Insolvency and Bankruptcy Code

The first way is by establishing a consolidated framework for insolvency resolution of corporations, partnership firms, and individuals industries. First and foremost, creditors are encouraged to engage in behaviour modification in order to improve their business decision-making and reduce the risk of going out of business. Second, it foresees a procedure by which corporate organisations that are in a precarious financial position can be rehabilitated and brought back on their feet by the use of this procedure.

“Creditor-in-control”

The Indian insolvency regime changed from being known as “debtor-in-possession” to “creditor-in-control” after the implementation of the IBC. The creditor-in-control approach involves the creditors of the debtor taking control of the debtor and relying on the managerial expertise of newly appointed management to assure the continued operation of the business after it has been taken over by the creditors. In the case of Swiss Ribbons vs. Union of India, India’s highest court ruled that the primary purpose of the Insolvency and Bankruptcy Code (IBC) is to secure the resurrection and continued operation of corporate debtors. As a result, the IBC takes into account the general welfare of the public in its deliberations.

The three classes being targeted here

Financial creditors, operational creditors, and corporate debtors are the three categories of parties that the IBC identifies as having the ability to initiate the corporate insolvency resolution process (CIRP).

In the case of Mobilox Innovations vs. Kirusa Software, the Apex Court made the observation that an operational debtor’s debt should be free from any pre-existing dispute that cannot be dealt with summarily in bankruptcy proceedings. This observation was made in reference to an operational debtor. In the case of Lalit Kumar Jain vs. Union of India, which was heard by the Supreme Court of India, it was established beyond a reasonable doubt that the obligation of a guarantor was equivalent to that of the principal debtor. In light of this, parallel procedures could be brought against the guarantors.

Under the IBC, the promptness with which insolvency issues are resolved is likely one of the most crucial aspects. In the case of Kridhan Infrastructure vs. Venketesan Sankaranarayan, the Supreme Court made the observation that the resolution of the insolvency should not be subject to an indefinite delay in complete abeyance of the timetables that were established by the IBC.

A stay of operations is placed into effect once a petition for bankruptcy is approved. During a corporate insolvency resolution process (CIRP), the Supreme Court ruled in the case P Mohanraj vs. Shah Brothers Ispat that a moratorium prevents any legal action against a corporate debtor from being initiated or continued. However, the key managerial people of the corporate debtor who were responsible for the insolvency are not protected by a moratorium because its purpose is to prevent further depletion of the corporate debtor’s assets and, as a result, acts as a “shield.”

The IBC prohibits certain persons from filing a resolution plan or taking part in the process of resolving an insolvency. In the case of Chitra Sharma vs. Union of India, the Supreme Court of India held that the purpose behind the bar against certain individuals is to ensure that persons responsible for the insolvency of the corporate debtor do not participate in the CIRP by means of a backdoor entry. Specifically, the court stated that the goal of the bar is to prevent these individuals from entering the programme illegally.

Similarly, in the case of Phoenix ARC vs. Spade Financial Services, it was pointed out that the IBC stipulates that any connected party of a corporate debtor does not have the right to participate in a committee of creditors. This was one of the observations made in that case (CoC). The purpose of a clause like this is to ensure that connected parties of the corporate debtor will not be able to subvert the decisions made by the Committee of Creditors.

The National Company Law Tribunal

The National Company Law Tribunal (NCLT), in addition to having the authority to carry out insolvency resolution proceedings, has been granted broad residuary jurisdiction under the Insolvency and Bankruptcy Code (IBC) in order to make decisions regarding any and all questions that are brought up as a result of or in relation to the insolvency and liquidation of corporate debtors. Nevertheless, the apex court decided in the Jaypee Kensington case that there was no room for interference with the commercial judgement of the council of commissioners during the adjudicatory process that was taking place over a settlement plan. In the event that an adjudicating body identified any deficiencies in the resolution plan, such plan would be returned back to the CoC for the purpose of being resubmitted.

The Insolvency and Bankruptcy Code (IBC) has significantly altered the insolvency legal landscape in India. It has made a significant contribution to the growth of responsible borrowing practises among businesses. In the case of a default, the promoters are concerned that they will lose control of their respective businesses. It has been reported that a whopping 18,629 applications with a total value of more than 5,29,000 crore have been settled even before they have been admitted. According to research by the World Bank, India’s rank in resolving insolvency moved from 136 in 2017 to 52 in 2020 after the introduction of the Insolvency and Bankruptcy Code (IBC). The rates of recovery that are allowed under the IBC are quite modest. During the conclusion of some insolvency cases, creditors may receive reductions in their claims of up to 95% of their original amounts. Since 2016, the lenders have taken a haircut of an average of 61 percent on the claims.

The ongoing insolvency proceedings are making the situation even more difficult. The fact that approximately 71% of the cases have been pending for more than 180 days represents a significant departure from the goal of quickly resolving bankruptcy issues. In terms of personnel, the NCLTs were operating without a President and were missing 34 members out of a total sanctioned strength of 62 members in September of 2021. This was despite the fact that the total sanctioned strength of the NCLTs was 62 members.

Digitization of the IBC environment

The digitization of the IBC environment presents another significant obstacle to overcome. The insolvency procedure has been hampered by a lack of digitalization, which has resulted in lengthy delays that go well beyond the time restrictions set by law. The admission of cases before the NCLT has proven to be a challenging endeavour on many occasions. The National Company Law Trials and the National Company Law Appellate Tribunals (NCLTs and NCLATs), according to the findings of a Special Parliamentary Committee, ought to be digitised. In order to quickly resolve the cases that are now outstanding, there should be the option to have hearings virtually.

The next logical step

It is essential for the main players to put forth their utmost efforts to guarantee that the effectiveness of the IBC is not diminished, as this is of utmost importance. It is necessary to make it a priority to plug the gaps that are uncovered and work toward a more intricate legal structure over the course of time. According to the statistics, the vast majority of businesses are forced into liquidation when they undergo a protracted insolvency process that causes their assets to depreciate over time.

Therefore, the promptness with which insolvency issues are resolved is of the utmost importance. It is imperative that the government allot sufficient financial resources to the retraining of bankruptcy experts, the enhancement of the physical infrastructure of the courts, and the digitization of the insolvency resolution process.

There is little doubt that the IBC has given India’s insolvency regime a new lease on life. It has not only been successful in combating the growing threat of NPAs, but it has also been beneficial to the economy in a variety of nuanced ways, including improving credit discipline. Not only has it been successful in combating the growing threat of NPAs, but it has also improved credit discipline. Reports indicate that a total of 2.5 million crore rupees has been put back into the banking system beginning in 2016 as a result of insolvencies being resolved under the Insolvency and Bankruptcy Code (IBC).

Conclusion 

In spite of this, the IBC, like any other body of law, contains aspects that have room for significant development. There is still a significant amount of work to be done before the insolvency process in India can live up to the expectations of other developed global jurisdictions.