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.
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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.
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.
The Committee’s top three reasons for making these recommendations, as stated in its report, are as follows:
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.
The Code establishes several entities to aid insolvency settlement. The following are some of them:
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.
The Code offers the following steps to resolve insolvency:
(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.
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.
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