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Bankruptcy & Insolvency in India
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Bankruptcy & Insolvency in India

Previously, the situation of insolvency and bankruptcy law seemed to be weak as compared to the expected state as it was bifurcated in different acts to deal with it in India. It was very important to enact a single act in order to deal with all insolvency and bankruptcy cases. Earlier,  various acts were applied for conducting or proceeding the application for Insolvency and Bankruptcy, also many cases were found in Sick Industrial Companies (Special Companies) Act, 1985, The Recovery of Debts by Banks and Financial Institutions Act, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Companies Act, 2013 due to this there were multiple cases filed for the same purpose under different heads. This futility of filing cases led to uncertainty in deciding the solution for cases. The statutes under which the cases were filed, resulting in forming a various board to deal with this matters, i.e. Board for Industrial and Financial Reconstruction, Debt Recovery Tribunal, Debt Recovery Appellate Tribunal, National Company Law Tribunal and National Company Law Appellate Tribunal.

All the mentioned petitions eventually were handled by the High Courts. The individual filings for insolvency were filed under Presidency Town Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

Considering all the authorities and their functioning led to undue delays ambiguity and further discrepancies making the process futile and unending, cause trouble in further development in the economy of the country.  It was essential to come with laws that deal with all the matters where the conclusion expected from the facts is to be the same.

What is Bankruptcy?

When an organisation is unable to manage its financial obligations or make payment to its creditors, an organisation files for bankruptcy in the court of law, a petition is filed in the court for the same where all the outstanding debts of the company are measured and paid out from the company’s assets.

Insolvency and Bankruptcy Code:

Section 79 (4) "bankruptcy" means the state of being bankrupt; (the state of being completely lacking in particularly good quality.)

Two primary objectives of bankruptcy are;

  1. To conduct a fair settlement of the legal claims of the creditors with an equitable distribution of debtor's assets, and 
  2. To provide the debtor with an opportunity for a fresh start.

Bankruptcy can amount to a business-failure, but not voluntary winding up. The Government of India has implemented the Insolvency and Bankruptcy Code (IBC) to strengthen all laws related to insolvency and bankruptcy and to tackle the problem of Non-Performing Assets (NPA) that has been dragging the Indian economy down for many years. As stated in Swiss Ribbons Pvt. Ltd. v/s Union Of India, that Insolvency and Bankruptcy Code is a consolidated code for all the matter related to insolvency and reorganization of Corporate entity dealt by an authority appointed under the code.

Companies not only generate employment but also create economic growth on a large scale. It is essential to bring in a mechanism to settle entities driving into bankruptcy, without causing damage to the economy. That's where IBC came in.

Before the initiation of IBC, the companies took about five to six years with respect for the dissolution of its operations; the number has dropped to a year nowadays. It helps to increase the ease of doing business and also to develop a stronger sense of trust in investors and lenders.

There have been significant debates, whether the implementation of IBC is a boon or a bane. The whole process of insolvency and liquidation is always in the hands of the debt holders and shareholders. Generally, by the time the entire process is completed, the assets are eroded with very few left for distribution.

The IBC has flagged the way for a significant power shift from the hands of debt and shareholders to creditors and now a creditor with a default of Rs 1 lakh, can roll the company into liquidation. However, there are some grey areas as regards to foreign creditors.

The benefit of this enactment has been the time-restricted resolution process. Besides, the IBC regulations recently amended that promoters are now prohibited from bidding or getting engaged in the process of selling the assets and making the whole process transparent and reliable. It has fostered an immense hope of faster recovery, lesser defaults, and a stronger lending and investment sector in India.

Most of the businesses have outstanding debts in crores based on their business practices. They partially fail in reasoning how a creditor can file for bankruptcy if the company defaults payment to other creditors and not the creditor who is the applicant.

The law has now made it very clear that promoters and business holders can no longer work as per their rules. The authorities are trying to make a genuine attempt to reduce the time by curbing delays and preventing NPAs.

The development in creating the IBC has been a massive boon for the mergers and acquisitions of the companies while every debt-stricken company tries the restructuring of the debt or selling its distressed assets to the potential buyers.

The banks have been piling up on stressed assets of the companies, and the cases of IBC being filed with the National Company Law Tribunal (NCLT) are increasing day by day.

All in all, the IBC seems to be in its initial stage, backed by a persuasive composition and structure. The government is constantly restructuring the provisions of the code; furthermore, the Supreme Court (SC) has also amended it many times.

Recently, the Insolvency and Bankruptcy (ordinance) 2017 received the assent of the president on 1st October, 2018 but came with a retrospective effect from the date 23rd November, 2017 followed by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 which state under section 29 A of the Code which enunciated that person who is an “Undischarge Insolvent” is ineligible to submit the resolution plan under the Code.

(Undischarged Insolvent means a person who cannot pay his due as when it arise even though he has committed any act of Insolvency or not.)

The purpose of the IBC is to develop a proper process for the resolution of insolvency. It is observed that this work is under progress, as the code is trying to overcome obstacles and is trying to tackle important issues.

Procedure to file a case for insolvency

A case for insolvency is filed before the adjudicating authority, i.e. in NCLT by financial or operation creditors or the corporate debtor themselves, who are claiming a stake in the company. The plea can be allowed or rejected in a maximum 14 days. In case, the petition is accepted, the tribunal appoints an Insolvency Resolution Professional (IRP) to draft a plan for resolution within 180 days (extendable by a maximum amount of 90 days). After that, the court initiates the Corporate Insolvency Resolution Process (CRIP). For that time, the Company Board of Directors are suspended, and promoters do not have a say in the management of the company.

If required by IRP, they can seek the support of the company’s management for day-to-day operations. Moreover, if the Insolvency Resolution Professional fails to revive the company, the process of liquidation is initiated.

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