CORPORATE INSOLVENCY RESOLUTION

PROCESS: A STEP IN THE RIGHT DIRECTION?

The Insolvency & Bankruptcy Code has aimed at improving the Ease of doing
business in the Country. With the consolidation of Sick Industrial Companies Act
(SICA), Corporate Debt Restructuring (CDR), Joint Lenders’ Forum (JLF), Strategic
Debt Restructuring (SDR) and the S4A Scheme, IBC has focussed on a time bound
resolution to get maximum output. According to a world bank report (2009), an
insolvency process on an average took 7.9 years, and the recovery rate stood only
at 13.7%. Further, in 2015 the World Bank statistics stated that it took an average of
4.3 years to resolve a soured account. Lenders recovered an average of 26.4 cents
to the dollar. Amongst the developing economies these were the worst numbers.
India lagged far behind in the Ease of Doing business Ranking. After great thought,
the Insolvency and Bankruptcy Code (hereinafter, IBC) came into effect from the
year 2016, it provided for a 180 day period to resolve insolvency by the help of an
Insolvency Resolution Professional (IRP). A Corporate Insolvency Resolution
process (CIRP) would take place for an insolvent company in which options for
revival would be looked upon, failure of resolution to be passed would result into
liquidation of the company.

The Government by the help of the IBC has brought CIRP into the system and we
would analyse it in this article with the help of section 7,9 & 10 of IBC.

An Insight to CIRP & its Functioning

CIRP is initiated by a financial creditor under S.7 of the code, it can also be initiated
by an Operational Creditor under S.9 of the code and by a Corporate Debtor under
S.10 by filing an application before National Company Law Tribunal (NCLT). Once
the application is admitted, the NCLT would issue an IRP within 14 days who would
conduct the CIRP, this IRP can be recommended by either of the parties. The IRP
would then take care of debtors functioning. Afterwhich, a public announcement of
initiation of CIRP would be made which would result into the forming of a Committee
of Creditors (CoC). Certain restrictions and conditions have also been stated in the
code with regards to appointment of IRP and how he can be removed. According to
me, the CoC has a lot of power in the insolvency proceedings. It can also remove the
Insolvency Professional anytime it wants, with 75% of votes.
The basic aim while involving CIRP by the Government was to decrease the average
time taken for insolvency proceedings and also reduce the litigation expenses of the
Company. For which, the code provides for 180 days limit which can be extended by
90 days giving the companies a maximum total of 270 days to finish the process or
enter into liquidation.
Further, the code also provides for a moratorium under S.14 of the Code.
Moratorium has been exhaustively used by the Adjudicating Authority. It is one of the
standout features of the code. A Moratorium explicitly prohibits the filing of suits or
continuation of pending proceedings against the corporate debtor in any court of law,
tribunal, arbitration panel or other authority.
It further prohibits the Corporate Debtor from disposing off or transferring any
property. No property which is in possession of the corporate Debtor can be taken
away as well.

We have frequently seen in the Indian Judicial System that there is multiplicity of
proceedings in a lot of matters, which increases the cost of litigation and also takes
away a lot of useful time from the judiciary. Moratorium is actually a very useful
method to stop it. The thing about Moratorium is that it is not automatically imposed
but can only be enforced by a tribunal or a Court.
One thing which stands true is that IBC is still a developing code. No Law is perfect,
it is only after certain Amendments and tweaks that a law becomes better, but CIRP
is definitely a step in the right direction. CIRP Regulations are a very important
source to the IBC.

INITIAL FLAWS IN CIRP

The CIRP like any other developing law has also faced certain problems with regard
to its implementation. The Government as well as the Insolvency Board has
constantly aimed at flushing out these flaws in the code. The Ground realities are
much different than the expectations which were laid. The time limit for completing a
CIRP was 270 days which is usually elapsed in most of the cases, this not only
endangers the primary point of the resolution but also results in interest income loss
for lenders. Another flaw which struck me was that the Operational Creditor under
S.9 of the code was supposed to receive a certain portion of the liquidation amount,
but the liquidation amount in itself is so low that it is not even sufficient to pay the
financial Creditors.

Moreover, there have been immediate steps taken by the Government to ebb out the
flaws in this code. Project Sashakta is on the radar and has aimed at sketching the
resolution of bad loans and also strengthening credit capacity of Public Sector
banks. Another important thing this code has done is bring a certain sense of
urgency amongst the companies and the stakeholders, there is a fear of losing their
companies as well. In my opinion, the major role in this process is taken by the
Resolution Professional and their functioning is a decisive factor in CIRP. A survey
done by Confederation of Indian Industry (CII) in accordance with PwC had
expressed that the role of IRP’s in handling the day to day affairs of the Bankrupt
Company have come into spotlight where the NCLT has also questioned their
decision making powers. What makes their job more challenging is the constantly
changing laws, but they will have to do better to make CIRP a success in the long
term future.

The Debt Recovery Tribunal (DRT) along with the NCLT have played a very
important role in adjudicating matters pertaining to CIRP. The Insolvency Law
Committee Report, 2018 provides an accurate analysis of the code, specifically
regarding CIRP proceedings and the issue of Moratorium. Certain problems and
suggestions have also been put forward. The Government has been pretty active
with regards to IBC, as they also realise its importance for the growth of Indian
Economy.

A detailed study of CIRP makes me affirm that its foundation has been laid upon
Transparency, Resolution & Accountability. The Indian Judiciary is also playing a
very important role in the development of CIRP as it has brought various important
points into the notice of the government. It is a step in the right direction, but it is not
something to dwell upon. Each of the schemes which were consolidated under IBC
were a step in the right direction but had to be closed down eventually. CIRP has
undoubtedly revolutionised how insolvency proceedings in India take place but there
is still a long way to go. Proper implementation and it is a bud sure to blossom into a
flower.