Role of IBC and IBBI in Insolvency process of India

  • November 10, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Role of IBC and IBBI in Insolvency process of India

Subject : Economy

Section: Monetary Policy

  • Significant Supreme Court ruling: Upheld the constitutionality of IBC provisions on Personal Guarantors’ Insolvency Resolution.
  • Dismissed over 200 petitions: Challenged the legal validity of the IBC provisions related to personal guarantors’ insolvency.
  • Decision Summary: Insolvency and Bankruptcy Code provisions (Sections 95 to 100) on personal guarantors’ insolvency process were deemed non-arbitrary by the court.
  • Implications: Likely to aid lenders, especially banks, in recovering dues of corporate debtors from personal guarantors, often promoters of companies.
  • Removal of Obstacles: The ruling effectively removes procedural obstacles to the progress of insolvency motions against personal guarantors pending before the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT).
  • Insolvency Applications: 2,289 insolvency applications involving corporate debt of ₹1,63,916 crore have been filed since 2019 against personal guarantors under the IBC.
  • Principles of Natural Justice: Variability of their application based on the situation was affirmed. Sufficient safeguards were highlighted regarding the resolution professional’s functioning during insolvency processes.
  • Resolution Professional’s Role: Not intended to perform an adjudicatory function, as the petitioners contended. The court emphasized that the RP does not possess adjudicatory powers.
  • Introduction of Provisions: The provisions related to personal guarantors were introduced under the IBC in 2019, facing subsequent challenges in various courts and ultimately moving to the Supreme Court.
  • Encouragement from Finance Ministry: Public sector banks were urged by the Finance Ministry in 2020 to enhance their initiatives in initiating insolvency processes against personal guarantors.
  • Contentious Point: Concerns were raised about the lack of opportunity for personal guarantors to dispute the initiation of the insolvency resolution process against them before the petition is admitted.
  • Legal Expert’s Comments: highlighted that the Supreme Court’s decision clarifies the legal landscape concerning personal guarantors within the context of the IBC and emphasizes the need for careful consideration before assuming such responsibilities.

Insolvency and Bankruptcy: Key Concepts

  1. Insolvency:

A state where individuals or companies cannot repay their outstanding debts.

Situation: Inability to meet financial obligations.

  1. Bankruptcy:
  • Definition: A legal declaration of insolvency by a competent court.
  • Outcome: Court orders to resolve insolvency and protect creditors’ rights.
  1. Insolvency and Bankruptcy Code (IBC):
    • Enacted: In 2016 to streamline and expedite the resolution of failed businesses.
    • Objective: Provide a common forum for debtors and creditors of all classes to resolve insolvency.
    • Timeline: Resolution process for a stressed company must be completed in a maximum of 270 days.
  1. Threshold Adjustment:
    • Change: In March, the government raised the threshold for invoking insolvency under IBC to Rs 1 crore from Rs 1 lakh.
    • Purpose: Prevent triggering insolvency proceedings against small and medium enterprises affected by the coronavirus pandemic.
  1. Institutions under IBC:
  • Insolvency Professionals: Licensed professionals administering the resolution process, managing debtor assets, and providing information to creditors.
  • Insolvency Professional Agencies: Register and certify insolvency professionals, enforce a code of conduct.
  • Information Utilities: Creditors report financial information, including debt records, liabilities, and defaults.
  • Adjudicating Authorities: National Companies Law Tribunal (NCLT) for companies; Debt Recovery Tribunal (DRT) for individuals. Responsibilities include approving the resolution process, appointing insolvency professionals, and approving creditors’ decisions.
  • Insolvency and Bankruptcy Board: Regulates professionals, agencies, and utilities under the Code. Comprises representatives from the Reserve Bank of India, Ministries of Finance, Corporate Affairs, and Law.

About National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT)

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are key judicial bodies in India that deal with matters related to companies and corporate affairs.

National Company Law Tribunal (NCLT):

  • The NCLT is a quasi-judicial body that was established under the Companies Act, 2013.
  • It was set up to handle matters related to company law in India, including disputes, insolvency, liquidation, mergers, and amalgamations.
  • NCLT exercises powers that were earlier vested in various judicial forums such as the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).

National Company Law Appellate Tribunal (NCLAT):

  • The NCLAT is a higher appellate authority that was established under the Companies Act, 2013.
  • It serves as an appellate body for appeals against the orders passed by the NCLT.
  • NCLAT has the jurisdiction to hear appeals against the orders of NCLT related to insolvency, liquidation, and other company-related matters.
  • It plays a crucial role in ensuring transparency and efficiency in the adjudication of company law cases and disputes in India.

Both the NCLT and NCLAT were created to streamline the legal processes and provide a single platform for resolving corporate disputes and insolvency cases, thereby contributing to the ease of doing business in India.

About Debt Recovery Tribunal (DRT)

The Debt Recovery Tribunal (DRT) is a specialized legal body in India that handles cases related to the recovery of debts primarily by banks and financial institutions.

  1. Establishment:
    • DRTs were established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).
  2. Objective:
    • The primary objective of DRTs is to provide a speedy and efficient mechanism for the recovery of debts.
  3. Jurisdiction:
    • DRTs have jurisdiction over cases where the claim by banks and financial institutions against a borrower is more than Rs 20 lakhs.
  4. Applicability:
    • DRTs handle cases related to the recovery of debts due to banks and financial institutions and are not involved in other civil or criminal matters.
  5. Powers:
    • DRTs have the authority to adjudicate debt recovery cases, examine witnesses, and pass orders for the recovery of debts.
  6. Appeals:
    • Appeals against the orders of DRTs lie before the Debt Recovery Appellate Tribunals (DRATs).
  7. Speedy Resolution:
    • One of the main features of DRTs is to ensure the speedy resolution of debt recovery cases, which is crucial for the financial health of banks and financial institutions.
  8. Secured and Unsecured Debts:
    • DRTs handle both secured and unsecured debts, providing a forum for creditors to recover their dues.
  9. Recovery Certificate:
    • Once a DRT passes an order in favor of the bank or financial institution, it issues a Recovery Certificate, which empowers the creditor to recover the debt as arrears of land revenue.
  10. Debt Recovery Appellate Tribunal (DRAT):
    • DRATs serve as appellate authorities for appeals against the orders of DRTs.

Cross-Border Insolvency

  1. Definition:
  • Cross-border insolvency involves cases where a debtor has operations or creditors in multiple countries, requiring coordination among different courts for an efficient resolution.
  1. UNCITRAL Model Law:
  • The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (1997) provides a widely accepted legal framework for addressing cross-border insolvency issues.
  1. India’s Decision:
  • The Indian government has decided to halt the adoption of a cross-border insolvency regime. This regime would have allowed foreign lenders to initiate bankruptcy proceedings against defaulting Indian businesses in local tribunals.
  1. Reason for Halt:
  • India’s decision is based on the limited adoption of the UN model globally, with only around 50 countries implementing it, and many having stringent restrictions.
  1. Government Priorities:
  • Instead of focusing on cross-border insolvency, the government prioritizes:
    • Expanding the informal debt resolution scheme for larger corporations.
    • Implementing a new regime for handling group company insolvencies.
    • Creating a special regime for the real estate sector.
    • Addressing lacunas in the operation of the Insolvency and Bankruptcy Code.
    • Reducing delays in case admission and approval of rescue plans.
    • Preventing inappropriate transactions by the management of defaulting companies.
economy Role of IBC and IBBI in Insolvency process of India