•  •  Dark Mode

Your Interests & Preferences

I am a...

law firm lawyer
in-house company lawyer
litigation lawyer
law student
aspiring student
other

Website Look & Feel

 •  •  Dark Mode
Blog Layout

Save preferences

Evolution of the Corporate Insolvency Resolution Regime in India

India’s Insolvency and Bankruptcy Code has promised to completely transform the country’s insolvency resolution regime. Jyoti Singh analyses the key judicial decisions under the Code.

Click here to read PDF of chapter
Click here to read PDF of chapter

As far as the introduction of new laws in India is concerned, the Insolvency and Bankruptcy Code, 2016 (Code) is second to none in the discussion, excitement and media interest that it has generated since the time it has been legislated. Its framers professed that it would radically alter the debt restructuring and debt recovery landscape of the country, and bring the framework of insolvency resolution on par with developed countries. While it may be too early to gauge whether the Code lives up to its “objects and reasons”, this chapter analyses the backdrop that necessitated the introduction of the Code and the key judicial decisions under the Code, which paint a picture of hope and promise to completely transform the insolvency resolution regime in India in a time bound manner.

A. Background

Prior to the Code, India did not have a consolidated statute governing incidents of insolvency and bankruptcy of various entities. For example, the provisions relating to the insolvency of corporations were scattered amongst laws as diverse as the Companies Act, 1956 (Companies Act), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB Act), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the much-reviled Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Similarly, there were two statutes, namely, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 governing instances of individual bankruptcy.

One downside to having multiple statutes was that on one hand, there was an overlap/contradiction in some provisions and on the other hand, the legal proceedings initiated thereunder would sometimes run in parallel before several different forums, which often led to multiple and contradictory orders in respect of the same entity. To further aggravate the situation, the entire process of recovery, debt restructuring and liquidation remained extremely susceptible to dilatory tactics to the extent that on an average, debt restructuring and liquidation took almost 4.3 years in India1. In fact, under laws like SICA, it was possible for a corporate debtor to avoid recovery proceedings/ liquidation indefinitely by seeking protection under its provisions prohibiting claims against sick companies2. As Mr. Arun Jaitley, the Minister of Finance, expounded in his address before the Parliament when the Code (then a Bill) was tabled:

Now, the object behind SICA was revival of sick companies. But not too many revivals took place. But what happened in the process was that a protective wall was created under SICA that once you enter the BIFR, nobody can recover money from you. So that non-performing investment became more non-performing because the companies were not being revived and the banks were also unable to pursue any demand as far as those sick companies were concerned, and therefore, SICA runs contrary to this whole concept of exit that if a particular management is not in a position to run a company, then instead of the company closing down under this management, a more liquid and a professional management must come and then save this company. That is the whole object. And if nobody can save it, rather than allowing it to be squandered, the assets must be distributed – as the Joint Committee has decided – in accordance with the waterfall mechanism which they have created. (emphasis supplied)

It was widely felt that that the previous framework for insolvency and bankruptcy in India was inadequate, ineffective and resulted in undue delays in resolution3. One of the objects of bringing in the Code therefore was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.4

To overcome the infirmities of the previous insolvency resolution framework, the Banking Law Reforms Committee (BLRC) was constituted in October, 2014 under the chairmanship of Mr. T.K. Viswanathan. In November 2015, the BLRC came out with its report recommending drastic changes to the law relating to insolvency and bankruptcy (BLRC Report). The BLRC Report recommended a complete institutional overhaul, inter alia, proposing the constitution of a regulator (which eventually became the Insolvency and Bankruptcy Board of India), information utilities, insolvency professional agencies and insolvency professionals. Most importantly, taking into account the need of the times as well as the statutory framework in place in other developed countries, the BLRC proposed that India shift from a “debtor-in-possession” to a “creditor-in-control” model.

Although the complete overhaul of the system and the implementation of the recommendations of the BLRC Report appeared to be a tall order, the government’s commitment to the cause can be gauged from the fact that the Code was brought into effect expeditiously, and its provisions were notified from time-to-time, and it was implemented in December 2016. Since its implementation, India has dedicated tribunals, the National Company Law Tribunals (Adjudicating Authority) with twelve benches across the country, the National Company Law Appellate Tribunal (Appellate Authority), a fully functional regulator (viz., the Insolvency and Bankruptcy Board of India (IBBI)), insolvency professional agencies and several highly-qualified insolvency professionals. Quite recently, India’s first information utility also became functional. IBBI as a watch dog is keeping a close watch on the roadblocks in the successful implementation of the Code and from time to time, based on feedback from its research team and in consultation with the stakeholders, comes out with guidelines, regulations, circulars, clarifications and the like.

A study of the orders passed by the various benches of the Adjudicating Authority under the Code suggests that they have on an average disposed of insolvency petitions within 24 days of their filing. The same study also suggests that the Code largely dispenses with the pro-debtor bias exhibited by judicial bodies under the previous regime.5 While it must be acknowledged that the data set used in the study is limited as it only takes into account orders passed by various benches until August 2017, one can infer that the Code marks the onset of a remarkable change in insolvency resolution in India, and that giving effect to the Code was one of the important factors in India’s over all jump by 30 places in the Index of Ease of Doing Business in 2017 released by the World Bank (and the bump by 33 points as far as resolving insolvency is concerned).6

The expeditiousness with which the Indian government has introduced these systemic changes and the joint effort make by the judiciary and other stakeholders is indicative of the fact that the state remains committed to putting in place a robust insolvency resolution system that is creditor-friendly and maximizes the asset value in a time bound manner.

B. Judicial Pronouncements

As the Code nears its one-year anniversary, and with the best way of assessing implementation of any law is by assessing the judicial pronouncements, it is very heartening to note that the Adjudicating Authorities, Appellate Authority along with various high courts and the Supreme Court of India are giving timely judgments, thereby illuminating various aspects of the Code. This section seeks to examine some of the most notable and landmark court decisions, which have brought a lot of clarity to the provisions of the Code, thereby further boosting the confidence of all the stakeholders.

Innoventive v. ICICI7

The very first case under the Code by a financial creditor was filed by ICICI Bank Limited (ICICI) by way of an insolvency application under Section 7 of the Code against its borrower, Innoventive Industries Ltd. (Innoventive) before the Adjudicating Authority, Mumbai Bench. Innoventive sought to defend itself by arguing that the claim amount was not due, as it was protected under the Maharashtra Relief Undertakings Act, 1958 (MRU Act), under which its liabilities and remedies for enforcement thereof were suspended for a period of one year.

By an order dated January 17, 2017, the Mumbai Bench admitted the insolvency petition filed by ICICI and held that the Code prevailed over the MRU Act by virtue of the Code’s Section 238 non-obstante clause, which states that the Code shall have effect notwithstanding anything contrary contained in any other law. Innoventive appealed against the said order before the Appellate Authority, which also rejected Innoventive’s argument of MRU Act prevailing over the Code. Ultimately, the Supreme Court, while dismissing Innoventive’s appeal, passed a very detailed order laying down the background and framework of the Code.

This being the first case where the Supreme Court had an opportunity to pronounce a conclusive judgment on the interpretation of the Code, the Supreme Court dealt extensively with the nature of insolvency applications filed under Section 7 of the Code and also with the issue of repugnancy between the Code and the MRU Act. The judgment of the Supreme Court also touches upon other key aspects of the Code, thereby boosting the confidence of all the stakeholders.

Mobilox v. Kirusa8

In this case, the Supreme Court interpreted the term “dispute” for the purposes of Section 8(2) of the Code. This decision came against the backdrop of multiple contradictory decisions interpreting “disputes” by various benches of the Adjudicating Authority: the Delhi Bench took the view that the definition of “disputes” was inclusive and not restricted to merely pending suits and arbitrations, while the Mumbai Bench, interpreting the concerned provision strictly, interpreted a dispute to mean only pending suits and arbitrations.

Pronouncing on the interpretation of “dispute”, the Supreme Court held that keeping in mind the legislative intent of the Code, the “and” in Section 8(2) of the Code ought to be read as ‘or’ and therefore the definition of dispute therein was inclusive and could not be restricted to only pending suits and arbitrations. The Supreme Court further observed that in an insolvency application, the Adjudicating Authority is only to inquire whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited & Ors.9

In this decision, the Supreme Court examined the decision of the Appellate Authority with respect to the mandatory/directory nature of various time periods laid down by the Code. The Appellate Authority held that the time period prescribed for operational creditors to rectify the defects in their insolvency applications in seven days in the proviso to Section 9(5) of the Code is mandatory in nature, while holding that the time period for the Adjudicating Authority to admit or reject an insolvency application in fourteen days in Section 9(5) of the Code is directory in nature.

On appeal, the Supreme Court in particular examined whether the prescription to remove defects within seven days in an insolvency application was a mandatory requirement, failure to adhere to which would result in the dismissal of the application.

The Supreme Court took the view that there could be weighty, valid and justifiable reasons for not being able to remove the defects within seven days and the said stipulation was directory in nature, and that an insolvency application could be entertained even when the applicant had overshot the seven day period prescription, provided that the petitioner was able to show sufficient cause for the delay.

Essar Steel India Limited v. Reserve Bank of India

Essar Steel India Limited (Essar) had challenged a directive by the Reserve Bank of India (RBI) to banks to initiate insolvency proceedings against twelve entities, one of which was Essar. The RBI directive was issued pursuant to the amendment of the Banking Regulation Act, 1949 (BRA) as a result of which the Central Government could authorize the RBI to direct banks to initiate insolvency proceedings against loan defaulters under the Code. The move was an attempt by the Central Government to address the very serious and lingering issue of NPAs in the country.

Essar sought to challenge the said directive before the Gujarat High Court by claiming that the twelve entities mentioned in the RBI directive had been chosen arbitrarily and further that it was in discussions with its lenders for restructuring of its debts, which had come to a standstill as a result of the RBI directive.

RBI on the other hand argued that the directive to initiate insolvency proceedings against the aforementioned twelve entities was not arbitrary and that it had in fact, used the twin criteria of the largest and longest standing non-performing assets to arrive at the list of the said twelve entities. The Gujarat High Court refused to interfere with the RBI directive and held that the said RBI directive was not arbitrary. It further directed Essar to raise its concerns before the NCLT.

The aforesaid amendment to the BRA, the RBI directive and the Gujarat High Court’s verdict in the instant case wherein it refused to intervene and stay the proceedings against Essar, eventually paved the way for the initiation of insolvency resolutions against other large companies, the most notable of which are Jaypee Infratech Limited and Amrapali Infrastructure Limited.

c. Conclusion

While Indian courts have sometimes drawn criticism for judgments that appear to defeat the legislative intent behind certain statutes (a case in point being several Supreme Court decisions in the early years of enactment of the Arbitration and Conciliation Act, 1996), the first round of case law suggests an approach that is conscious of the legislative intent behind the Code, and an intention to not allow debtors to scuttle or delay the insolvency resolution process. Understanding the time-bound nature in which the Code functions, courts have shown great restraint and have ensured that proceedings before them do not become susceptible to dilatory litigation tactics that are the curse of Indian courts. Even in cases where the corporate debtors have approached the courts for relief that would result in stalling insolvency proceedings, as in Innoventive v. ICICI (see above) and Essar v. RBI (see above), the courts have rightly refused to intervene and stay insolvency proceedings.

ABOUT THE AUTHOR

Jyoti Singh

Partner

Tel: +91 22 43408505 / +91 22 43408500

Email:

Jyoti Singh is an Insolvency and Disputes Partner with Phoenix Legal, a full service Law Firm. Jyoti has been ranked by Chambers and Partners for ‘Dispute Resolution: Insolvency’ and ‘Dispute Resolution- Mumbai based’ since 2015. Jyoti has also been recommended by Legal 500 for “Dispute Resolution and Insolvency and Restructuring”. She has been awarded the “Young Achievers Award of the Year in the Law Firm category” for the year 2016-17 by Legal Era. Jyoti has co-authored a book titled “Insolvency and Bankruptcy Code, 2016: Concepts and Procedure”.

Ms. Singh was assisted by Ms. Smiti Verma and Mr. Vishnu Shriram, advocates working in the Mumbai office of Phoenix Legal.

Phoenix Legal

Vaswani Mansion, Office No. 17 & 18,

3rd Floor, 120 Dinshaw Vachha Road,

Churchgate, Mumbai-400020, India

www.phoenixlegal.in

Notes

  1. World Bank Doing Business Report, 2016
  2. Section 22 of the SICA.
  3. Statement of Objects and Reasons of the Code.
  4. Statement of Objects and Reasons of the Code.
  5. Watching India’s insolvency reforms: a new dataset of insolvency cases, Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, IGIDR working paper WP-2017-012, August 2017.
  6. World Bank Doing Business Report, 2017: 2017 SCC Online SC 1025.
  7. 2017 SCC Online SC 1154,
  8. Civil Appeal No. 8400 of 2017.

International Disputes
Spring 2018
Digital Print Issue

Welcome Legally India's Spring 2018 Issue

If you would like to receive future editions, please click here to register your interest.

Our Spring 2018 print and digital edition of Legally India, a joint publication by Global Legal Media and Legally India, has a strong disputes flavour, and examines: AI, global litigation risk, GC wishlists and more than a dozen jurisdictions and practice areas.

Click to show 1 comment
at your own risk
(alt+c)
By reading the comments you agree that they are the (often anonymous) personal views and opinions of readers, which may be biased and unreliable, and for which Legally India therefore has no liability. If you believe a comment is inappropriate, please click 'Report to LI' below the comment and we will review it as soon as practicable.

Latest comments