The law relating to Insolvency and Bankruptcy in India has recently become a hallmark of dynamism with the passage of the Insolvency and Bankruptcy Code, 2016 (Code or IBC) and is witnessing new horizons. The legal regime has undergone a paradigm shift to reach a position where the law is facilitating faster resolution of stressed assets, while also opening avenues for acquisition of businesses as going concerns.
India has evolved from a slow, bureaucratic system under a multitude of legislations such as Sick Industrial Companies Act, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, and Recovery of Debt Due to Banks and Financial Institutions Act, to one where the insolvency resolution process is streamlined under a consolidated Code and only two adjudicating authorities are involved – a departure from the old framework that involved multiple fora.
Although having received wide-spread acclaim at resolving the stress situation in the country’s financial system, the Code, still in its nascent stages, requires further fine tuning to iron out issues experienced with growing practical experience. To keep pace, the legislature and the Insolvency and Bankruptcy Board of India (IBBI), a dynamic institution, have been proactive in making amendments to the Code and the regulations to address the shortcomings exposed and doubts created in insolvency resolution processes. This effort is being further supplemented by the judiciary by putting to rest various issues that have been creating a great deal of ambiguity in giving effect to the provisions of the Code. Other stakeholders such as the Securities and Exchange Board of India (SEBI) (discussed later) and Ministry of Corporate Affairs have also notified various changes to further streamline the corporate insolvency resolution process to further advance the objectives of the Code.
The previous legal framework that dealt with cases of insolvency suffered from various defects which made it more difficult for lenders to recover debts from insolvent entities, which was further marred by delays and consequent deterioration of value. The process took several years for liquidation of the debtor company.
Since the debtor company remained in the hands of the promoters and extant management, often there was very little value left for the lenders to recover. Various RBI schemes such as Corporate Debt Restructuring, Joint Lenders Forum, Scheme for Sustainable Structuring of Stressed Assets (S4A), Strategic Debt Restructuring etc. also failed to yield results. Lack of availability of quality information and in quantity required by potential bidders also acted as a major impediment. Under the new law, the resolution professional provides information about the corporate debtor through various modes, the information memorandum being one of them. The new framework provides a time-bound process wherein the first objective is to continue the company as a going concern, preserving its assets, and thereby, the value of the company. The Code marks a significant departure from a debtor in control to creditor in control model, wherein the resolution professional takes control of the corporate debtor and the Code imposes an obligation on the personnel of the corporate debtor to cooperate with the resolution professional.
When a corporate debtor defaults in repayment of dues, Corporate Insolvency Resolution Process (CIRP) can be initiated by a financial creditor under Section 7, by an operational debtor under Section 9 or by the corporate debtor itself under Section 10 of the Code, by making an application to the National Company Law Tribunal (NCLT).
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