Introduction
Reconstruction is the corporate process which involves modifying the structure of the
company in order to improve the financial health of the company. The Insolvency and
Bankruptcy Code of 2016 (Code) deals with the formal restructuring of Indian companies.
The process of restructuring under the Code is called the Corporate Insolvency Resolution
Process (CIRP). It is the process of settling the issue of corporate insolvency with the help of
the provisions of the Code. This process can only be initiated when the company commits
default. By initiating the process of corporate insolvency under the Code, there can be two
possible outcomes. First outcome is that the company is effectively revived, through the
process of restructuring the company. Second outcome is that when there is no room for
revival, then the company goes into liquidation.
The Code is a positive contribution towards the insolvency laws in India as it has a different
approach than the existing legal frameworks. The code focuses on the creditor in possession
approach rather than the debtor in possession model. Under this former approach, more
power is given to the creditor during the insolvency approach. Once the CIRP is filed in the
NCLT, the court appoints an unbiased person referred as the resolution professional. He is
appointed to handle the management and daily operations of the company. Whereas in the
latter approach, the debtors still have the control of the day-to-day affairs of the business.
This approach allows the debtors to continue to mismanage the company and worsen the
financial health of the company. Second overall we see that the Code indeed improves the
ease of doing business in multiple ways. The Code has established a faster resolution
insolvency process by making it time bound. Additionally, by adopting the creditor-inpossession approach, it has successfully earned the confidence of the creditors. This results
in an increase in investment, which helps in expansion of the businesses and the overall
national economy.
Even though there are advantages, the Code has experienced numerous setbacks. First is
that, the prerequisite for filing the application for initiating the CIRP is to establish that default
has been committed by the company. However, it is difficult to establish the same either due
to operational issues or ambiguous contract terms or choosing complex financial
transactions. Second is that the court has held that the timeline for the adjudicating authority
to take decision with respect to the CIRP application is directory and not mandatory. This is
suggestive that these corporate debtors end up filing for their responses even beyond 14
days as they are well aware they will not be penalised. This will lead to parties questioning
maintainability of the application and even make the proceeding lengthy, ultimately
increasing the burden of the NCLT. Another cause of delay is the involvement of multiple
stakeholders in structuring the resolution plan for the restructuring of the company. Under
section 5(26) of the Code, the resolution application prepares the resolution plan, which
requires further inspection and analysis by the resolution professional under section 30(4), it
then requires the approval of the Committee of Creditors before seeking approval from the
NCLT under section 30(6). Additionally, the recent amendment of the default amount under
the code has been as low as Rs. one lakh, this leads to additional burden on them.
In addition to this, although the recent case of Essar Steel India Limited v. Satish Kumar Gupta
tried to provide interpretation of certain provisions of the Code, especially focussing on the
treatment of financial and operational creditors during the CIRP. The question arose because the
Code does not specifically deal with priority to be given to these two types of creditors in the
distribution of the proceeds during CIRP. The Supreme Court held that the Committee of
Creditors should be given the discretionary power to determine the distribution of the proceeds.
This is problematic because the Code itself mandates equitable treatment of all kinds of creditors
under section 53. This section lays down the order of priority by which the proceeds of the sale of
assets will be distributed against the creditors. This section ensures that no creditor is ignored and
all of them receive just and equitable treatment. However, under this case the court gives too
much power in the hands of the financial creditors to decide the proceeds, by doing this they are
not taking into consideration the interests of the operational creditors.
Way Ahead
1) It would be better to have a more realistic timeline to ensure consistency in the CIRP.
Additionally the response period of the adjudicating tribunals should be extended as well,
in order to prevent overburdening and ensure approval of the right resolution plan.
2) There are multiple stakeholders involved in the making of the resolution plan. This causes
further delay in the approval of the resolution plan.