The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’ or ‘the code’) has brought in a fresh breeze of value – added economic reforms. After decades of a sluggish legal regime in the wake of the Sick Industrial Companies (Special Provisions) Act, 1985 and the Board of Industrial and Financial Reconstruction, India Incorporated woke up to a new start. This historic step allowed India to be a recipient of the Global Restructuring Review Award for the Most Improved Jurisdiction in restructuring and insolvency regime.
This Code has also witnessed an array of amendments in just three years of its implementation. The Code requires filing of a bankruptcy proceeding by a creditor against a corporate debtor within 14 days of default. Section 12A has been inserted by the second amendment (2018) to the Insolvency and Bankruptcy Code, 2016. Section 12A allows the withdrawal of the proceedings filed against the corporate debtor, creating a win–win situation for the creditors and a sigh of relief for the corporate debtor.
Prior to the amendment, it was mandatory for the creditor to file a proceeding under the code. This creates deterrence beyond doubt and has sometimes been referred to as the golden goose in the code. However, this also invited unnecessary litigation along with the cumbersome litigation expenses, both for the creditor as well as the debtor. This proves to be a burden for both the creditor whose monies have been frozen; as well as the debt-ridden cash-strapped creditor. It is, therefore, a scary idea to enter into such proceedings. Moreover, prior to the 2018 amendment, there was no window for allowing the debtor to make adjustments and pay off the creditor, as withdrawal of the proceedings was not possible. The shift in this theme has made many corporate debtors heave a sigh of relief. Compulsory bankruptcy proceedings without affording a reasonable opportunity shall have led India to an economic disaster. The 2018 amendment allowed such withdrawal of proceedings, if a settlement has been reached between the creditor and debtor. This shall reduce the burden upon the courts and the monies due may be realized sooner than anticipated. Without the amendment, the number of cases were just piling up and did not really help either of the parties economically, at least until they were disposed off. And the end result would always be tilted in favour of the creditor, with little room for the debtor to act.
The removal of the requirement of a financial creditor, having to give the corporate debtor written notice and an opportunity to repay the dues prior to initiating insolvency proceedings, is a paradigm shift in process that the code prescribes. Section 7 of the IBC allows the financial creditor to initiate insolvency proceedings when default has occurred. The Supreme Court in Arcelor Mittal case has held that the 14-day window for the creditor to file bankruptcy proceedings under the code is mandatory and not directory. Although, these provisions have a huge positive impact on financial creditors and the economy, they sound like a death-knell for the corporate debtor. Although Section 12A allows the withdrawal of proceedings after filing, it may not have solved the problem entirely. A pre–insolvency window is still unavailable. Currently, there is no provision of issuing notice to corporate debtor by the financial creditor before filing proceedings under the code. Imagine a scenario, where, the corporate creditor is given an opportunity to settle its dues before the filing. A similar provision exists under the Negotiable Instruments Act, 1881, which allows a drawer of the cheque to make a payment within a window of 15 days from the day of the default, notice being served. If a similar provision of giving notice to the defaulting corporate debtor is allowed, along with a statutory window of settling the dues, the benefits shall be manifold. Such benefits shall include reducing the burden on the judiciary, preventing unnecessary litigation expenses, pushing the corporate debtor into further debts needlessly and also allowing a smooth time–bound settlement process. The Legislature is required to consider the dynamics of such situations and act for the benefit of all persons, not prejudicing the interest of the corporate debtor.
It is indeed necessary to have a pre-insolvency stage of a specified number of days to allow the corporate debtor to resolve the issue, before moving the NCLT. This will reduce the burden on courts and also allow a settlement. Although allowing withdrawal under Section 12A is a good tool, it only allows a settlement after creating deterrence; and also leads to wastage of the time of courts first allowing admission and then allowing withdrawals.
Insolvencies and bankruptcies are delicate matters, affecting a wide range of persons. Bankruptcies in cases of corporate debtors create ripples across the economy. A deterrent law in lines with the IBC is the need of the hour, considering the sluggish corporate attitude towards its debtors and its salient weapon of limited liability. However, the Legislature needs to look at the larger picture of mounting number of cases, withdrawals, harassment to creditors and the stakeholders of the corporate debtor and the shifting paradigms related to these bankruptcies since the advent of the code. It shall be in the interest and welfare of the public at large, if a statutory settlement window or a pre-insolvency window is created with the framework of the code.
Hiral Mehta Kumar is Assistant Professor of Law, National University of Study and Research in Law, Ranchi.Disclaimer: The views or opinions expressed are solely of the author.