Economy through a wider prism

The Preamble of IBC gives the broad contours of the legislation:

An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a timebound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

The IBC in my view is amongst the game-changing statutes to regulate corporate India and the credit for this must go to the BJP government. It seeks to regulate corporate behaviour which in the earlier regimes had put a premium on debt defaults and a penalty on creditors who lent money to defaulting corporates.

The IBC seeks to bring about insolvency resolution of corporate debtors. It puts in place a framework for maximization of value of the assets of the corporate debtors. The object of the Code is to facilitate an expeditious change of the management of the corporate debtor so that the corporate vehicle can get back on its feet and become profitable again. This will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by other entrepreneurs. When a resolution plan to rehabilitate the corporate debtor takes off and is brought back into the economic mainstream, it is able to repay its debts which enhances the financial strength of banks and financial institutions and hence their ability to lend more which propels economic growth. Also, workers are paid and shareholders/investors are able to get returns on their investments.

Resolution process

The procedure for taking a defaulting corporate debtor for insolvency resolution before the adjudicating authority is simple and expeditious. When a debt becomes due and isn't paid, the insolvency process can be initiated. 'Default' is widely defined in the IBC as non-payment of a debt once it becomes due and payable, which includes non-payment of even a part thereof or an instalment amount.

The Corporate Insolvency Resolution Process (CIRP) may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A classification has been made in the IBC between debts owed to financial creditors and operational creditors. A 'financial creditor' has been defined as a person to whom a financial debt is owed and a financial debt is defined as a debt which is disbursed against consideration for the time value of money, loans, and so on. On the other hand, an operational creditor is a person to whom an operational debt is owed and an operational debt means a claim with respect to provision of goods and services.

If a corporate debtor defaults in repayment of a financial debt to a financial creditor, the CIRP can be triggered by filing an application before the National Company Law Tribunal (NCLT). It's worth noticing that any financial creditor, that is, even a financial creditor whose debt is being serviced, can move the NCLT. As long as there is a default of a financial debt, the application is maintainable even though it is filed by a financial creditor whose debt is being paid and the corporate debtor isn't in default thereof.

The adjudicating authority (NCLT) will ascertain the existence of a default from the records of a specialized agency called the 'Information Utility' and the evidence adduced by the applicant financial creditor. This is done within fourteen days of the receipt of the application. At this stage, the corporate debtor is given an opportunity to argue that default has not occurred. On the adjudicating authority being satisfied that a default has occurred, the application is admitted.

The procedure for invoking IBC is different for operational creditors. On the occurrence of a default, the operational creditor is first required to serve a demand notice on the corporate debtor who can within ten days thereof bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings. If the corporate debtor is able to show a bona fide dispute regarding the claim of the operational creditor, it is out of the clutches of the IBC. The adjudicating authority is not a money-recovery forum. Recovery of money can be sought through suits in civil courts or arbitration proceedings if there is an arbitration clause in the contract.

The distinction in the procedure between financial creditors and operational creditors is based on the fact that there's a higher degree of probability that an operational debt (payments due for goods and services) is disputed in comparison with financial debts (e.g., loans). Hence, a longer process has been laid down for operational creditors to get their applications admitted by the NCLT.

As soon as the application is admitted, a moratorium is declared on all litigations against the corporate debtor except criminal proceedings. Immediately upon the admission of the application, an interim resolution professional is appointed who is vested with the management of the corporate debtor. At this stage only, the incumbent management is thrown out and replaced by the interim resolution professional who may subsequently be appointed as the resolution professional or may be substituted by another resolution professional.

(Excerpted with permission from Vivek Sood's 'Progress of the Indian Economy'; published by Thomson Reuters)