FIVE YEARS OF INSOLVENCY AND BANKRUPTCY CODE, 2016

THIS ARTICLE WAS WRITTEN BY SPOORTHY PERAPOGU, A STUDENT OF NALSAR UNIVERSITY OF LAW, HYDERABAD.

This year 2021 marks the five years of Insolvency and Bankruptcy code since it has been passed by parliament and received presidential assent on May 28, 2016. Going to the evolution of the IBC it was in the eighties called the Sick Industrial companies Act, 1995, which was enacted on recommendations given by T.Tiwari committee[1]. The aim of SICA was to identify sick industries and to revive its potentiality, determine sickness and to provide preventive, remedial measures which need to be taken with respect to such companies.

Sick industries are those who has at the end of that particular financial year accumulate losses equal to or exceeding its entire net worth and has suffered cash losses. According to the act, there should be established two quasi judicial bodies which takes up cases under this act. They are Board for Industrial and financial reconstruction (BIFR) and the Appellant Authority for Industrial and financial reconstruction (AAFIR). But the act was not successful as it lacks in various aspects, lot of issues were found and two quasi judicial bodies weren’t potential enough to handle the cases which most of the times led to be dealt by high court. Thus IBC before it has been formulated as Insolvency and Bankruptcy code which is operative currently, has several failed laws in earlier years before enactment of the current IBC.

There were also landmark judgments under SICA but it has failed and inoperative presently. One such is the case of Gopal MG Gases Pvt Ltd v SBQ steel Ltd[2] where the facts goes like this; the appellant and the respondent company has entered into contract for supply of oxygen and nitrogen gases through Air separation Unit. Due to the breach of the contract, disputes arose and matter came up before Arbitration relating to monetary claims. SBQ filed a case before Arbitration Tribunal and argued it has been registered with BIFR under SICA and while the case is before BIFR, arbitral proceedings has been suspended. The Arbitral tribunal had proceeded to dispose Appellant’s application under section 17 of SICA..

Supreme court cited the case of KSL and Industries Ltd v Arihant threads[3] where the judge bench has considered the scope and impact of section 22 of SICA. It has held that object of section 22 and scope of powers vested with BIFR under section 16, 17, 18 of SICA.

SC also cited SAN-A Tradubg Co Ltd v I.C Textiles Ltd[4]  where it held under section 22(1) of SICA, arbitral proceeding is not a suit and its reference to BIFR wouldn’t bar continuance of such proceedings. And citing Paramjeet singh Patheja v ICDS Ltd[5], SC said that object of section 22 of SICA is to protect guarantors from legal proceedings pending a reference to BIFR to ensure scheme for rehabilitation wouldn’t be defeated by isolated proceedings adopted against guarantors of sick company.

The government used Bad loan recovery mechanism[6] to resolve the issues of Insolvency issues of banks and financial institutions which was governed by the following legislation s prior to enactment of IBC :

• SARFAESI Act, 2002
• Companies Act, 2013
• Recovery of debts due to banks and financial institutions Act, 1993
• Sick Industrial companies Act, 1985
• The Presidency towns insolvency act, 1909 and the provincial insolvency Act, 1920.

Section 252 of IBC,2016 has been amended for the repeal of SICA by two repeal notifications by the Ministry of Finance on which the provisions of sick industrial companies repeal act, 2003 shall come into effect. With the SICA repeal act coming into effect, SICA shall get repealed and BIFR and AAFIR shall get dissolved.

With section 252 read with schedule 8 provides repeal of SICA Act and provides for substitution of SICA Act.

The main aim of IBC is to consolidate laws relating to Insolvency and Bankruptcy for Individuals, partnership firms, corporate body and simplify the process of Insolvency and Bankruptcy proceedings in India. IBC provides time bound process to resolve the issues of insolvency. The code will expedite the cases which are pending for a long time and resolve them within 180 days with a further period of 90 days. IBC also provides immunity from resolution claims of creditors to debtors during the period to resolve them. As far as insolvency processes are concerned IBC will have an overriding effect on all insolvency laws. Civil courts cannot undertake the cases that comes under the code but the established tribunals namely, National company law tribunal and National company law Appellate tribunal

 For the past five years since the operative of IBC in the country, it has proved it self several times that it has been best in settling legal issues relating to insolvency and financial problems. The National company law Tribunal and the National company law appellant tribunal has also been much active and has given the best decisions and judgments. Some of the major landmark judgments by NCLT and NCLAT are:

1. Committee of creditors of Essar steel India Ltd v Satish Kumar Gupta and others[7]

Facts : Essar steel was admitted for insolvency resolution under the code before NCLT. RBI identified it as one of the 12 companies whose Non performing assets has been severely impacting the banking in India.

Held : NCLT approved Arcelor Mittal’s original resolution plan and directed Committee of creditors to share 15% of amount from profits which were made in Corporate insolvency resolution process(CIRP) with the creditors of Essar steel. This decision of NCLT was challenged before NCLAT. NCLAT held that resolution plan must not differentiate between financial creditors and operational creditors in the manner of payment of dues.

This decision of NCLAT was challenged before Supreme court by financial creditors where SC held that Committee of creditors(CoC) is the key decision maker in recovering corporate debtors. CoC can approve resolution plans by majority voting of atleast 66% by financial creditors.

Appointment of sub committees by CoC decisions under section 28 of the code are to be made by CoC itself and decisions of such cannot be delegated to a sub committee. SC has upheld that the constitutional validity of the Amendment act, 2019; where SC struck down the word mandatorily and said CIRP must be completed within limit of 330 days from insolvency commencement date.

1. Indian overseas bank v Arvind Kumar resolution professional liquidator richa industries Ltd[8]

Facts: On behalf of a corporate debtor, the total amount of margin money was required to be deposited by the Appellant/ Shareholder.     During the CIRP, the respondant has demanded margin money from bank and Appellant bank has adjusted the money. Then, Application was filed by Resolution professional asking for direction against the appellant bank to release all funds of company debtor which were retained by the appellant bank in violation of IBC. NCLT has passed impugned order to the appellant bank to release margin money.

Held: In Appeal, NCLAT held that invocation of guarantee during moratorium under section 14 couldn’t be stopped by the bank. Margin money is not security and doesn’t require any registration of charge. Margin money is the contribution on part of the borrower who seeks Bank guarantee.

iii.  Punjab National Bank v Mittal Corp Ltd[9]

NCLT has dismissed PNB’s plea on basis of circular issued by RBI on Feb 12, 2018 mandating bank to refer an account as NPA. Bank should refer all cases with over 2000 crore loan to NCLT, if they failed to restore the issue within 180 days of default. The joint lenders forum of Mittal corp has already started process of restructuring debt. NCLAT has rejected it saying that process was initiated by JLF prior to the issuance of circular.

The actual intention of bringing Insolvency and Bankruptcy code seems to be fulfilled and has given sustainable solution within five short years of its implementation. Though there were pitfalls and many times it has been criticized for low recovery, IBC gives the different kinds of fruits and results but operated not only to recover the insolvency proceedings but to rehabilitate the whole processes by helping the banks and institutions. Overall, IBC has brought new economic standards and helped to improve the situations though there were delays and disappointments it served its purpose.

[1]https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CR32_19927E9E88840F264C68899BDCF841D79121.PDF

[2] https://indiankanoon.org/doc/46555913/

[3] https://indiankanoon.org/doc/885483/

[4] https://indiankanoon.org/doc/1026511/

[5]https://jharkhandhighcourt.nic.in/sites/default/files/annual/012010181942013_94421-WPC-3998-2013.pdf

[6] http://www.wbnsou.ac.in/openjournals/Issue/2nd-Issue/Surojit.pdf

[7] https://ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdf

[8] https://www.iiipicai.in/images/PDF/CaseSnippets3n38.pdf

[9] https://nclat.nic.in/Useradmin/upload/19606511745f55e6415b61c.pdf