Why Insolvency and Bankruptcy Code is enacted?

insolvency and bankruptcy

A legislation is a skeleton structure normally. The flesh and blood to it is provided by the judicial interpretation. Therefore, the manner in which a company before the IBC is to run during the proceedings, does its business comes to a standstill? How does the normal operation take place?

Arun Jaitley[1]

The terms insolvency and bankruptcy are used with reference to the financial position of a person and a corporation or a company. The term Insolvency is a state whereas Bankruptcy is the effect of that act. In legal terms, insolvency is a state where the liabilities of an individual or an organization exceeds its assets and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment. When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here the entity asks for help from government to pay off his debts to his creditors.

The Code was enacted in 2016 following decades of recommendations suggesting improvements to the previous insolvency regime, which was fragmented, fraught with delays and resulted in poor recoveries for creditors.[2] The scheme of the Code marked a sea change from the previous regime. In respect of corporate entities, the Code introduced a creditor-in-control regime (with a focus on empowering financial creditors), a time-bound resolution process and reduced scope for judicial intervention, and established institutions such as the Insolvency and Bankruptcy Board of India, insolvency professionals and information utilities.

There are two personal insolvency acts in India, Presidency Town Insolvency Act, 1909 covering Kolkata, Chennai, Mumbai and the Provincial Insolvency Act, 1920 applicable to other parts of India which being amended from time to time since being under List II of Schedule VII under Article 246 of the Constitution. Both the statutes govern the procedure as to petition, adjudication, administration of properties and discharge of the insolvent, also attach criminal liability and other offences for certain acts of the debtor. The Section 8 of PIA and Section 107 PTIA, explicitly provides with an exception, by barring the right to initiate insolvency proceedings against corporations. Various other options to recovery of money was also available to the Debtors were also available under Section 13 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). The Insolvency and Bankruptcy Code, 2016, has the provisions related to Individual Insolvency process, but it has not been officially enforced by the Government, whereby the Chairman of Insolvency and Bankruptcy Board of India has assured for the commencement of IBC for individuals soon[3], thereby repealing the earlier acts on individual insolvency process. On December 1, 2019, the Notification No. S.O. 4126(E) enforced the Insolvency & Bankruptcy (Application to Adjudicating Authority for IRP for Personal Guarantors to Corporate Debtor) Rules, 2019 as passed by IBBI, opening the scope of liability to the Personal Guarantor for a corporate debtor, thereby opening the scope for individuals under the IBC.

The Corporate insolvency law was passed for the first time by the British Parliament as Joint Stock Companies Act, 1844, and other enactments of 1848 and 1849 acts, whereby the bankruptcy and winding procedure was separated exclusively. Prior to the IBC, The Companies Act, 1956 and Sick Industrial Companies (Special Provisions) Act, 2003 governed the rights so the Creditors and the Debtor Companies, still greatly mis-used. IBC was notified as on 28th May, 2016 and the repeal of SICA came into full effect from December 1, 2016. Mistakes of the past were rectified and IBC opened a wide scope and aimed to resolve issue through more effective provisions. The code established three new institutions such as Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professional Agencies (IPA) and Insolvency Professional to regulate and render services as to the insolvency process.

In the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors.[4] where the constitutional validity of Section 7, 8 and 9 of the IBC was challenged on the grounds that Article 14 is violated due to the differential treatment given to the Financial and Operational Creditors in the Code. It noted that the Code is a beneficial legislation which puts corporate debtor back on its feet, not being a mere recovery legislation for creditors. The Supreme Court made a precedential judgement in the case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India,[5] the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 which amended the IBC, following the under Real Estate (Regulations and Development) Act, 2016 (RERA) which gave status of financial creditor to the home buyers and allottees under IBC, was challenged before the Supreme Court. The Supreme Court has taken a significant leap in holding that the IBC is a ‘beneficial legislation’ that can be invoked by unsecured financial creditors like home buyers. Keeping in mind that time is of the essence under the IBC, the Court has also reminded the Government that it must provide adequate infrastructure to the NCLTs and the National Company Law Appellate Tribunal (NCLAT) for expeditious disposal of applications filed by home buyers under the IBC. It has also asked the Government to appoint permanent adjudicating officers, real estate regulatory authority and its Appellate Tribunal within three months from the date of the Pioneer Judgment.

After prima facie default is made out on an application under section 7 of the Code, the burden shifts on the promoter/ real estate developer to point out that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/ apartment, as stated in the Pioneer Judgement by the Supreme Court.

It is found that unscrupulous or speculative homebuyers are trying to disrupt a well-running real estate company thereby misusing the laws. “There have been complaints that a single homebuyer, who could be a speculative buyer, is trying to dislocate otherwise well-run real estate companies. In Mumbai, many such cases have been admitted. As a result, half of the cause list (in National Company Law Tribunal) comprises real estate companies,” Injeti Srinivas said in a conference organised by the Insolvency and Bankruptcy Board of India (IBBI).[6]

He also stated that “One or two homebuyers should not be able to drag a full project comprising of hundreds of homebuyers into insolvency.” And also said that “While the developer must be penalised for the delay but the solution is not IBC”. It was also proposed by him that, the insolvency law committee would look into the issue adding that the companies Act already provided for a 5% threshold for the initiation of a class action lawsuit and a threshold of 20% of shareholding for the initiation of a case of mismanagement or oppression of minority shareholders and that these thresholds may be used as a guide. And said, “We may look at a threshold to build in those checks and balances by way of regulations or if necessary, by way of amendment”[7]

Homebuyers directly approaching the NCLT is to be considered that it is not a forum for recovery and that unlike RERA or Consumer Forum to resolve an individual dispute, Insolvency proceedings do not exclusively protect the interest of homebuyers but also other stakeholders like banks and lending institutions.  Thus, homebuyers must seek best suited forum for their individual case.[8]

Edited by Pushpamrita Roy

Approved & Published – Sakshi Raje 

Reference

[1]Speech of Shri Arun Jaitley, Union Minister of Finance, Corporate Affairs and Defence at the National Conference on ‘Insolvency and Bankruptcy: Changing Paradigm’ at Mumbai on Saturday, 19th August 2017. See at https://ibbi.gov.in/uploads/resources/19Aug2017speechFM.pdf

[2]Bankruptcy Law Reforms Committee, The Interim Report of the Bankruptcy Law Reforms Committee (2015)

[3] FINANCIAL EXPRESS, IBBI to commence individual insolvency process soon by FE Bureau (Aug 2019)https://www.financialexpress.com/economy/ibbi-to-commence-individual-insolvency-process-soon/1671610/ (Last Visited on Nov 27, 2019; 11:37 AM).

[4] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors.,Writ Petition (Civil) No. 99 of 2018.

[5]Pioneer Urban Land and Infrastructure Ltd. v. Union of India,Writ Petition (Civil) No. 43 of 2019.

[6] BUSINESS TODAY, IBC Code: Are speculative homebuyers misusing insolvency law? By Dipak Mondal(Oct 2019), https://www.businesstoday.in/current/corporate/ibc-code-are-speculative-homebuyers-misusing-insolvency-law/story/382538.html (Last Visited on 17th December, 2019; 2:44 PM)

[7] THE ECONIMIC TIMES, MCA looking to set minimum threshold for homebuyers initiating insolvency by Karunjit Singh (Oct 2019), https://economictimes.indiatimes.com/news/company/corporate-trends/need-to-look-at-innovative-ways-to-prevent-ibc-abuse-corporate-affairs-secretary/articleshow/71396194.cms?from=mdr (Last Visited on 17th December, 2019; 2:52 PM)

[8] CENRIK, Are Builders more threaten by NCLT proceedings than RERA? By Priyanshi Jaiswal (Dec 2019), https://www.centrik.in/blogs/are-builders-more-threaten-by-nclt-proceedings-than-rera/ (Last Visited on 17th December, 2019; 3:50 PM)

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I am Hariharan V, pursuing BBA., LL. B., (Hons.) at SASTRA Deemed to be University. I am a law student who has made a routine life to learn contemporary issues of legal and political society. My eyes wide open to Constitution, International Law, Competition Law, Consumer Protection and tax. Books, Movies, Web Series and music complete my day. I always pull up myself to all aspects of the law on a daily basis through Research Papers, Articles, Books and Heated conversations with friends.