The Various Factors Affecting on Bankruptcy Law

The Various Factors Affecting on Bankruptcy Law

by April 5, 2018 0 comments

As business failures slow down expansion in the third-largest economy in Asia, law enforcement seek to deal decisively with these failures that will lead to a major overhaul of the India’s bankruptcy law.

The Insolvency and Bankruptcy Code, 2016 was conceived as a path-breaking legislation to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals, in a time bound manner. The avowed objective was also to secure maximisation of the value of assets of such persons, to promote entrepreneurship and balance the interest of all the stakeholders. The Legislative intent was to improve ease of doing business and to facilitate more investments, leading to a higher economic growth and development.

The Supreme Court of India in a recent judgment in Innovative Industries versus ICICI Bank (2018) 1 SCC 407, authored by Hon’ble Justice RF Nariman, has exhaustively dealt with the provisions of the Code. It has eruditely delved into the Bankruptcy Reforms Act, 1978, adopted by the US and the Insolvency Act of 1986 applicable in the UK which has served as a model for the present Code. Whereas, the US code continues to favour the debtor, the UK code favours the creditor.

It may be pertinent to mention that the Code was meant to ensure a collective process where all stakeholders participate to collectively assess the viability of a resolution. However, demonstrably, this aspect is lacking in the Code which lays over impetus to a financial creditor and a corporate debtor. The term “stakeholder” is not even defined under the Code. A perusal of the scheme of the Act leads to an irresistible conclusion that the Code is overtly “creditor friendly”.

The Code postulates two types of creditors, namely a financial creditor and an operational creditor. A financial creditor is defined as “any person” to whom a financial debt is owed whereas an operational creditor is one on whom an operational debt is owed. A financial debt, in broad terms, is money borrowed against interest. An operational debt means a claim on account of providing goods and services and includes employment. Section 7 of the Code provides for a procedure for initiation of corporate insolvency resolution process by a financial creditor.

Sections 8 and 9 provide for a procedure for initiation of corporate insolvency resolution process by an operational creditor. In keeping with the spirit of the Code, Section 12 provides for strict timelines for completion of the resolution process. The resolution process must be completed within 180 days with a maximum period of extension by another 90 days by the adjudicating authority i.e., the National Company Law Tribunal (NCLT).

The Code in Section 14 postulates a complete moratorium against enforcement of any security interest against the company in corporate insolvency or its assets, once the adjudicating authority admits the application under Sections 7 or 8 of the Code. Thereafter, there is a public announcement of corporate insolvency resolution process under Section 15 of the Code.

The Code further provides, under Section 16, for appointment of an interim resolution professional (IRP) by the adjudicating authority. Once an IRP is appointed, the management of the affairs of the corporate debtor vests in the IRP and the powers of the Board of Management or the partners, as the case may be, stand suspended under Section 17 of the Code.

The duties of the IRP inter-alia include assessing the financial health of the company after collecting all information relating to the assets, finances and operations of the corporate debtor. The IRP is further mandated to receive and collate all the claims of the creditors against the company. It is, thereafter, required to constitute a committee of creditors (COC). The COC in turn appoints a Resolution Professional (RP) to manage the affairs of the company. The COC comprises of all the financial creditors and their voting is determined on the basis of the financial debt owed to them. All decisions of the COC is to be taken by a vote of not less than 75 per cent of voting share of the financial creditors.

Section 23 of the Code mandates the RP to conduct the corporate insolvency resolution process. Under Section 25 it is obligated to invite prospective lenders, investors and any other person to forward resolution plans. It has to put all the resolution plans before the COC.

Further, Section 29 requires the RP to formulate an information memorandum containing all the details of the company and the same is required to be given to the resolution applicants.

Curiously, the Code suffered an amendment on November 23, 2017 by an Ordinance wherein Section 29A was inserted after Section 29 of the principal Act. A perusal of the Statement of Objects and Reasons of the Amendment Act clearly shows that the proposed amendment sought to restrict people who with their misconduct contributed to defaults of companies or who were otherwise undesirable, or could misuse their position due to lack of restriction to participate in the resolution process and regain control of the corporate debtor.

However, significantly, the element of ‘misconduct’ is conspicuously absent in Section 29A which seeks to totally exclude host of stakeholders viz. the earlier promoters, holding company, guarantors etc, from the resolution process.

Thus, the amendment is clearly against the purpose stated in the Statement of Objects and Reasons of the Amendment Section. Therefore, the questions that beg answers are: (i) How can misconduct be established without adjudication? (ii) Why should stakeholders who are victims of bonafide business failures be excluded from the resolution process? This is also against the interest of the stakeholders of the company who are entitled to the best resolution plan. A legal challenge to this amendment could well result in the amendment being declared as ultra vires Articles 14 and 19 (1)(g) of the Constitution of India.

Section 29A has the potential of obfuscating the very purpose of the Act i.e., the right of the creditors to choose the best resolution plan under Section 30 of the Act. This anomaly is compounded as the adjudicating authority is also compelled to put its seal of approval under Section 31 of the Act on a resolution plan which could very well be the second best in the light of an unreasonable fetter imposed by Section 29A of the Act.

The Supreme Court in Mobilox Innovations Private Limited versus Kirusa Software Private Limited (2018) 1 SCC 353, speaking through Justice Nariman, has in extenso taken note of “Legislative Guide on Insolvency Law of the United Nations Commission on International Trade Law” which is taken as Model Law. Even this Legislative guide does not contemplate a draconian provision of exclusion of some important stakeholders in Section 29A without having any reasonable nexus or rationale with the object sought to be achieved i.e. best resolution for all the stakeholders of the corporate debtor.

(The writer is an Advocate, Supreme Court of India)

Writer: Anupam Lal Das

Courtesy: The Pioneer

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