Legal Developments in Insolvency and Bankruptcy Code

Today, there are numerous conflicting laws and adjudication fora dealing with financial loss and insolvency of companies and individuals in India. The existing legal and regulatory framework somehow doesn’t allow borrowers to reclaim or restructure defaulted assets in an accurate and efficient manner and imposes enormous burden on the Indian finance system. After the public consultation process and suggestions of the Joint Parliamentary Committee, all Houses of
Parliament have since adopted the Code of Insolvency and Bankruptcy 2016 (Code). One of the core characteristics of the Code is that it allows investors to determine the feasibility of the debtor as a commercial enterprise and to decide on a plan for its recovery or speedy liquidation. The Code provides a modern administrative structure, composed of regulators, insolvency practitioners, database providers and adjudication processes, which will promote a systematic
and time-limited insolvency settlement and liquidation process. The Code aims to safeguard the rights of small investors and to bring economic process less complex. Since corporate lenders verbalize litigation risks which were not many before the Code was adopted, they are likely to become more proactive to avoid inefficient changes. Better screening and monitoring procedures are also likely to be used by banks to constrain exposure to unsustainable projects. Since its
inception, the Code has been continuously reviewed and updated many times. The Court also pronounced verdicts defining the structure of the Code and the standardizing of assistance to the newly established debt recovery law in India.
Recent Amendments
1. Bankruptcy and Insolvency Law modified, Home Buyers Recognized as finance Creditors-
This legal change comes as a major relief to home buyers, because it puts home buyers on a par with insured or financial creditors. Previously, Section 6 of the Code stated that where a corporate debtor defaults, a financial creditor, an operating creditor or a corporate debtor may undergo the insolvency resolution process of a corporation. The proposed Legislation, by putting home buyers under the protection of secured creditors, entrusts them with the right to demand their money back and to begin insolvency proceedings under the Law. The Ordinance amends Section 7 of the Act,
which allows for the introduction of a mechanism for the settlement of corporate insolvency by financial creditors. The amended clause stipulates that the words ‘other finance creditors’ shall be replaced by the words ‘other financial creditors or any other individual on behalf of the financial creditor as may be informed by the Central Government.’
2. Amendment in Section 2

In January 2018, the Insolvency & Bankruptcy Code was revised to expand the scope of the Code to specific guarantors of financial creditors and proprietary companies by amending Section 2 of the Code. Section 29A, which lists the class of persons who are not eligible to participate in the resolution process, was also incorporated in the
amendment. An individual shall not be entitled to apply a resolution plan if that individual, or any other entity acting jointly or in tandem with that person, is a non- discharged insolvent, a willing defaulter, an account or an account of a corporate debtor,known as a non-performing asset.

3. Functional Creditor Cannot Use Code as an alternative for Debt regulation Procedure
Case- K. Kishan v. M/S Vijay Nirman Company

In the situation, the parties had signed into an arrangement for a project and, during the process of the project, conflicts occurred between the parties and the same were appealed to the Arbitral Tribunal, which handed down its decision, under which the Tribunal accepted the respondent’s claims. Accordingly, the Respondent made three cross-claims
and was ultimately dismissed by the Appellant. Upon denial of the petition, the Respondent submitted a notice to the appellant to pay the amount specified under Section 8 of the Insolvency and Bankruptcy Code of 2016, i.e. notice of insolvency of the operating creditor. In the meantime, the appellant has lodged an appeal to set aside the grant in compliance with Section 34 of the Arbitration and Conciliation Act, 1996.
4. Behavioral change
The Code has had an impact on how sponsors and administrators perceive and handle debt reduction. From the beginning, there is a concerted push to allow sponsors or directors and all partners to engage early in the event of problems.
The Ministry of Corporate Affairs explained that the Code had an impact on non- performing assets (NPAs) of around INR 3 lakh crore and, more specifically, resolution cases led to an increase in the recovering of about INR 71,000 crore, instances at a mature resolution point of INR 51,000 crores, totaling INR 1,2 crore from resolution. The Code prompted a systemic shift in relationships between the lender and the borrower, the seller and the creditor. There is now a framework, coupled with a circular central bank, which embraces and promotes constructive action to address anguish without recourse to formal insolvency proceedings.
5. Personal insolvency regime (operating with effect from 1 December 2019)
The rules relating to individual insolvency under the IBC apply to three separate groups of persons:

(i) personal guarantors to corporate debtors;
(ii) associations and commercial enterprises; and
(iii) other entities.
By way of a notification dated 15 November 2019 (‘Notification’), the Central Government recently approved 1 December 2019 as the date for the implementation of the first process, i.e. the regulations related to personal guarantors to corporation debtors.

Changes during COVID-19
Throughout the exercise of its authority under Section 4 of the IBC, the Central Government has increased the ceiling for insolvency imposing Rs 1 crore from the current Rs 1 lakh. The purpose of this amendment is primarily to deter insolvency from being caused against micro, small and medium-sized enterprises (MSMEs) that are hard hit by the lockdown. The Government will also notify the special insolvency resolution framework for small and medium- sized enterprises in accordance with Section 240A of the Code. The calculation, however, is not in line with the aim. This reform can provide relief to many small and medium-sized businesses with financial or high operating debts. Nevertheless, it does not find the various MSMEs holding the role as “operational creditors” under the IBC with demands for industrial loans, salaries or compensation claims that are mostly less than Rs 1 crore. Such amendment would relegate small
and medium-sized businesses to civil debt repayment mechanisms which could have the effect of removing them under the IBC. In addition, this revision has also given rise to various functional uncertainties. There is no clarification as to what happens to defaults in the range of Rs 1 lakh to Rs 1 crore that happened previous to the outbreak. While the NCLT explained the provision not to be retrospective, there is a lack of clarification as to the fate of operating debt claims where a complaint notice has been given but insolvency has not been triggered.

IBC, 2020
The Government has come up with IBC 2020 to streamline the CIRP, secure last-mile funding and improve demand in financially vulnerable sectors. The amendments set a threshold for the initiation of CIRP by financial creditors who are allotted to the real estate project.
The changes further implemented a provision to guarantee the continuity of the delivery ofnecessary goods and services and to guard against the revocation or removal of important company licenses, approvals and government permits during the moratorium. Since these amendments under IBC 2020 have been in effect since 28 December 2019 and the constitutional appeal to the rules of IBC 2020 is still pending. Just after the courts re-open the amendment will be tried in effect.
Under such situations, the Adjudicating Authorities — who are not just adjudicating conflicts arising out of the IBC, but even in the sense of business law and antitrust law conflicts — must institutionalize technologies. This one change can, in particular, disburse the courts, maximize

services, minimize delays and reduce operating costs. The legal protection that a corporate debtor may enjoy under Section 10 through voluntary bankruptcy shall also be suspended. And if the borrower wants to take the SARFAESI path in the absence of IBC, the debtor does not get any immunity from law compliance, etc. that he might otherwise have been able to acquire.
In these conditions, the Adjudicating Authorities — who are not only adjudicating disputes that arise out of the IBC, but also in the context of disputes related to corporate law and competition law — must institutionalize technology. This one reform can, in particular, disburse the courts, enhance resources, reduce delays and reduce operating costs. The provision in Section 10A is absurd. Top corporate lawyer Shardul Shroff told CNBC-TV18, who is the executive chairman of Shardul Amarchand Mangaldas & Co. Shroff said, ‘The revocation of the right to initiate proceedings pursuant to Sections 7,9 and 10 shall not negate the right to recover or initiate proceedings after the expiry of Section 10 A. A person who has not remedied his default by voluntary payment for the time covered by Section 10 A shall remain liable.
Some new notifications
Modifications have been made by adding Section 10A in the Code, which says, ‘In view of anything found in Sections 7, 9 and 10, no provision shall be made for the commencement of corporate insolvency proceedings by a corporate debtor for any default occurring on or after March 25, 2020 for a term of six months or for a further duration not beyond one year from that date, which may not be the case for any default occurring on or after March 25, 2020. Changes to this effect were first declared by Union Finance Minister Nirmala Sitharaman as part of the ‘Atma Nirbhar Bharat’ Abhiyan reforms. The aim, as per the Law, is to “prevent businesses that are in trouble due to an extraordinary condition from being forced into insolvency proceedings under the said Code for some time to come. The borrower, who continues to recognize his security interest, shall pay his share of the costs of the insolvency procedure, the expense of the liquidation process and the labour costs within 90 days of the beginning of the process. This shall therefore compensate the
sum of the actual value of the asset over the receivables accepted within 180 days of the liquidation.The liquidator shall deposit the sum of unclaimed dividends and outstanding gains, along with any profits received thereon, into the Corporate Liquidation Account before making an application for dissolution of the corporate debtor.
IBC allows for the establishment of an IRP against a particular guarantor in the event of default on payment of the loan on the application of a personal guarantee. Under Sec 8, 9, and 10, the new law explicitly repealed the CIRP. The Ordinance, however, has not dealt with the insolvency resolution process against personal guarantors whose debt liability is co-extensive with that of the corporate debtor. The IRP can therefore still be initiated against personal guarantors, which will further hinder the achievement of the objective behind the promulgation of the Ordinance of 5 June 2020 and create further ambiguity. The IBC (Amendment) Regulation 2020 has created complexities and raised certain questions that need further answers. Although some things have been clarified by this to the stakeholders, more than the drafting has invited different interpretations, which are certainly questioning the intention behind it. The Law has provided the businesses with much-needed relief. It presented the firms with at least a period of six months to get back on their feet and manage to fulfill their debt obligations. The Ordinance further took into account the interest of the financial institutions by not calling for a general termination of any debt restructuring process that had been proposed earlier. It remains to be
seen how much the debtors will take the chance to streamline their companies. A limited sum of assistance from the Government will not be misused by the defaulters. Nonetheless, the obvious dispute between the main section and the service needs to be addressed on an immediate basis.

By:- Tanushree Chakraborty Final Year, BA LLBJEMTEC School Of Law

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