When Zero Hour Strikes: The Insolvency and Bankruptcy Code as an Exit Mechanism – Insolvency / Bankruptcy / Restructuring

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The Insolvency and Bankruptcy Code of 2016 (“Code”) brought about a magnanimous change in the field of insolvency and bankruptcy laws in India. The Code transformed the insolvency regime from a “debtor in possession” to a “creditor in control”, providing major control to the financial and operational creditors of a debtor company in an insolvency or liquidation process.1

The Code offers a balance of benefits to creditors, debtor companies and the management of debtor companies. Although on the one hand, it offers a better mechanism to collect debts from creditors, it also offers an option to execute the operations of the debtor business while the insolvency process is going on. In addition, it also allows the management of the debtor company to focus on important matters other than the insolvency or liquidation process of the debtor company.

The Code aims to provide an easy exit mechanism for debtor companies by streamlining their insolvency or liquidation process. It also allows an easy exit for the management of the debtor company by suspending it from its functions once the insolvency or liquidation procedure has started.

This article aims to provide an analysis of how the Code contributes to achieving these two objectives, comparing it with the old insolvency laws.

Insolvency Laws: A Brief History

Insolvency, prior to the implementation of the Code, was governed by numerous laws. While the Presidency Towns Insolvency Law of 1909 and the Provincial Insolvency Law of 1920 governed individual insolvency, for businesses it was the Companies Law of 1956, the Companies Act 2013 (“Companies Act”) and the Sick Industrial Companies Act (special provisions). , 1985. In addition, financial institutions used to initiate proceedings under the 1993 Law on the Collection of Debts Due to Banks and Financial Institutions and the 2002 Law on Securitization and Reconstruction of financial assets and the enforcement of collateral (“SARFAESI law”) to collect debts owed to them by individuals and other entities.

The Code, which was enacted in 2016, was an attempt to consolidate insolvency laws and therefore repealed, amended or replaced those laws.

Exit mechanism: the code against the laws of yesteryear

The description of the objects and reasons for the Code indicates that it is an “act aimed at consolidating and amending the laws relating to the reorganization and resolution of the insolvency of legal persons, companies in name collective and individuals in a time-bound manner in order to maximize the value of the assets of such persons. “The intent of the Code is to complete insolvency processes within a specified time frame, thereby maximizing the value of the assets and balancing the interests of all stakeholders, including government.The Code, through its variety of insolvency and liquidation processes, seeks to advance the objectives it sets out.

  1. Company exit mechanism

The Code provides that a request to open a corporate insolvency resolution process (CIRP) must be decided by the contracting authority, namely the National Company Law Tribunal (NCLT), within a time limit 14 (fourteen) days and that the Company Admission Order The Insolvency Resolution Process (CIRP) also includes the appointment of the Resolution Professional (PR) and the latter is deemed to have been appointed to from the date of the NCLT order. In addition, the Code provides that the CIRP must be completed within a maximum of 330 days. In this regard, the Supreme Court, in its recent decision, ruled that the CIRP should be completed within the timeframe prescribed by the Code.2

The Code provides for a CIRP Fast Track process for certain categories of debtor companies which can be completed within a maximum period of 135 days, including extensions, if any.

In addition, the Code also introduced a new type of insolvency process for MSMEs, called the prepackaged CIRP, where creditors and the MSME enterprise can enter into an arrangement / agreement, without initiating the CIRP, and sanction. can be requested. for said arrangement before the NCLT.

Apart from this, the Code also provides that the liquidation of debtor companies must be completed within one (one) year from the start of the liquidation process.

Comment:

Under the old laws, the time limit for the completion of the liquidation or insolvency was not provided or, if provided, would in most cases be a directory provision. In addition, under the old laws, the process of completing liquidation or insolvency was vague and resulted in further delays in completion and increased costs. In addition, under the old laws, all entities had to go through the same liquidation or insolvency process, regardless of the nature and size of the business.

The Code, by simplifying the process and providing for strict deadlines and also offering different insolvency / liquidation options for various categories of corporate debtors, seeks to speed up the insolvency and liquidation process.

  1. Exit mechanism for management

The Code provides that once a CIRP or a CIRP Fast-Track (as the case may be) is initiated, the management of the debtor company is taken over by the PR or the liquidator (as the case may be) and the powers of the Board. Administration (CA) is suspended from the date of appointment of the RP. The role of the board of directors and management will then be limited to helping the PR to provide the necessary information as required by the PR.

By suspending the powers of the board and management, the Code essentially allows these people to focus on other matters and not to fear the insolvency process of the debtor company.

Comment:

Under the old laws, such a provision did not exist and therefore, as long as the insolvency process continued, the board of directors / management would also continue to manage the entity. In addition, the lack of clarity on the insolvency process or its complexity was also something that weighed on management with additional compliances.

Concluding Notes

A review of the provisions indicates that the Code (in theory) serves its dual purpose and provides a hassle-free exit mechanism for both management and the debtor company. In previous laws, there was no system that allowed a business to survive and operate while protecting the interests of creditors. As the exit mechanisms progress, it is the one that aims to preserve and maximize the value of the company’s assets and aims to provide practical solutions to stakeholders in a regulated process that respects deadlines and a schedule. .

That said, it should be noted that although the insolvency / liquidation process has been described in detail, there are many practical issues involved in the process that the Code does not address. This testifies to the number of amendments that the Code has undergone since its entry into force in 2016. For example, several practical problems that arise after the opening of the CIRP concerning the submission of complaints, the admission of complaints, the rejection of complaints , etc. are not covered by the Code or its rules or regulations. Therefore, although theoretically the Code aims to provide a faster exit mechanism, only time will reveal whether the Code has achieved these objectives from a practical point of view.

Footnotes

1 Insolvency and Bankruptcy Board of India, 2020, “Understanding IBC: Key Case Law and Practical Considerations – A Handbook,” available at: https://ibbi.gov.in/uploads /whatsnew/e42fddce80e99d28b683a7e21c81110e.pdf

2 Ebix Singapore Private Limited v. Educomp Solutions Limited’s Creditors Committee (“CoC”) Civ. Call n ° 3224 of 2020

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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