bankruptcy code ecosystem or the pillars of IBC includes:

1. Insolvency and Bankruptcy Board of India (IBBI): The Insolvency and Bankruptcy Code is governed by IBBI, an apex organization. It is a necessary and important institution for the CIRP Process.   It is made up of representatives from the Ministries of Finance, Corporate Affairs, and Law as well as the Reserve Bank of India. It includes creating the required infrastructure, establishing numerous rules and regulations, and accrediting information utilities (IUs) and insolvency professionals (IPs). It oversees and supervises the insolvency practitioners, agencies, and information utilities established in accordance with the Code.
2. Insolvency Professionals (IPs): IPs are qualified individuals who are registered with the IBBI and hold the licenses necessary to perform the roles of Resolution Professional, Liquidator, and Bankruptcy Trustee. A specialized category of officers is established to handle the corporate debtor’s affairs, administer and execute the resolution process, and exchange information with creditors to aid in their decision-making. Within 14 days of the insolvency start date, the adjudicating body must designate a professional for interim resolution.

Important Functions and responsibilities of Insolvency Professional’s:

• To publish a notification about the bankruptcy proceedings in a newspaper in both English and the local language.
• To oversee business operations as a going concern.
• To gather data on the assets, finances, and operations of a corporate debtor in order to assess its financial status.
• To gather and evaluate all claims made by creditors.
• To organize with IBBI and NCLT.
• Information Utilities: Information utilities are those professionals who collect, store, and distribute data pertaining to companies’ debt. a person who has registered with the Board as an information utility; that is, a person to whom the debtors’ creditors disclose financial information, such as debt, obligations, and default. Information utilities provide extremely accurate and reliable information, demonstrating the security of the investment. Registration of the information utilities is covered under Section 210 of the code. Sections 209 to 216 of the code deal with information utilities in addition to those sections.
• Insolvency Professional Agencies (IPAs): According to section 201 of the code, insolvency professional agents or agencies are those people, businesses, organizations, or people who have registered with the IBBI of India. These organizations carry out a test, certify these insolvency experts, and establish a code of conduct for their work. These organizations’ duties include designating the requirements for resolution professionals in such detail that the resolution professionals can rebuild the business and issuing or suspending membership to resolution professionals. Rights, benefits, and RP’s interests. Follow up on the membership and suspend or cancel it. Publication of a member list, performance information, etc.[4] At present there are three IPAs: The Indian Institute of Insolvency Professionals (ICSI) and the Institute of Cost Accountants of India (ICAI) both have insolvency professional agencies.
• Adjudicating Authorities (AA): The NCLT, which was formed in accordance with Section 408 of the Company’s Act of 2013, serves as the deciding party when a CIRP or liquidation procedure is initiated.  The residence where the debtor’s listed headquarters are located must have adequate influence on the NCLT in order to make an application to start the CIRP procedure there. Similar to this, a voluntary liquidation proceeding must be filed with the tribunal in question, which has adequate authority over the corporate person’s registered office. The NCLAT, an Appellate Tribunal, will hear appeals from such NCLT. The IBC establishes a three-tier adjudicatory mechanism, for all disputes relating to insolvency resolution and liquidation for corporate persons as well as insolvency resolution and bankruptcy for individuals and partnership firms, consisting of the:
• NCLT/ DRT
•  NCLAT/ DRAT
•   Supreme Court

The National Company Law Tribunal (NCLT) will have territorial jurisdiction over the location of the corporate person’s registered office. Any bankruptcy, liquidation, or insolvency procedures must be moved to NCLT. If any individual who feels aggrieved by NCLT decision may file an appeal with the National Company Law Appellate Tribunal (NCLAT) within 30 days of the NCLT’s ruling. The NCLAT’s decision may then be appealed to the Supreme Court within 45 days after the NCLAT’s ruling on any pending legal issues. The appeal period may be extended by 15 days if both appellate courts find that there is adequate reason. Instances involving NCLT shall not be subject to civil court jurisdiction.

Corporate Insolvency Resolution Process (CIRP)

CIRP is the procedure used to resolve a corporate debtor’s insolvency in compliance with the Code’s rules. CIRP is the procedure used to resolve a corporate debtor’s insolvency in compliance with the Code’s rules.  An instrument for recovering the money owed to creditors is the insolvency resolution procedure. When a corporate person becomes bankrupt, the code permits both the corporate person and the corporate entity’s creditors to start the restructuring process.

When a corporate debtor’s minimum default amount is INR 1 crore (INR 10 million), the code’s insolvency procedure is applicable. “The Government enhanced the minimum amount of default for starting CIRP from INR 1 lakh to INR 1 crore by announcement dated March 24, 2020.”

Who can initiate the CIRP?

In the event that any Corporate Debtor defaults, Corporate Insolvency Resolution may be started by submitting an application to the Adjudicating Authority in accordance with the procedures outlined in the Code.

CIRP may be initiated by any of the following:

• a financial creditor (FC) under Section 7,
• an operational creditor (OC) under Section 9,
• a corporate debtor’s applicant under Section 10 of the Code.

What are the consequences of initiation of CIRP?

There are basically two consequences:

• Revival of the corporate debtor or
• Liquidation

All efforts are undertaken to find a restructuring plan or a new ownership plan to address the insolvency. The company’s assets are liquidated if the attempts at resolution are unsuccessful. The code’s main goal is to resolve—that is, to restore and save the Corporate Debtor. Liquidation only happens once the CIRP fails.

CIRP process

There are mainly three stages in CIRP Process which includes:

Stage 1: Pre-admission Process (Sections 3 to 11)

A Person who is eligible to apply to NCLT to start the CIRP procedure under Section 7 as a Financial Creditor (“FC”), Section 9 as an Operational Creditor (“OC”), or Section 10 as a Corporate Debtor (“CD”).

Stage 2: Post-Admission Process (Sections 12 to 32A)

It is up to NCLT’s decision whether or not to accept an application after receiving one. If accepted NCLT will declare moratorium (Section 14), Appointment of interim resolution professional and public announcement by the Interim Resolution Professional to invite claims from creditors of the Corporate Debtor. Then there will be Constitution of committee of creditors by interim resolution professional. Then there will be appointment of final resolution professional, as the Committee of Creditors decides whether or not to nominate the IRP so chosen as the Resolution Professional (RP) at its initial meeting. Later, preparation of information memorandum and Submission of resolution plan by resolution applicant for further approval of resolution plan by committee of creditors. Then the resolution plan will be further be approved by NCLT. If NCLT approves, the resolution plan is implemented and becomes legally operative. If the NCLT does not accept the resolution plan or does not receive the resolution plan before the CIRP time expires, the Tribunal may order the liquidation of the corporate debtor.

Time limit: The entire CIRP procedure should be finished within 180 days of the admission date; NCLT will only permit one extension of that time, which is for 90 days. However, CIRP must be finished within 330 days of the insolvency beginning date, at the latest. If not, the Company would enter the liquidation procedure in accordance with Sections 33 to 54.

Stage 3: Liquidation process (Sections 33 to 54)

If the company’s resolution plan is unsuccessful, that company would enter the liquidation process.

When the default amount exceeds one crore rupees (10,000,000), as opposed to the previous threshold of one lakh rupees (1,000,000), the CIRP is triggered. Financial creditors, operational creditors, or corporate debtors submit applications before the adjudicating body, the NCLT (National Company Law Tribunal) for reimbursement of their debts.

Within 14 days of receiving an application, the NCLT issues a decision to accept or reject it, notifying the applicant to correct any defaults within 7 days of receiving the notification from the NCLT. On approval of an application in accordance with IBC Section 14, the moratorium period will begin by a Public Announcement by an Interim Resolution Professional in Form A of IBBI and the Appointment of an Interim Resolution Professional by an Adjudicating Authority.

Latest Amendments to IBC 2016

On December 31, 2019, there were around 1961 organizations going through the CIRP procedure in accordance with the code. However, because to the COVID-19 Pandemic and nationwide lockdown, it was nearly difficult for stakeholders to get involved in the process, to take part in CIRP, or simply to carry out their duties within the timeframe required by the code for the completion of CIRP. The Indian government amended many laws to safeguard them. In order to safeguard various economic sectors from the continuing epidemic, numerous relaxations were established under various legislation. Some of them are:

• On March 24, 2020, the Government of India published a notification. The minimum threshold, which was formerly 1 lakh INR, was raised to 1 crore INR The goal of this action is to reduce the number of corporate debtors, or medium and small businesses, who must file applications for the CIRP procedure since their debts range from 1 lakh to 1 crore.
• The Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulation) have a new regulation, regulation 40C, that was issued on March 29, 2020. It allowed for the exclusion of the time during which the Central Government enforced a lockdown owing to COVID-19. As long as it is subject to the provisions outlined in the code.
• A second modification to the Insolvency and Bankruptcy Board of India (Liquidation procedure) Regulation, 2016, was approved by the board. In 2020, Regulation 47A was added to the liquidation regulations. The newly added rule has the same provisions as the revised rule 40C under the CIRP Regulations. According to this legislation, any liquidation procedure must be conducted outside of the time when the nation is under lockdown.

Landmark Judgments on Corporate Restructuring

Essar steel India Ltd. V. Satish Kumar Gupta (2019)[5]

This case deals with an important issue pertaining to the code’s corporate insolvency resolution process. The Insolvency and Bankruptcy Code, 2016, was upheld as constitutional in the contested decision.

The Supreme Court ruled that tribunals cannot intervene in any commercially related decisions made by the committee of creditors, which are taken by a majority vote. Only the COC is authorised to make any decisions pertaining to creditor payments. The maximization of the company’s assets’ worth, the balancing of all shareholders’ interests, and the maintenance of the corporate debtor as a going concern throughout the CIRP are three significant constraints that must be taken into account. The court determined that operational and financial creditors are not the same and therefore not be treated identically. If this were to happen, the object of code wouldn’t be guaranteed. Additionally, the Apex Court ruled that another committee might be constituted as part of the CIRP process to perform certain tasks like negotiating with applicants or other administrative tasks. However, the court also stipulated that the subcommittee might only carry out those tasks that the COC might assign or authorize.

 The Supreme Court also ruled that the time limit specified by the code may be extended in extraordinary circumstances. It is not required to finish the entire CIRP within 330 days of the beginning date. As a result, the Supreme Court invalidated the word “mandatorily” in section 4 of the 2019 Amendment Act.

Excel Metal Processors Limited V. Benteler Trading International GMBH and Anr.[6]

The NCLT has the authority to decide on problems that are pending under the code, according to the NCLAT’s ruling in the current instance. And because NCLT has already been given such authority, the parties cannot include clauses in their agreement that would limit NCLT’s jurisdiction by giving it solely to courts outside of India. Parties are not permitted to take advantage of the terms and circumstances of their contract. The appellants referring their agreement, contended that it contains a clause stating that in the event of a dispute arising from the agreement, only the Court of Germany shall have jurisdiction and no action may be brought in India.

In this case, NCLAT cited an earlier decision in 2018, known as the Binani Industries case. The NCLAT ruled that the resolution procedure described in the statute is not a lawsuit that needs to be filed in a court. The main goal of starting such a resolution procedure is to provide a solution to the insolvent firm and so assist it in avoiding any defaults on the payment of its debts.

NCLAT ruled that because the applicant’s registered office is in Mumbai, NCLT Mumbai will have the jurisdiction to try and decide the application, rather than taking advantage of an agreement’s terms and granting jurisdiction to the Court of Germany.

V. Ramakrishnan vs. M/s. Sudhir Batra & Ors. (2021): In this decision, the Supreme Court addressed the question of whether a person who has been labelled a “willful defaulter” is qualified to serve as a resolution applicant. The court decided that a person is not automatically disqualified from applying for a resolution just because they have been labelled a wilful defaulter.

Conclusion

In conclusion, the Insolvency and Bankruptcy Code (IBC) in India has emerged as a pivotal instrument in reshaping the landscape of corporate restructuring and insolvency resolution. It has dismantled the complexities of the previous regime, offering a transparent and time-bound process for addressing financial distress among businesses.

Unquestionably, the IBC in India has revolutionized the insolvency and bankruptcy system. The expedited resolution procedure, enhanced creditor rights, and general financial sector health all reflect its influence. Even though the IBC has made great progress, there are still problems to solve and things that can be done better. The IBC’s continuing usefulness will depend on its capacity to adjust, improve, and deal with new difficulties as the legal and commercial contexts change.

References:

1. https://www.legalserviceindia.com/legal/article-8526-the-evolution-of-corporate-insolvency-laws-in-india.html visited on 3-09-23
2. https://theamikusqriae.com/analyzing-the-impact-of-the-insolvency-and-bankruptcy-code-on-corporate-restructuring-and-debt-recovery-in-india visited on 4-09-23
3. https://incorpadvisory.in/blog/corporate-insolvency-resolution-process-under-ibc/ visited on 5-0923
4. https://blog.ipleaders.in/corporate-insolvency-resolution-process-under-ibc/ visited on 3-09-23
5. https://www.legalserviceindia.com/legal/article-13123-a-comprehensive-analysis-of-india-s-insolvency-and-bankruptcy-laws.html visited on 3-09-23
6. https://taxguru.in/corporate-law/emergence-insolvency-bankruptcy-code-2016.html visited on 5-09-23
7. https://www.mondaq.com/india/insolvencybankruptcy/1058270/case-note-judgement-of-the-supreme-court-in-the-essar-steel-case#_ftn1 visited on 4-09-23
8. Insolvency Professional Agency: Meaning, Registration & Functions, Taxman (Mar.23, 2021, 9:00 PM), https://www.taxman.com/post/blog/372/insolvency-professional-agency-meaning-registration-functions/
9. Ministry of Law and Justice, Insolvency and Bankruptcy Code, 2016, http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
10. Umakanth Varottil, The Scheme of Arrangement as a Debt Restructuring tool in India: Problems and Prospects, NUS Working Paper (2017).  Available at:  http://law.nus.edu.sg/wps/pdfs /005_2017_Umakanth.pdf
11. Ajay Naronha, Corporate Debt Restructuring Mechanism In India – A Special Reference to Corporate Insolvency Resolution Process, 5 JETIR 44, 45-46 (2018).

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[1] Ministry of Law and Justice, Insolvency and Bankruptcy Code, 2016, http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[2] Umakanth Varottil, The Scheme of Arrangement as a Debt Restructuring tool in India: Problems and Prospects, NUS Working Paper (2017).  Available at:  http://law.nus.edu.sg/wps/pdfs /005_2017_Umakanth.pdf

[3] Ajay Naronha, Corporate Debt Restructuring Mechanism In India – A Special Reference to Corporate Insolvency Resolution Process, 5 JETIR 44, 45-46 (2018).

[4] Insolvency Professional Agency: Meaning, Registration & Functions, Taxman (Mar.23, 2021, 9:00 PM), https://www.taxman.com/post/blog/372/insolvency-professional-agency-meaning-registration-functions/

[5] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, (2020) 8 SCC 531.

[6] Excel Metal Processors Limited V. Benteler Trading International GMBH and Anr. [Company Appeal (AT) (Insolvency) No. 782 of 2019], NCLAT