A historical evaluation of Insolvency and Bankruptcy laws in India

Introduction

The Insolvency and Bankruptcy Code 2016, enacted to radically change the process of insolvency resolution in India, is being closely monitored by economists and jurists, as well as businessmen and investors because each aspect of the law’s implementation has the potential to have a significant impact on the ease of doing business in India.

The primary goal of the legislation is to promptly reorganise and resolve the insolvency of corporations, partnership businesses, and individuals in order to maximise the value of their assets. While doing so, it is also vital to expand entrepreneurship and finance availability. In December 2015, the Lok Sabha passed the Insolvency and Bankruptcy Code, 2015.

It became effective in December 2016. It is a one-stop solution for resolving insolvencies, which is a lengthy procedure that does not provide an economically viable answer. It provides a strong insolvency framework in which the cost and time spent on liquidation are minimised.

The code aims to protect investors’ interests while also making the business process efficient and simple. This article, mainly describes the evolution of The Insolvency and Bankruptcy Code, 2016.

The origins of Indian insolvency law

Insolvency law in India is based on English law. The need for a legal framework to deal with insolvency was first recognised in India’s three Presidency towns of Bombay, Calcutta, and Madras, where the British engaged on trade. Sections 23 and 24 of the Government of India Act, 1800, the Indian Insolvency Act, 1848, and the Presidency-towns Insolvency Act, 1909 are the first insolvency regulations.

The Presidency-towns Insolvency Act, 1909, is still in effect in Bombay, Calcutta, and Madras, and it governs the insolvency of individuals, partnerships, and groups of individuals. The first insolvency court was formed in the Presidency towns by law enacted in 1828.

Basically, these courts were established to assist insolvent debtors. They acted as both individual and record courts. Any person who is dissatisfied with the above-mentioned court’s decision may appeal to the Supreme Court. The Supreme Court established the authority to hear and transfer such types of requests as it deemed fair and substantial, and identical applications or demands are to be deferred through the courts for the mitigation of the insolvent or borrower.

The Supreme Court entrusted the personnel of the insolvency court. One of these officials was described as a “normal appointee.”

Prior to 1907, there was no legislation dealing with insolvency in non-presidency areas. As a result, the Provincial Insolvency Act was passed in 1907, which was eventually replaced by the Provincial Insolvency Act 1920 .
These two pieces of legislation were in effect until recently, when they were repealed by the IB Code. Bankruptcy and insolvency were defined in the Concurrent List of the 1950-adopted Indian Constitution, whereas the incorporation, regulation, and winding up of corporations fell under the Union List. In 1956, the Parliament passed the Companies Act with this authority.

All facets of a company’s operation, including its winding up, were covered by this Act. Insolvency and bankruptcy were not defined under the Act, which simply addressed a person’s “inability to pay debts.” In this Act, which was passed during the earliest stages of India’s industrialization drive, Worker and government payments were made a priority over secured creditors’ payments.

The Companies Act of 1956 included a number of provisions that may be used by the company or its creditors to re-organise it, although these were generic clauses and not specific to instances of insolvency or bankruptcy. Due to legal complications, these could not, however, be communicated.

The newly enacted Companies Act was passed in 2013. Most of the provisions of the 2013 Act are similar to those that were in 2002 in the amendment. Significant changes were suggested under the Companies (Amendment) Act 2003.

The Companies Despite the new regulations, there are still difficulties in implementing the corporate insolvency rules. As a result, the provisions of the Companies Act, of 1956 continue to be in effect.

The only statute addressing corporate insolvency existed from 1956 to 1985 and was known as the Companies Act. In the government’s early decisions, after gaining independence, the economy needed to establish manufacturing sectors, which required substantial expenditures.

The government made these investments through sizable development finance institutions (DFIs), which were established with the aim of promoting industrial development, as was common in other emerging economies. The DFIs received board seats at these companies in exchange for credit.

As a result, it was anticipated that these creditors would have direct control over how these companies were run. Poor distribution of economic capital followed as a result of this. Sick Industrial Companies Act (SICA) was passed in 1985 with the objective of finding out “sickness” in industrial companies and reviving them.

The Board of Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction were established to support the Act. The SICA was the first statute that was primarily concerned with corporate restructuring.

The SICA’s main drawback was that it only applied to sick industrial companies, excluding those engaged in trading, service, or other businesses. It had limitations, though, one of which was that it did not apply to non-industrial enterprises or small/ancillary businesses. SICA was intended to be repealed by the Companies Act Amendment 2003. However, this Amendment was unable to be notified due to legal complications.

The RBI appointed the Advisory Group on Bankruptcy Laws, which was established in 2001 and made various recommendations for changes to bankruptcy law. One particularly noteworthy idea was the consolidation of all the disparate bankruptcy court laws into a distinct code. But nothing was done.

The J.J. Irani Committee Report was then established in 2005 with the goal of reviewing and revising company law in particular and creating an open framework for international bankruptcy and restructuring procedures.

The Committee suggested modifying the statute to speed up the restructuring and liquidation procedure. The recommendations aimed to create a unified framework for addressing corporate insolvency through a specialised adjudicatory authority.

The bankruptcy law reforms committee (BLRC)

In 2014, the Ministry of Finance established the Bankruptcy Law Reforms Committee (BLRC), which is chaired by Dr. T. K Viswanathan, to fight for comprehensive bankruptcy reform. The report of this committee was divided into two parts: the first dealt with including logic and design/recommendations, and the second was a comprehensive draught Insolvency and Bankruptcy Bill covering all companies.

The paper proposed significant modifications to the current structure. The Insolvency and Bankruptcy Code 2016 is the result of these recommendations.

The major recommendations of the Report are as follows

Insolvency Regulator: The Bill seeks to establish an insolvency regulator to exercise regulatory control over Professionals in insolvency, insolvency professional organisations, and informational services.

Insolvency Adjudicating Authority: The adjudicating authority for insolvency will have the authority to hear matters brought by or against the debtor and make decisions in them.

a. The Debt Recovery Tribunal (“DRT”) will be the adjudicating authority for unlimited liability partnership firms and individuals. Debt Recovery Appellate Tribunal (DRAT) is the proper forum for appeals from DRT orders.

b. Companies and limited liability entities are subject to the National Company Law Tribunal (“NCLT”) adjudicative authority. The National Company Law Appellate Tribunal (NCLAT) is the appropriate forum for appeals of NCLT orders.

c. The appellate authority that will review appeals against decisions made by the Regulator regarding insolvency professionals or information utilities is NCLAT.

Insolvency Information Utilities: The proposed Bill calls for information utilities that would gather, compile, authenticate, and transmit financial data from publicly traded firms and their operational and financial creditors. In order to provide information on people’s insolvency status, it is also suggested that an individual insolvency database be put up.

Bankruptcy and Insolvency Procedures for Corporations and Limited Liability Entities: The draught Bill proposes to update the revival/re-organisation regime applicable to financially distressed corporations and limited liability entities, as well as the insolvency-related liquidation regime applicable to corporations and limited liability entities.

Bankruptcy and Insolvency Processes for Individuals and Unlimited Liability Partnerships: A bankruptcy regime for people and partnerships with limitless liability is also suggested in the draught bill. The draught Bill envisions two unique processes under this Part, namely Fresh Start and Insolvency Resolution, as a prelude to a bankruptcy process.

Transition Provision: Until the Regulator is constituted, the Central Government shall exercise all of the Regulator’s powers, according to a transitional provision in the draught Bill. This transition provision will enable the quick starting of the process on the ground without delay for the proposed institutional structure to develop.

The Insolvency and Bankruptcy Code, 2016

In December 2015, the Insolvency and Bankruptcy Code, 2015, was introduced in Lok Sabha. The law came into force in December 2016. A Notification was passed by the national company law tribunal under SICA (special provisions) repeal act 2003. Therefore, the SICA is repealed with effect from 1 December 2016.

Because of this, the government announced that all ongoing processes before the BIFR and AAIFR will be suspended and terminated. However, it shall be open to the company whose appeal, reference or inquiry has abated to initiate fresh proceedings before the National Company Law Tribunal (NCLT).

In accordance with the provision of the insolvency code, within 180 days of the implementation of the insolvency code and to get protection under section 14 of IBC 2016. IBC offers a venue for group healing and settlement. It allows all significant parties the chance to take part in the bankruptcy processes and jointly evaluate the defaulting firm’s viability.

Unlike SICA 1985 where restructuring proceedings can be initiated only when the firm has been reported “sick” which might be too late to recover any value, IBC 2016 enables the resolution process to start at the earliest sign of financial distress as reflected in a single default. IBC also establishes time constraints that must pass before determining if a debtor is viable.

In the current system, judicial intervention in corporate choices frequently results in excessive delays in insolvency resolution. The adjudicator’s primary responsibility under IBC is to ensure that the procedures are legal. A committee made up of all financial creditors will make all company decisions.

The debtor firm enters liquidation if it is deemed insolvent and unviable. After the assets of the insolvent firm are liquidated, IBC lays out a clear waterfall of priority for the fulfilment of obligations to all claimants. IBC suggests creating new institutions to facilitate the application of the legislation and guarantee effective results in addition to process improvements.

These consist of a group of licenced insolvency practitioners (or IPs) and IP agencies, licenced information utilities, a regulator of insolvency and bankruptcy, as well as a specialised tribunal to decide on insolvency-related issues. Individual insolvency cases will be referred to the DRTs and DRATs, and corporate insolvency cases will be handled by the newly established NCLT and NCLAT.

Conclusion

The Insolvency and Bankruptcy Code, 2016, is a reformist piece of legislation designed to increase the effectiveness of insolvency and bankruptcy proceedings in India. The new legislation offers a time-bound method for settlement as well as early diagnosis of financial difficulty.
The Code’s flexibility in adapting to various sorts of dynamic modifications as well as clarifying decisions have turned out to be the straw that stirs the beverages. Also, it can’t be ignored that this code has spared many sick and distressed companies from their early demise.

When compared to other systems of twisting up and BIFR, which used to consider a number of occurrences over a long period of time before making their judgement, the Code continues to be an invited change.

According to the trend in the judgements, debtors cannot stop or postpone an insolvency process under the code on dubious justifications. Both NCLT and the higher levels of the judiciary place a strong focus on the necessity of Speedy resolution.

This article has been authored by Anjali Krishna, a student at Presidency University, Bangalore.