Since the globalization of business, the problems of corporate insolvency have taken on greater importance and the need for changes in this branch of law has been felt for a long time. Furthermore, with the Indian economy being opened up to investment by foreign investors and the Indian company also making investments in outside companies abroad, the scope of cross-border insolvency law has expanded breathtakingly.
In India, the legal and systemic debt defaulting mechanism was not in line with global norms. The repayment action by borrowers, either via the Indian Contract Act, 1872, or by special laws such as the Banks and Financial Institutions Recovery Act, 1993 and the Securitization and Reconstruction of Financial Resources and Security Interest Protection Act, 2002, had no desired impact.
Moreover, legislation under the Sick Industrial Companies (Special Clauses) Act of 1985 and the winding-up clauses of the Companies Act of 1956 was neither able to support the recovery of borrowers nor facilitate the consolidation of businesses. Laws concerning individual insolvency, Presidential Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920, they are nearly a century old. This has undermined the lender’s confidence. If lenders are unconfident, creditors’ loan control is reduced.
This is mirrored in the condition of Indian credit markets. Secured bank loans are the primary portion of India’s credit market. The demand for corporate bonds has yet to grow. This article explores the concept of insolvency laws in India along with its short background and also discusses the impact of COVID 19 over it.
“Breach of promise is no less an act of insolvency than a refusal to pay one’s debt”1
INSOLVENCY/BANKRUPTCY – THE VIEW
Insolvency is a situation where an individual, company, or other entity cannot meet its debt-paying financial obligations when they become due. Bankruptcy is not quite similar to insolvency. Functionally, bankruptcy happens as insolvency is decided by a judge, and legal orders are issued to remedy it. Bankruptcy is an insolvency decision taken by a judge and subsequent judicial instructions to settle the insolvency. Insolvency defines a condition in which the debtor cannot discharge his / her responsibilities. Bankruptcy is a civil procedure pursuing compensation from an insolvent debtor.
HISTORICAL DEVELOPMENTS OF INSOLVENCY LAWS IN INDIA
Insolvency laws in India owe its roots to English rule. There was no Insolvency Rule in the world until the British came to India. The earliest laws on insolvency can be traced to sections 23 and 24 of the Government of India Act, 1800, which granted the Supreme Court authority over insolvency. The passage of Statute 9 in 1828 may be said to be the origin of India’s peculiar insolvency law. Within this Law, in the Presidency-towns, the reliefs for insolvent debtors were issued. Another step in the growth of insolvency law was taken with the passage of the Indian Insolvency Act, 1848.
However, the provisions of the Indian Insolvency Act, 1848, were considered to be insufficient to accommodate the changing circumstances. The Act of 1848, however, was in effect in the presidential cities until the Presidential-towns Insolvency Act of 1909 was passed. The Presidential Towns Insolvency Act of 1909 and the Provisional Insolvency Act of 1920 are two main acts concerned with personal insolvency and have concurrent provisions, and their substantive substance is identical as well, although the two vary in terms of their geographical competence. Although Presidential Towns Insolvency Act, 1909 refers to all provinces of India in presidential towns, including, Kolkata, Mumbai, and Chennai, the Provincial Insolvency Act, 1920.
Those two laws refer to individuals and sole proprietorships as well as business companies. Under the Indian Constitution ‘Bankruptcy & Insolvency’ is laid out in Entry 9 Part III— Concurrent List, (Article 246— Seventh Schedule to the Constitution), i.e. Center and State Governments may make laws on this matter. The major corporate insolvency statutes were: the Companies Act, 1956, relating to the liquidation of corporations & the Sick Manufacturing Companies (Special Provisions) Act, 1985.
WHAT IS THE NEED FOR A NEW LAW?
There was no common statute in the country until the enactment of the Insolvency and Bankruptcy Code to deal with insolvency and insolvency. Throughout India, there have been several conflicting statutes and mechanisms to adjudicate on financial loss and insolvency of corporations and individuals. Insolvency and insolvency processes were insufficient, inefficient, and resulting in unnecessary delays in resolution. The regulatory and structural environment did not allow borrowers to recover or restructure default assets in an efficient and timely manner and placed unnecessary pressure on the Indian financial system.
THE INSOLVENCY AND BANKRUPTCY ACT, 2016
The word “insolvency” applies to the state of someone whose assets are insufficient to cover his debts; or his overall incapacity to cover his debts. In a limited context, the word “insolvency” is used to describe a party’s failure to pay its obligations when they are due in the usual course of business.
On 21 December 2015, former Finance Minister, Late Arun Jaitley, launched the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha. The Code was referred to Parliament’s Joint Committee on 23 December 2015 and approved on 28 April 2016 by the Commission. The Lok Sabha and the Rajya Sabha adopted the Code on 5 May and 11 May 2016 respectively. This eventually received President Pranab Mukherjee ‘s assent and was published on 28 May 2016 in India’s Gazette.3
The 2016 Code of Insolvency and Bankruptcy applies to all of India.
An insolvency petition is brought by financial or service creditors or the corporate debtor himself with the adjudicating body (NCLT in the case of corporate debtors). The permissible legal time to either accept or deny the plea is 14 days. When the appeal is approved, the tribunal must nominate a Specialist Interim Resolution (IRP) to prepare a settlement proposal within 180 days (renewable every 90 days).
Following this, the court initiates the Corporate Insolvency Settlement process. The company’s board of directors is dissolved for that time and the promoters have no voice over the company’s management. If required, the IRP will request the company’s management assistance for day-to-day operations. Unless the CIRP(Corporate Insolvency Resolution Process) refuses to restore the company the process of liquidation will be begun.
Is the Code of Insolvency and Bankruptcy a solution for all Banking problems?
The NDA government brought insolvency and bankruptcy law bill in 2015 in the Indian parliament, which received final approval in the May 2016 legislative session. This legislation was claimed to fix all of the banking issues present in the economy. The key reason this bill was passed was to fasten the lengthy cycle of insolvency which it did. Following this bill, the company’s insolvency period is 180 days with an extension of 90 days, and for companies and small businesses, it is 90 days with a 45-day extension.
The question is whether it can fix all the banking problems and my answer is no, as the banking sector in our country is going through a very difficult process, Most banks are combining due to bad loans and all this hustle cannot be resolved with this bill just because IBC can fix the mechanism of suing only for certain bad debts that are reported but the key problem is unidentified bad loans or bad loans that are revealed after the borrower runs away. And in past years, there are several cases in which borrowers moved away from the country after being unable to pay back the loan they had taken. But even IBC has changed the economic structure and improvements can be seen, the economy is more stable after IBC and we need more policies like IBC and PCA to address all of the banking problems present in the Indian economy. 4
BUSINESS CHALLENGES IN COVID 19- IN 2020
The year 2020 is proving to be incredibly difficult year worldwide because people are facing the novel pandemic COVID 19. Over 3 million lives worldwide have now been infected by the COVID 19 virus which originated in China in late 2019. The Central Government of India declared a national shutdown starting March 23, 2020, as a precautionary measure to contain the deadly spread of the virus. The said shutdown has deeply impacted industries across India as all kinds of operations and events have stopped functioning in compliance with the lockout, bar critical services.
Many businesses are still unable to survive because their activities have been effectively halted. Employers are unable to manage their staff, facilities, etc. among many other issues. When the company affairs are absolutely at a standstill, creditors can now be seen lined up for repayments. Despite, the government has launched several compensation initiatives to ensure that companies are maintained and discourage them from being insolvent.
INSOLVENCY RELIEF ACTIONS INTRODUCED IN VISION OF COVID 19
Under the law, the corporate debtors’ default threshold is set at INR 1,00,000. Nevertheless, the latter threshold was increased to INR 1,00,00,000 in the light of the COVID 19 outbreak and ensuing lockout. The said modification was made through Notification No. O.S. 1205 (E), as provided by the Department, dated 24 March 2020.
Effect of relief-The above relief mechanism was adopted to safeguard the interest of MSME companies CIRP can be quickly activated in the present situation provided the previous threshold. The provision will also cover corporate debtors because in the current case the earlier default cap for insolvency could be readily achieved.
INCREASE IN THRESHOLD LIMIT TO INR 1 CRORE
The central government’s immediate substantial relief is that the IBC (insolvency and bankruptcy code) threshold cap of default Section 4 of the Insolvency and Bankruptcy Code, 2016 is Rs. 1 crore (from the current Rs. 1 lakh threshold) for initiating the corporate insolvency resolution process (CIRP). Section 4 of the IBC is respondent under-
“Section 4(1) shall refer to matters affecting the insolvency and liquidation of corporate debtors where one lakh rupee is the total value of the default:
Provided that by notification, the Central Government can determine the minimum sum of the higher value default which shall not be more than one crore rupees.”
It is a positive move, and a boost for small and medium-scale enterprises, aside from the same, such an initiative would greatly minimize the National Business Law Tribunal’s workload.5
The Proposed measure to be implemented if COVID outbreak continues beyond APRIL 30, 2020
The Minister for Union Finance & Corporate Affairs, Smt. Niramla Sitharaman has announced many significant relief steps taken by the Government of India in the light of the COVID-19 outbreak, in particular on multi-sector legislative and regulatory enforcement matters. When addressing the press conference here by video conferencing, Smt. Sitharaman declared much-needed assist initiatives in the areas of Income Tax, GST, Customs & Central Excise, Corporate Affairs, Insolvency & Bankruptcy Code (IBC) Fisheries, Banking Sector, and Trade. In addition to Shri A.B. Pandey, Secretary of Finance and Shri Atanu Chakraborty, Director of the Department of Economic Affairs, State Minister for Finance & Corporate Affairs Shri Anurag Singh Thakur also attended.
These are the actions under which all of them took part-
Due to the emerging financial pressure faced by most businesses due to the massive economic disruption caused by COVID 19, it was agreed to increase the default threshold to Rs 1 crore (from the current Rs 1 lakh threshold) under section 4 of the IBC 2016. This would effectively prohibit insolvency proceedings against MSMEs from being caused. If the current situation extends until 30 April 2020, we may consider suspending IBC 2016 section 7, 9 and 10 for six months to prohibit major corporations from being driven into insolvency proceedings in the event of certain force majeure causes of default.5
It was further informed that if the current situation of coronavirus crisis persists beyond 30 April 2020, the Central Government may suspend IBC sections 7, 9, and 10 for six months to prevent large companies from being forced into insolvency proceedings in the event of certain force majeure causes of default.
- By Mahatma Gandhi.
This blog is written by Akriti Sharma, Banasthali University
Some of her blogs-
- INTRODUCTION TO INDIAN EVIDENCE LAW
- INDIAN EVIDENCE AMENDMENT BILL, 2016
- BURDEN OF PROOF (Section 101-114)
- INHERENT POWERS OF THE COURT
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