General

Increase in Insolvency and Bankruptcy Code, 2016 Threshold for Resolution Process Initiation: Prospective or Retrospective?

The Insolvency and Bankruptcy Code, 2016, is up for debate today in the Rajya Sabha. The Lok Sabha approved the Code last week, with revisions suggested by the Joint Parliamentary Committee that looked at it. We answer some of the most frequently asked questions about the 2016 Insolvency and Bankruptcy Code.

Introduction

The purpose of this article is to examine the impact of the recent notification dated March 24, 2020, by which the Central Government increased the minimum threshold for initiating the Corporate Insolvency Resolution Process (‘CIRP’) against corporate debtors under the Insolvency and Bankruptcy Code, 2016 (as amended) (‘hereinafter referred to as the code). 1. The purpose of this paper is to look at the nature of this notification and how it affects the various players participating in the settlement process. By issuing this announcement, the Central Government has upped the minimum threshold for initiating CIRP against a corporate debtor to one crore rupees, using powers granted to it by the Constitution.

“Section 4. Application of this Part. – (1) This Part shall apply to matters pertaining to the insolvency and liquidation of corporate debtors where the least amount of default is one lakh rupees: Provided, however, that the Central Government may describe the least amount of higher value default by notification, which shall not be more than one crore rupees.”

Section 4 of the Code will now have to be read in accordance with the abovementioned notification, and the previous minimum threshold of one lakh rupees will no longer be applicable.

Purpose of the notification

The current notification was announced by Finance Minister Nirmala Sitharaman, who was elaborating on various government measures to provide some relief to small businesses. And to strengthen the economy in general amidst the current economic and overall uncertainty caused by the coronavirus outbreak. 2 The context of this notification must be examined, as well as the grounds for prescribing the highest feasible threshold authorised under Section 4 of the Code.

The Insolvency Law Committee submitted its findings to the Ministry of Corporate Affairs in February 2020, after conducting a comprehensive examination of the Code and recognising the challenges that Tribunals confront in implementing the Code’s scheme. On the question of determining the default threshold, the Committee believed it was acceptable to suggest raising the minimum threshold for start of CIRP against a corporate debtor to fifty lakhs in the aforementioned Report. Companies and individuals are both subject to the 2016 Code. It establishes a time-bound procedure for resolving insolvency. When a debtor defaults on a payment, creditors obtain control of the debtor’s assets and are given 180 days to settle the insolvency. To ensure that the resolution process runs smoothly, the Code grants debtors immunity from creditors’ resolution claims during this time. The Code also brings together provisions from existing legislation to create a single venue for debtors and creditors of all types to address the insolvency.

3 main reasons given by the Committee in its Report

The Committee’s top three reasons for making these recommendations, as stated in its report, are as follows:

  • A high number of petty applications for CIRP initiation were made against corporate entities due to an unreasonably low threshold of merely one lakh rupees. Adopting such a low bar seemed impracticable, given the undue strain it would place on the system, causing delays in hearing cases. Given that the Code’s most unique characteristic is time-bound resolution, the Committee’s decision to make these recommendations appears to have been influenced by the fact that matters are admitted and heard slowly.
  • Adopting a one-lakh-rupee minimum debt level would allow creditors with such a little debt to force otherwise solvent enterprises into CIRP. 4 In a previous report5, the Committee noted that the Code’s debt resolution scheme, which involves the appointment of an Interim Resolution Professional, has greater expenses than alternative debt recovery measures. This is especially true when the amount of debt is little and the CIRP costs that the debtor will have to face to resolve the debt are significantly higher than the debt itself. Even a solvent corporation becomes more prone to financial trouble as a result of a lack of this cost-benefit balance, rather than being resolved out of its current financial difficulty.

In light of this, the Committee suggested a fifty-lakh-rupee minimum threshold for initiating CIRP against a corporate debtor. Furthermore, a careful reading of the recommendations, particularly paragraph 2.5, gives the impression that the Committee has also recommended a separate threshold of five lakh rupees for CIRP against a Micro, Small, or Medium Enterprise registered under the Micro, Small, and Medium Enterprises Development Act, 2006.

  • In terms of the current Central Government notification dated 24.3.2020, it does not appear to be strictly in accordance with the recommendations of the Insolvency Law Committee, as it instead prescribes the highest possible and a minimum blanket threshold of one crore rupees for initiation of CIRP against any corporate debtor. There is no specific restriction for MSMEs that are also operating creditors.

Who helps the insolvency resolution under the Code?

The Code establishes several entities to aid insolvency settlement. The following are some of them:

  • Professionals in Insolvency: It is proposed that a specialised cadre of licenced professionals be established. These professionals will oversee the settlement process, handle the debtor’s assets, and give creditors with information to help them make decisions.
  • Professional Agencies for Insolvency: Insolvency practitioners will be registered with professional agencies for insolvency. The agencies conduct exams in order to certify insolvency experts and to impose a code of conduct for their work.
  • Creditors will submit financial information about the debt owing to them by the debtor to information utilities. Records of debt, liabilities, and defaults will be among the data.
  • The National Corporations Law Tribunal (NCLT) will adjudicate the proceedings of the resolution process for companies, while the Debt Recovery Tribunal (DRT) will adjudicate the procedures for people. The authorities’ responsibilities will include approving the start of the resolution process, appointing the insolvency professional, and approving the creditors’ ultimate decision.
  • The Insolvency and Bankruptcy Board will oversee insolvency experts, professional agencies, and information utilities established under the Code. Representatives from the Reserve Bank of India and the Ministries of Finance, Corporate Affairs, and Law will sit on the Board.

Applicability of the Notification: Retrospective or Prospective?

In the recent case of Foseco India Limited v. Om Boseco Products Limited19, the Hon’ble National Company Law Tribunal in Kolkata ruled that the change raising the CIRP initiation threshold was prospective in nature, stating:

“It is well-established law that unless a statute is ruled to be retrospective, either expressly or by necessary implication, it is presumed to be prospective. When the change to Section 4 of the IBC was made, it included a proviso expanding the pecuniary jurisdiction for filing applications against small and medium-sized businesses. However, nowhere in the notification did it say that the alteration would be retroactive. As a result, I believe the modification should be regarded prospective rather than retrospective.”

In the absence of any other court of law’s decision on the matter, the judgement mentioned above has defined the timetable of the amendment’s applicability, establishing the legal position. However, it should be emphasized that the explanation presented in the judgement above about the prospective application is exceptionally brief, and the authors intend to examine this subject in depth.

A party’s right to file an appeal against an order, for example, is a substantive right bestowed by a legislation that is untouched by subsequent changes in legislation unless expressly or by essential implication. Procedural law, on the other hand, establishes a method for deciding those rights and liabilities, as well as a system for enforcing them. It is seen as a set of norms that govern the exercise of rights. A statute divesting vested rights is to be interpreted as potential, a state law merely legislative is to be interpreted as review, and a statute which, while procedural in nature, adversely affects vested rights is to be interpreted as potential, unless the language used clearly manifests a contrary intention in express terms or by necessary implication.

What is the Code’s procedure for resolving insolvency?

The Code offers the following steps to resolve insolvency:

  • Initiation: When a default occurs, either the debtor or the creditor may commence the settlement process. The process is overseen by an insolvency professional. The professional manage the debtor’s assets and transmits financial information from the debtor’s information utilities to the creditor. This process lasts 180 days, during which time any legal action against the debtor is barred.
  • The decision to resolve insolvency: The insolvency professional will appoint a committee made up of financial creditors who lent money to the debtor. The creditor’s committee will make a judgement about the future of the debt that they owe. They have the option of either reviving the debt owing to them by altering the repayment plan, or selling (liquidating) the debtor’s assets to pay off the debts owed to them. If no decision is reached within 180 days, the debtor’s assets are liquidated.
  • Liquidation: If the debtor goes into liquidation, the procedure is overseen by an insolvency expert.

Some issues in the Code that require consideration

  • Insolvency professional agencies (IPAs) will be regulated by the Bankruptcy Board (regulator), which will, in turn, regulate insolvency professionals (IPs). It’s unclear why many IPAs, rather than a single regulator, are in charge of regulating the operations of their member IPs. Multiple IPAs functioning at the same time could boost competitiveness in the industry. This, however, may create a conflict of interest between the IPAs’ regulatory and competitive objectives. This regulatory framework differs from current practice, in which the regulator regulates its registered professions directly.
  • The Code’s seamless operation is contingent on new entities such as insolvency professionals, insolvency professional agencies, and information utilities functioning properly. For the system to work properly, these entities will have to evolve over time. Furthermore, the NCLT, which will decide on corporate insolvency, has yet to be formed, and the DRTs are overburdened with pending cases.
  • The Code gives an order of priority to divide assets during liquidation. It is unclear why:

(i) Secured creditors will get their whole outstanding amount, rather than up to their collateral value

(ii) Unsecured creditors have an advantage over trade creditors

(iii) Government dues will be repaid after unsecured creditors.

Important regulatory changes

While the IBC includes a personal insolvency and bankruptcy regime, it has not yet been fully announced. Much as it relates to individual guarantors of corporate debtors, the same was informed in a restricted way with effect from 1 December 2019. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules 2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations 2019 have also been notified in giving effect to the regulations.

In the NCLT, creditors were able to file and sustain claims against both the corporate debtor and the guarantor of the corporate debtor. The NCLAT had earlier concluded in Vishnu Kumar Agarwal v Piramal Enterprises Limited that once an insolvency procedure under section 7 of the IBC has been admitted against the principal borrower, a second application by the same creditor on the same claim against the guarantor cannot be maintained. This has raised some questions about whether concurrent action against the corporate debtor and the personal guarantor for the same claim can be pursued.

According to a recent change to the CIRP Regulations, the COC must now vote on all resolution plans submitted by the IRP that conform with the CIRP Regulations and the IBC at the same time. If only one plan is submitted, the COC will consider it acceptable if it receives 66% of the votes. If there are many plans, the one that receives 66 per cent of the votes is declared authorized; otherwise, the plan with the most votes will be voted on again. This method allows the COC to review multiple ideas at the same time, rather than voting on each one individually, which could result in all ideas being rejected.

Conclusion

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