By- Harshala Keny
Abstract:
Nirav Modi scam developments are recently on news. Union Budget 20-21 is viewing debt recoveries and bank credit capacity seriously. The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 have raised several debates. Thus, an overall picture of the IBC, its background, working, amendments and several issues regarding debt recovery need to be clear. The lockdown has affected debt recovery laws. There are beneficiaries as well as victims for the same. Thus, an insight to such section is necessary.
Keywords:
"insolvency and bankruptcy code, 2016" "insolvency and bankruptcy code (amendment) ordinance, 2020" "union budget 20-21"
Introduction:
India’s extradition request against Nirav Modi was allowed by the U.K. court, and the Secretary of State’s decision dependent on the permission of High Court in U. K. will further clear the path. A scam of 13, 758 crores was committed using a public sector bank, the Punjab National Bank.[1] When big scams happen, the banks of the State get looted, eventually the liquidity in the Indian market reduces, the State pumps up money to these banks through recapitalization and the money recapitalized in these banks are from the revenues earned. Higher revenue requirements are met up by high impose of taxes and thus when high taxes are paid, the purchasing power reduces leading again to less liquidity. A vicious circle, caused by the draining scams thus continue to exist in absence of a strong action against it. Overseas scams are hard to curb cause of jurisdictional problems. However, to curb the debt recovery problems within India, a strong system has been set up by introducing Insolvency and Bankruptcy Code, 2016. A recent amendment as an ordinance passed in 2020 keeping in view the economic hit by the lockdown has become a matter of debates.
Background :
Before IBC, 2016, several acts existed for debt recovery. The oldest one being The Presidency Towns Insolvency Act 1909 for presidency towns like Kolkata, Chennai and Mumbai and The Provincial Insolvency Act, 1920 for the rest; followed with The Sick Industrial Companies (Special Provisions) Act, 1985; The Recovery of Debts due to Banks and Financial Institutions Act, 1993; Companies Act, 2013, somewhat tried to decrease the bad debt problems beforehand; the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) act, 2002 still coexisting with IBC, 2016 also tried to pacify the issue at its best. Several schemes like Scheme for Sustainable Structuring of Stressed Assets (S4A), Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR) were made to curb the problem.[2] Suits in the civil courts continued. But through all the above means it took 5-7 years on average for a debt recovery proceeding to be successful.
The other problem which happened to arose, cause of several such acts is that multiple proceedings were initiated under multiple acts and jurisdictional problems arose. Thus, to consolidate and amend the laws regarding debt recovery, Insolvency and Bankruptcy Code, 2016 got introduced.
Insolvency and Bankruptcy Code, 2016:
The Insolvency and bankruptcy code, 2016 was enacted and came into force with effect from 28th May, 2016. The objective of the code is “to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation 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.”
Very much dedicated to the objective, it not only solved the jurisdictional problems cause of proceedings under multiple acts but it also ensured quick debt recovery proceedings with a clear structured process. It gave a time limit of 180 days for Corporate Insolvency Resolution process which can be extended maximum for 90 days that is till 270 days and within 330 days maximum complete resolution procedure should be completed keeping in mind several other factors which may delay the process. [3]
It works in two branches, one the regulatory and other the adjudicatory. The regulatory branch include:
IBBI (The Insolvency and Bankruptcy Board of India) which is responsible for the implementation of IBC, 2016,
IP (Insolvency Professionals) who act on behalf of Insolvent individuals and companies during the insolvency proceedings and smoothly manage the affairs to benefit the process,
IPA (Insolvency Professional Agencies) which are registered with IBBI under section 201 which regulate the activities of insolvency professionals and lastly,
the IUs (Information Utilities) which act as data repositories of financial information of the debtors which accelerate the Insolvency proceedings.[4]
The adjudicatory branch includes NCLT which is for corporate debts. Appeal against its decision lies before NCLAT and further appeal directly lies before the Supreme court of India. It also includes DRT for individual debts, appeal for which lies to DRAT and further it directly lies to the Supreme Court of India.
The overall resolution process in summary starts from an application which can be made by the creditor as well as the debtor. The application is accepted within 14 days and if rejected for technical reasons, 7 days are given to rectify it. After it is accepted an Interim Resolution Professional is appointed to publish that such proceedings have started and thus invite claims. Moreover, moratorium is said to maintain to stop any other multiple proceedings regarding the same debt by different creditors. A Resolution Professional is appointed with the consent of the creditors, a committee is formed of the creditors and a resolution is sorted within a limited time period. If it doesn’t conclude with a resolution plan, proceedings to liquidify the assets of the companies take place.[5]
As seen above this not only helps the creditors, but also the corporate debtors to exit as a company and liquidify. Such fast resolution procedures which ensure quick debt recoveries encourage entrepreneurs and lenders to invest without hesitance and also attracts foreign business investments in India.
IBC has recovered maximum debts than any other statutes and methods before.[6] It has also increased ease in business.
Recent affairs in the debt recovery section:
The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 was published which brought up two elements which raised debates.
No application for insolvency or bankruptcy proceedings can be applied for 6 months from 25th March 2020 which may extend further for a year.
This means no person, even the corporate debtor can apply to liquidify their assets from 25th March 2020 to 25th September 2020. No defaults arising within this period can be asked for adjudication.
The above amendment was made adding section 10 A in the code. It was made keeping in mind the economic hit which people and companies suffered cause of the lockdown.
In the above period, during any ongoing Corporate Insolvency Resolution process, if the debtor tries to defraud the creditors, by doing certain transactions no actions will be taken against it.
The most important aspect of these two elements is that, both the elements apply perpetually. No proceedings can be applied for the resolution as well as against the defrauding even after the said period.
A new notification (Notification F. No. 30/09/2020) dated 24th March 2020 also increased the threshold for insolvency proceedings from 1 lakh to 1 crore. Which means proceedings for claim amount of more than 1 crore only can be applied for before the IBC’s adjudicating authority. It purported to secure the MSMEs from such proceedings and give them a chance of revival. However, it has somewhat secured the big debtors who have credit claims against them just below the 1 crore mark.
On the other hand, in the Union Budget 20-21, 20 thousand crores of recapitalization have decided to be infused. Considering the previous amounts, this is quite less. Surprisingly, government is looking forward for more liquidity through debt recoveries itself. And for the same they have proposed to set up Asset Reconstruction Company, Asset Management Company and Alternative Investment Funds. This system thus, will work to buy the bad loans from the banks, and take the responsibility to convert their assets. The NPAs (Non Performing Assets) are constantly rising and may take a shoot of 15%.[7] Considering the situation, such machineries have been introduced. However, whether they will be completely government owned companies or not is still in question.
Conclusion :
Considering the debt recovery situation currently, adjudicatory bodies of IBC for the said period are unapproachable, however civil suits can be filed. ARC, AMC and AIF are the hopes from saving the growing NPAs and further developments in Nirav Modi scam case would attach new histories in the debt recovery section.
References:
[1]. Special Correspondent, Nirav Modi can be extradited to India in PNB scam case, says U.K. court, The Hindu, Feb 25, 2021
[2]. M. Ghadyali, D. Nanani, N. Murarka, H. Shah, Evolution of Insolvency and Bankruptcy Code 2016, RBSA, Feb 2018
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