Tag: #InsolvencyandBankruptcyCode

About AAA Insolvency Professionals LLP

AAA Insolvency Professionals LLP is the second and the largest Insolvency Professional Entity (IPE) to be registered with Insolvency and Bankruptcy Board of India (IBBI). The IPE has 29 Designated Partners, 42 Associate Partners and about 75 employees engaged in CIRP & Liquidation process divided into various teams viz. CIRP team, Claim Verification team, Corporate Debtor Operations team, Legal team.

Job Title

Legal Associate (CIRP Process)

Roles and Responsibilities

• Perform various tasks under CIRP as per timelines in IBC/ CIRP Regulations independently.
• To plan for attending to various tasks and allotting them to various team members in CIRP
• To conduct due diligence on the work by Team Members to ensure its quality and timeliness
• Provide legal support to the Insolvency Professionals for the efficient conduct of the Corporate Insolvency Resolution Process (CIRP) and Liquidation Process

Requirements

• Expert knowledge of the IBC Code, CIRP Process, & other ancillary Laws.
• Excellent Drafting Skills, Proficient in MS Word and a decent knowledge of MS Excel
• Should have procedural knowledge of CIRP and Liquidation process such as claim verification, conducting COC meetings, drafting minutes of meetings, and interaction with COC members.
• Should have administrative and managerial skills
• Should be very good at English writing and speaking
• Should have confidence and appetite to work on a new project and should be ready to accept challenges.

Experience

2 to 5 years of Experience in Insolvency and Bankruptcy code.

Professional Qualifications

• Should be a Law graduate or company secretary.

Perks

• 5.5 days working (2nd & 4th Saturday Off)
• Salary- 5 Lakh Per Annum to 7 Lakh Per Annum
• The incentive for eligible tasks as per the policy of the Company.

Application Process

Interested candidates may send an email to hr@aaainsolvency.in

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Introduction

Money is a major factor in people’s lives in the modern world. With the transition from cash to banknotes to credit-rated playing cards, there is a clear rise in financial fraud. It has become necessary for third parties to help with transaction processing, buyer-seller mediation, storage of products and cash, money transportation, and even revenue accumulation to deal with these intricate currency structures. Banks have a right to fulfil this intermediate role, and bankers are mediators. As the variety of these intermediaries grew over time, more government regulation was required to monitor, regulate, and change their operations.

To date, there is no proper definition of attempted financial institution fraud by anyone. For gifts, the section under the IPC protects against fraud, concealment, forgery, embezzlement, breach of belief, criminal conspiracy, etc. It is used in all bank fraud cases. There is no proper section that deals with financial institution fraud and finds standards for committing and punishing such fraud. While these financial frauds cause substantial damage and loss to financial institutions and banks, they are not called scammers in India. Things are exploding right now and the types of these scams are increasing tremendously with our growing knowledge of the times. In 2001, after massive fraud such as Harshad Mehta fraud, vanishing agency rip-off, plantation company fraud, NGO fraud, mutual budget fraud, and Ketan Parekh rip-off.

As the economy slows, frauds increase

Financial institutions have seen a startling seven-fold surge in fraud instances in only five years.

90% of total fraud sums and 55% of total fraud coverage are attributable to Public Sector Bank (PSB) fraud. This year, there was more PSB fraud. A recent Rajya Sabha probe, according to the finance minister, revealed a very high amount of PSB fraud.

The State Bank of India registered the biggest loss due to the order in which bank losses occurred. Following it are the Baroda Bank with Rs 8,273 crore and the Punjab National Bank with Rs 10,822 crore. According to documents published in 2017 by the National Criminal Records Bureau (NCRB), the number of charges for financial offenses (as defined by the Indian Penal Code, or IPC) has increased to 111. Here, an economic crime includes offenses like ATM-related fraud, counterfeiting, and banknote forgery. White-collar crime has been dubbed the epicentre of Jaipur, and Chennai has been claimed by several leases.

Reporting also leads to an expansion of the fraud’s scope. Cases were thoroughly documented, and her RBI put up a Central Fraud Registry to aid with case monitoring. Additionally, the RBI commanded that any defective goods with costs exceeding Rs. 500 crores be checked for potential fraud. These offenses don’t just affect big banks; they also affect little institutions.

In general, slowing down might make these scams worse. According to one theory, it might be attractive to further reduce fraud as a corporation expands and fights to get out of a more debt-ridden scenario. PNB recently reported a bank quarter scam involving DHFL accounts for Rs. 3,688.58 billion. These frauds come in an increasing variety. The RBI detected fraud in financial institutions in 2019 of Rs 71,500, although state-owned banks were responsible for 90% of these losses.

There are no codified laws prohibiting such fraud in overseas prisons, therefore instead of filing cases with police/CBI courts, there is no legal structure in place for such situations. In FY’22, banking frauds totaling more than 100 crores significantly decreased. In private and public regional banks, there were 118 fraud cases in FY22 compared to 265 in 2020–21. Banks reported fraud cases totaling 41,000 crores in 2021–22, down from 1.05 lakh crore the year before. This shows a dramatic decrease in frauds involving amounts exceeding 100 crores in the banking sector. Professional figures show that the number of fraud cases in private and public regional banks decreased from 265 in 2020–21 to 118 in FY22.

According to statistics, the overall number of fraud cases involving above $100 crores for public region banks (PSBs) reduced to 80 from 167 in FY’21, while for private region creditors, such cases decreased to 38 in FY’22 from 98 in FY’21. For PSBs, the overall amount has decreased from 65,900 crores in FY 21 to 28,000 crores. The discount for non-public regional banks is from 39,900 crores to 13,000 crores in FY’22.

The RBI has been taking numerous actions to detect frauds, including enhancing the effectiveness of the Early Warning System (EWS) framework, strengthening the governance and response system for fraud, enhancing statistics evaluation for tracking transactions, and establishing a dedicated Market Intelligence (MI) Unit for frauds. Public sector banks (PSBs) saw a decrease in fraud cases from 167 in FY2021 to 80 in FY2021, while private sector lenders saw a decrease from 98 cases in FY2021 to 38 instances in FY2022.

From £65.9 trillion in FY21 to £28 trillion in PSB, it has decreased cumulatively. The cut for private banks for FY2022 is between Rs. 39,900 and Rs. 13,000.

RBI Steps to check fraud cases

To check for fraud, the RBI will improve the effectiveness of its Early Warning System (EWS), strengthen its fraud governance and response system, expand data analytics to monitor transactions, and develop a dedicated Market Intelligence (MI)

Use of Artificial Intelligence

The rapid development of technology has opened up a new criminal arena. Cybercrime is currently a hot topic in India. Not surprisingly, India ranked third in the world for the number of reported cybercrimes in 2020, and the majority of these cases (up to 45% of cybercrimes) were online financial fraud. There are many online scams these days, including:

Phishing – Scammers propagate links via messages, attachments, advertisements, and other media to redirect their clicks to fake pages identical to their original website such as banks, e-commerce platforms, social media, etc.

Vishing/Telegraphic Fraud – Scammers posing as representatives of banks, corporations, insurance agencies, governments, etc. Contacting people via phone or other media to obtain information such as passwords, OTPs, and PINs. Get unauthorized access to your account by tricking or persuading.

Malicious Apps – Scammers encourage you to download unknown apps via installed messages, ads, giveaways, etc., thereby gaining access to the target device and stealing OTPs and already stored information such as credentials.

ATM skimming – ATMs are installed with a device that can copy data from the target ATM card and a PIN that can be used to withdraw money.

SIM card cloning – Scammers can clone their SIM (Subscriber Identity Module) card of a registered mobile number linked to a bank account to steal and scam a target’s identity.

QR Code Scam – Scammers can trick a target into scanning her malicious QR (quick response) code, which allows them to surreptitiously access the target’s device and retrieve information.

Surprisingly, following the introduction of Covid-19, the number of instances of financial fraud committed online has risen. These con artists use deception to get victims to test their medication as one method of catching tartar. Financial institutions are investing more than $217 billion in AI and machine learning (ML) solutions to address this issue. According to estimates, the deployment of such technologies cut down on investigation time by 70% and increased fraud detection accuracy by 90%.

Here are some ways AI and ML can be integrated into banking systems to keep consumers safe:

Numerous IT firms, including Teradata and Datavisor, are developing customized AI fraud detection tools for banks. AI software analyses consumer transaction patterns, create profiles using such information and may spot anomalous behavior. Uncanny Vision offers artificial intelligence (AI) monitoring at businesses and ATMs to track human behavior and notify you in case of questionable conduct. To confirm identity, biometric security scans a person’s distinctive biometric print, such as a finger, thumb, or retina. Using multi-factor authentication, Know Your Customer (KYC) integrates all data, including biometrics, to thwart illegal access. Security software alerts users to illicit app downloads that haven’t been verified by the user and could harm the device. Every minute, email platforms like Gmail find millions of spam messages that, if not deleted, might target users. Software that recognizes spam and fraud calls, like the True Caller app, alerts you in advance. Similar apps are also used by some insurance firms to identify probable fraudulent claims.

In addition to being secure and quick, using AI to fight fraud also improves user experience, offers individualized solutions, and lowers expenses and the possibility of human error. AI is a self-learning program that instantly updates and modifies itself to offer the most practical and successful answers.

The Bottom Line

While the progressive liberalization process has given the Indian banking industry a fresh coat of paint, it has also presented some significant obstacles. Fraud and a spike in her NPA are two of them. The banks involved have not suffered losses as a result of the fraudulent activity afflicting the financial sector, but their credibility has been further damaged.

Cases of bank fraud have increased recently in India. In India, bank fraud is frequently regarded as one of the costs of conducting business, but since liberalization, its prevalence, complexity, and associated expenses have all skyrocketed. Regulatory issues are affecting bank profitability and, consequently, the Indian economy.

References

1. Akansha Barua, Emerging Economic Frauds in Banking Sector, LawBhoomi(22 July 2022) Available at: https://lawbhoomi.com/emerging-economic-frauds-in-banking-sector/
2. The Editor, Banking frauds of over ₹100 crore see significant decline in FY’22, The Hindu(4 July, 2022) Available at: https://www.thehindu.com/business/Economy/banking-frauds-of-over-100-crore-see-significant-decline-in-fy22/article65595269.ece
3. Pushpita Dey, ‘Banking Frauds Using Communication Devices Rose By More Than 65% Post Covid’ (Outlook India, 18 December 2021) https://www.outlookindia.com/website/story/business-news-bankingfrauds-using-communication-devices-rose-by-more-than-65-post-covid/405699 (22 Septl 2022)
4. Internet Crime Complaint Center, Internet Crime Report 2020 (2021) 17 https://www.ic3.gov/Media/PDF/AnnualReport/2020_IC3Report.pdf
5. PYMNTS, ‘How AI And Machine Learning Can Address Banks’ Fraud-Fighting Weaknesses’ PYMNTS, 09 July 2021) https://www.pymnts.com/fraud-prevention/2021/ai-ml-banks-fraud-fighting/  (22 September 2022)
6. Shruti Sinha,BANKING FRAUDS: REFORMS BY GOVERNMENT AND ARTIFICIAL INTELLIGENCE,VOL. 1 ISSUE 3,Journal of Legal Research and Juridical Sciences,ISSN (O): 2583-0066 Available at: https://jlrjs.com/wp-content/uploads/2022/04/8.-Shruti-Sinha-1.pdf

This article has been written by Jay Kumar Gupta. He is currently a second-year BBA LL.B.(Hons.) student at the School of Law, Narsee Monjee Institute of Management Studies, Bangalore.

The resolution plan is created for the firm based on the advice and recommendations of the committee of creditors members to maximize the effectiveness of the corporate insolvency resolution process. According to this Code, any financial or operational creditor may initiate the corporate insolvency process against the corporate debtor on behalf of a company registered under the Companies Act of 1956, such as Limited Liability Partnerships, Partnership firms, and Individuals, or under the Insolvency and Bankruptcy Code. This may only be started if the corporate debtor has fallen behind on debt repayment.

The committee of creditors plays a vital role in the insolvency process. This committee of creditors is regarded as a higher-level decision-making body and oversees the Corporate Insolvency Resolution Process. A committee of creditors is established under regulation 21 of the Code to carry out the duties of the interim resolution professional and solicit claims from all creditors^. The committee of creditors should be created no later than 14 days after the public notification and after the claim has been confirmed.

ROLE OF COC

• The committee of creditors must include every financial creditor as a code requirement. It also lists the financial and operational creditors separately per the Code’s rules. 
• The committee of creditors has several obligations and duties to fulfill by the Corporate Insolvency Resolution Process outlined in the law. The following are some critical duties:
• All significant decisions are made after approval from the committee of creditors’ creditors.
• The decision to adopt the resolution plan and restore the corporate debtor is up to the creditors’ committee.
• They can elect to replace the insolvency professional with the interim resolution professional or even decide to use the latter as the resolution professional.
• They have frequent meetings where the procedures for the specialists involved in the interim resolution, who finally decide the destiny of the corporate debtor, are addressed.
• The respected committee of creditors operates by the administrative choices made by the resolution specialist.

POWERS OF THE CREDITORS’ COMMITTEE

A committee of creditors serves as an authoritative body and is heavily involved in decision-making. It also controls the processes, activities, and roles of the creditors. According to the rules of the Code, they are granted the following authority:

• The committee of creditors has the authority to decide whether the corporate debtor will operate normally and can make crucial decisions in the company’s favor.
• When there is a suspicion of wrongdoing, they can go to the adjudicating body, the national business law tribunal.
• They can apply to the adjudicating body to switch the interim resolution professional if necessary.
• They may decide to move forward with liquidating the corporate debtor even without any approval on any resolution plan. 

NCLT AND ITS JURISDICTION

The National Company Law Tribunal (NCLT) was established as a quasi-judicial body to settle conflicts in Indian corporations. It is the Company Law Board’s replacement. It is controlled by the laws that the central government has established. Cases about civil court have been transferred to the NCLT, a special court.

The Board for Industrial and Financial Reconstruction (BIFR), The Appellate Authority for Industrial and Financial Reconstruction (AAIFR), and the powers relating to winding up or restructuring and other provisions vested in High Courts are consolidated under the National Company Law Tribunal (NCLT). As a result, all governing authority over Indian-registered corporations would be consolidated under the National Company Law Tribunal. The Company Law Board established by the Companies Act of 1956 has since been abolished with the creation of the NCLT and NCLAT.

The main issue that emerges from all of this confusion is whether Tribunals are permitted to interfere with the CoC’s operations and reverse its judgments about resolution plans. If the voluntary arrangement unduly prejudices the interests of creditors or there has been a severe irregularity in connection with the applicable qualifying decision procedure, remedies are provided by the UK Insolvency Act, 1986. The Adjudicating Authority has, in several instances, expanded the scope of its power under Section 31 in examining resolution plans and, in a sense, provided remedies for creditors whose interests have been harmed, despite the Insolvency and Bankruptcy Code, 2016, lacking any specific provisions, where this issue can be dealt with, the case laws, the cases. 

Shrawan Kumar Agrawal Consortium Vs. Rituraj Steel Private Limited in Company Appeal

• Facts and issues:

The CoC approved the resolution applicant in Company Appeal (AT) (Ins.) No. 1490 of 2019 is the AppAppellantnd the Committee of Creditors has adopted the Resolution Plan with 84.70% of the voting shares. The AppAppellantaims that following the CoC’s acceptance of the resolution plan, the RP submitted the plan to the Adjudicating Authority for approval by Section 31 of the Code. The other two bids (the failed bidders) contested said application before the adjudicating authority. The Resolution Plan is challenged before the NCLT.

• Judgment: 

It is held that the Adjudicating Authority cannot interfere with the commercial judgment of CoC in light of the facts mentioned above. The instruction to rebid to maximize the corporate debtor’s value also amounts to legal interference with the CoC’s business choice. The NCLAT further ruled that the prospective resolution applicant has a right to full disclosure of the corporate debtor but that the Appellants were not given this opportunity. As a result, the entire process was biased in favor of the bidder, which is also not a basis for the adjudicating authority to conduct a judicial review on this basis. 

Additionally, the NCLAT ruled that the judicial review of the Resolution Plan is based on an equitable perception and that the AA is not permitted to contest the CoC’s commercial judgment or engage in quantitative analysis. Additionally, the NCLAT ruled that the Resolution Plan’s Evaluation Matrix also fits under the CoC’s definition of commercial wisdom, which is non-justiciable.

In the case of Maharashtra Seamless Limited (Supra), the Honorable Supreme Court restricted the NCLTs and NCLAT’s ability to intervene. While Section 31 of the Code, when read with Section 30(2), limits the NCLT’s latitude. Similarly, Section 61(3) of the Code limits NCLAT discretion. Notably, the issues or grounds—whether under Section 30(2) or Section 61(3) of the I&B Code—are about determining whether the CoC’s “approved” resolution plan is still valid, not about accepting the resolution plan that the CoC has disapproved or determined to have rejected. It follows that the limited judicial review that is permitted must fall within the parameters of Sections 30(2) and 61(3) of the Code, respectively, and cannot under any circumstances infringe upon a business decision made by the majority of the Committee of Creditors. 

In other words, when the approved resolution plan passes muster under Section 31 read with Section 30(2) of the Code, and there is no violation of any provision of law currently in effect, the court would rely on the collective wisdom of the CoC to determine whether or not the plan makes economic sense. If the NCLT substituted its opinion about the resolution plan’s economic soundness, that would not be correct. Therefore, it would not be appropriate for NCLT and NCLAT to influence CoC’s business judgment. Additionally, the NCLT and NCLAT’s investigation of the authorized resolution plan must stay within Sections 31 and 61 and if it is not in its preview then the NCLT can take decisions regarding the issue. Where if the Resolution plan has not stayed within the section, then the NCLT has the authority to look into the problem within its jurisdiction.

K Sashidhar v. Indian Overseas Bank and others

The Hon’ble Supreme Court ruled that the National Company Law Tribunal lacks the authority and jurisdiction to assess the Committee of Creditors (CoC) decision regarding the legitimacy of the dissenting financial creditors’ rejection of the resolution plan. The Adjudicating Authority applies a judicial mind at this point to the resolution plan that has been provided, and after being satisfied that it satisfies (or does not satisfy) the standards outlined in Section 30, it has the option of either approving or rejecting the plan. An appeal from a decision approving such a plan may only be made on the few grounds specified in Section 61 (3). The Adjudicating Authority is required by Section 33(1) of the I&B Code to begin the liquidation procedure after receiving a settlement plan that has been “rejected.” The legislature has not granted the Adjudicating Ability the “ authority or jurisdiction to review or assess” the CoC’s commercial decision, much less to consider whether the dissenting financial creditors’ rejection of the resolution plan was justified.

Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd.

The Tribunal observed that Rajputana Properties Private Limited had not balanced the interests of stakeholders, such as operational creditors, and had made distinctions between certain financial creditors who are in an equal position. Clearly, the CoC did not use its best judgment in approving the proposal and acted in a discriminatory manner. The NCLAT ruled that Rajputana Properties Private Limited’s proposal was discriminatory and violated the Code’s design. It also ruled that the resolution plan might violate the Code’s requirements if it is proven biased against any financial or operational creditors.

The Adjudicating Authority ruled that just because a discriminatory plan was presented to the CoC and received their approval, it does not automatically follow that the Adjudicating Authority should also approve it because doing so would go against the fundamental goals of maximizing the corporate debtor’s assets on the one hand and balancing the interests of all stakeholders on the other.

The Tribunal’s two main concerns were: 

• Did CoC treat qualified resolution applicants differently while evaluating Rajputana Properties Private Limited’s resolution plan? 
• Is Rajputana Properties Private Limited’s proposed resolution plan discriminatory?

The Tribunal looked at the financial details of the plans to prove that the CoC had unfairly treated the resolution applicants. This was proven by the fact that the improved proposal made by Ultratech Cement Limited and its request for negotiation were not even remotely taken into account and the Resolution plan has been sent for review. The Tribunal also emphasized that both the RP and the CoC have a responsibility to maximize value within the time frame required by the Code and noted that the CoC’s goal in identify a resolution applicant who can offer the highest amount in order to protect the interests of all parties involved with the corporate debtor is lacking.

Scope and Extent of Power Vested on the Adjudicating Authority

In Bhaskara Agro Agencies v. Super Agri Seeds, the NCLAT held that the Adjudicating Authority could not revisit the decision of the CoC to determine the viability and feasibility of a resolution plan because the Adjudicating Authority cannot approve a plan unless approved by the necessary majority of the CoC. Likewise, in Darshak Enterprise Pvt. Ltd. v. Chhaparia Industries Pvt. Ltd., the NCLAT held that in the absence of any It neglected to mention, however, that “satisfaction” is one of the prerequisites for the Adjudicating Authority’s acceptance of a plan. This suggests that for the Adjudicating Authority to accept a resolution plan, it must be “satisfied” that the CoC’s authorized resolution plan complies with Section 30. (2). 

In Arcelor Mittal India Private Limited v. Satish Kumar Gupta, the Hon. Supreme Court utilized this concept by examining specific passages from the resolution plan to determine the applicant’s eligibility. Following its deliberations on the scope of the Adjudicating Authority’s jurisdiction under Section 31’s provisions, the Apex Court issued the following observations:

After the CoC has approved a plan, it must be submitted to the Adjudicating Authority, which applies a judicial mind after determining whether the plan complies with (or does not comply with) the requirements listed in Section 30. At that point, the Adjudicating Authority may either approve or reject the plan. 

After hearing arguments from both the resolution applicant and the CoC, the adjudicating authority, acting quasi-judicially, might decide if the resolution plan breaches any legal restrictions, including Section 29A of the Code.

The NCLT, Mumbai Bench interpreted the phrase “if the adjudicating authority is satisfied….” under Section 31 in Pratik Ramesh Chirana v. Trinity Auto Components Ltd., noting that “satisfaction” must be objective, subjective, or both and that in order to form an opinion, careful examination of a resolution plan is necessary. Objective Satisfaction: The Preamble’s declaration of the Code’s purpose for being enacted serves as the focal point of objective satisfaction. Subjective satisfaction is based on a logical analysis of the provided financial facts, and a systematic examination of the financial statement is anticipated before agreeing to the CoC’s approval. 

Again, it was noted in the case of J.R. Agro Industries P Limited v. Swadisht Oils Pvt Ltd. that the resolution plan’s benefits and drawbacks should be considered, and if the Tribunal approves the plan, it should express its pleasure in writing in the judgment.

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Citations:

1. Company Appeal (AT) (Insolvency) No. 1490 of 2019
2. Civil Appeal no. 4242 of 2019
3. Civil Appeal No. 10971 of 2018
4. (2018) ibclaw.in 100 SC
5. 2018 SCC OnLine NCLAT 340
6. Company Appeal (AT) (Insolvency.) No. 327 of 2017
7. Civil Appeal Nos. 9402 – 9405 /2018
8. CP No. 1032, MB, NCLT
9. (2018) ibclaw.in 142 NCLAT

This article is written by Inian R, a 4th Year BA LLB (Hons.) student, School of Law, Christ (Deemed to be) University, Bangalore.

INTRODUCTION:

Insolvency and Bankruptcy Code, 2016 came into existence to govern the easy exit of businesses, it has been witnessed from time to time that India has been lacking the legal framework for the companies whose businesses have been hindered and they want to exit the market although it had also been a matter of concern to determine the order of distribution of assets at the time of liquidation of the company. Previously there were no specific provisions to govern the distribution of assets amongst the creditors. But in the present era section 53 of the Insolvency and Bankruptcy code, 2016 deals with the mechanism for the distribution of assets under liquidation.

The mechanism laid down under the code is termed as “waterfall mechanism”. In a general sense, the waterfall mechanism lay put the list of stakeholders in a sequential manner to indicate the priority in getting the payments from liquidation.

HISTORICAL PERSPETIVE:

At the time of Insolvency proceedings, the Inter-se ranking amongst creditors plays an important role as it dictates the arrangement and determines the priority in which the financial offerings by the resolution applicant shall be distributed to the secured creditors. The status of determining the priority was the different pre-IBC regimes and post IBC regimes.

Pre-IBC Regime:
The Supreme Court of India in the case of ICICI Bank v. Sidco Leathers Ltd. and Others¹ addressed the issue of priority under Sections 529 and 529A of the Companies Act, 1956, which govern the ranking of creditors’ claims in a company in liquidation similar to what is given under section 53(1) (b) of the code. In this instance, the Supreme Court interpreted the meaning and scope of Section 48 of the Transfer of Property Act, 1882 to rule that the first-charge holder’s claims would persuade over the second-charge holder’s. The Supreme Court also noted that there was a lack of legislative clarity on this issue and that if the legislature had intended to reduce a right as important as the right of priority, it would have done so explicitly in the legislation.

Post- IBC Regime:
Even after the IBC came into force, there has been no clarity on this subject. Explanation: Section 53 of the IBC provides that “Each of the debts will be paid in full, or in equal proportion within the same class of beneficiaries, if the proceeds are inadequate to meet the debts in full, at each step of the distribution of proceeds in respect of a class of recipients who rank similarly.”

As a result, the IBC envisions the distribution of liquidation proceeds on a pari passu basis, or on an equal level, among the same class of stakeholders. Any agreement that upsets the priority ranking established by Section 53 of the IBC must be rejected, according to Section 53(2) of the code. Moreover, the issue of priority of inter-se secured creditors who have relinquished their security interests has not been specifically cleared by the code.

The National Company Law Appellate Tribunal in the matter of Technology Development Board v Anil Goel² held that “the moment when a secured creditor relinquishes their security interest in the liquidation estate, the sale proceeds shall then be strictly distributed as per the waterfall mechanism given under section 53 of IBC remains unpaid following the enforcement of security interest thereby when compared to a secured creditor, it has a lower priority.”

THE WATERFALL MECHANISM UNDER IBC:

The waterfall mechanism lays down that at the time of the company’s liquidation and while distributing the assets of the company the secured financial creditors shall be given the priority and the amount belonging to them shall be paid fully according to their admitted claim before initiating any distribution to unsecured financial creditors.

The Appellate Authority in its recent landmark judgment in the case of Technology Development Board vs. Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors³ made it specifically held that: “Whether the Secured Creditor holds a first charge or second charge is material only if the Secured Creditor elects to realize its security interest.” “However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by Section 53(1)(b)(ii), which states that – all Secured Creditors who have renounced security interests rank equally.”

Statutory provision:
The statutory provision which sets out the order of priority for the distribution of sale proceeds from the sale of liquidation assets is categorically mentioned under Section 53 of the Insolvency and Bankruptcy Code, 2016.

According to section 53 (1) (b):
“The following debts will be ranked equally between and among them:
(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52”

According to Section 53(2) of the code:
“The liquidator will overlook any contractual arrangements between receivers under sub-section (1) with equal ranking if they disturb the sequence of priority under that sub-section.”

WATERFALL MECHANISM AND MEANING OF SECURED CREDITOR:

A secured creditor is one in whose favor a “security interest” has been created by the corporate debtor.⁴ Section 52 of the code provides the secured creditors with two options:

• either to realize its security interest, or
• give away its security interest to the liquidation estate⁵

It is the duty of each secured creditor to communicate to the liquidator about his decision to either relinquish his security interest or to realize its security interest.
If the secured creditor fails to inform the liquidator of its intention within 30 days from the commencement of the liquidation process, the security interest held by such secured creditor is deemed to be relinquished.⁶
In case a secured creditor chooses to relinquish its security interest then it has to stake its claim to the liquidation estate.

CONCLUSION:

The prevailing approach towards the Secured creditors’ priority rights, established at the time of lending, supposedly provides them with a security net in the event that the firm defaults and insolvency procedures are initiated. Even after the IBC was enacted, there is nothing in the IBC that specifically addresses this issue. Furthermore, Section 53(2) of the IBC only prohibits agreements that disrupt the waterfall mechanism’s sequence of precedence. The problem of priority of inter-se secured creditors who have renounced their security interests is left unanswered. As a result, it is clear that there is still lacking legal certainty on this topic.

The intrinsic ambiguity in the topic, as well as the lack of a clear legal precedent, leaves no answer to the difficulty. It is conceivable, however, that any priority rights connected to a security interest stay tied to the security interest, and that when the security interest is abandoned, the priority rights associated with the security interest expire as well. Although it appears that lawmakers considered all issues when establishing the IBC’s liquidation waterfall, which favored secured creditors, legislators should give equal weight to the interests of other stakeholders in order to fulfill the IBC’s goals.

References:

1. (2006) 10 SCC 452.
2. Technology Development Board v Anil Goel, Company Appeal (AT) (Insolvency) No.731 of 2020
3. Company Appeal (AT) (Insolvency) No.731 of 2020
4. Insolvency and Bankruptcy Code, 2016, Section 3 (30).
5. Insolvency and Bankruptcy Code, 2016, Section 52 (1).
6. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, Regulation 21A.

This article is written by Shubhendra Joshi, a BBA.LL.B 4th-year student of Indore Institute of Law.

INTRODUCTION

One of the main changes in India’s overall set of laws is the Insolvency and Bankruptcy Code. This is on the grounds that the IBC does not just make India more grounded as far as the lawful structure, yet it additionally gives it another financial character and acknowledgment on an overall scale. If a disagreement emerges concerning bankruptcy, the debtor and the creditor have the authority to commence insolvency procedures against each other under the IBC, which is a combined study of numerous legal committees. With the President of India’s consent, the Insolvency, and bankruptcy Code 2016 became effective on May 28, 2016. Before that, there were long cycles that didn’t impressively offer a financially functional arrangement anyway as of now, this code is a one-stop reply for settling liquidations. To give a single guideline to Insolvency and Bankruptcy related issues, the Indian Insolvency framework went through a complete upgrade blending a couple of past guidelines (merging of 13 existing laws).

INSOLVENCY & BANKRUPTCY CODE, 2013

Meaning – Insolvency generally occurs when a person is unable to pay their debts to the creditor at the expected time frame. Bankruptcy, on the other hand, occurs when a court of competent jurisdiction declares a person or a business insolvent and issues necessary instructions to rectify the situation and safeguard creditors’ interests. Bankruptcy is a legal process by which an insolvent borrower seeks relief from his or her creditors.

Evolution – A statute was passed in 1828 that marked the commencement of insolvency-related law in India. In 1848, the Indian Insolvency Act established a division between traders and non-traders. There was no legislation dealing with insolvencies in non-presidency districts until 1907. The new Companies Act was approved in 2013, making several modifications to the corporate insolvency procedure.¹ Chapter XIX of the Firms Act of 2013 dealt with the resurrection and rehabilitation of ill companies. This chapter has been removed since the IB Code now covers the full revival/rehabilitation method or mechanism. The Insolvency and Bankruptcy Code, 2016 consists of 255 sections (divided into 5 parts) and 11 schedules. At this point, the IBC is the main regulation that oversees indebtedness, insolvency, and the recreation of failed organizations, reducing the job of earlier regulations.

FUNCTIONS & PROVISIONS OF IBC, 2016

The 2016 Code lays out a period-restricted strategy for settling indebtedness. At the point when a debt holder defaults on an installment, loan bosses hold onto responsibility for the debt holder’s resources and have 180 days to settle the indebtedness. To guarantee that the goal cycle chugs along as expected, the Code awards debt holders’ resistance from banks’ goal claims during this time. The Code likewise unites components from existing regulation to give a solitary scene to borrowers and lenders, all things considered, to address bankruptcy.

The IBC, 2016, specifies a Rs 1 crore least boundary for starting the pre-packaged bankruptcy goal strategy. It considers the excusal of simultaneous bankruptcy goal process and pre-packaged indebtedness goal process petitions documented against a similar corporate borrower. Punishment for starting a pre-packaged liquidation goal strategy deceitfully or malignantly to misdirect others, as well concerning the fake organization of the corporate indebted person during the cycle. Offenses including the pre-staging insolvency goal strategy are culpable.

RELATION OF NCLT WITH IBC

In contrast to concerns expressed during the IBC’s creation and later talks regarding the difficulty of quickly installing adjudicating capability, the NCLT is capable of fulfilling the job of adjudication under the IBC. While the NCLT’s present operation has defied expectations from previous insolvency cases, there are clear gaps between how the NCLT operates under the IBC and what is intended by the statute.² The empirical investigation on whether the NCLT is able to provide judgments within the timeframes required by law, as well as if the judgments are consistent with the function envisioned by the legislation, reveals that there exist gaps. From an adjudicating authority for the Insolvency redressal process of companies and individuals to the power prescribed to NCLT, it can be said that NCLT plays the most important role under IBC. It provides simplicity for financial creditors, operational creditors, and corporations to collect money from debtors.

PROCESS OF INSOLVENCY RESOLUTION

Corporate Insolvency Resolution: During the resolution of Corporate Insolvency, the creditor should record an application with the NCLT for starting bankruptcy redressal procedures. The NCLT will be expected to either acknowledge or dismiss the application within 14 days of documenting the application. When the application has been acknowledged by the NCLT, the administration of the indebted person is suspended and the transitional power, selected by the NCLT and alluded to as the ‘break indebtedness goal proficient’ assumes control over the administration of the corporate debt holder. Further, as soon the application for CIRP is conceded by the NCLT, a ban produces results on the corporate indebted person, which forbids the continuation or commencement of any legal actions against the debt holder, the exchange of its resources, or the requirement of any security interest. Within 30 days of the NCLT admitting the application for CIRP, the interim resolution expert reviews the creditors’ claims and forms the creditors’ committee. The panel of loan bosses then, at that point, names a free individual as the goal proficient, alluded to as the Insolvency Resolution Professional (‘IRP’) to assume control over the administration of the corporate borrower for the rest of the CIRP. Within 180 days of the commencement of the CIRP, the IRP is expected to draw up a goal plan for the restoration of the corporate borrower. Such an arrangement should be supported by lenders holding no less than 75% of the obligation of the corporate account holder.³

CASE LAWS – IBC

In Aditya Enterprises vs Rajratan Exim Pvt. Ltd.⁴, due to the non-payment of a debt owed to them by a corporate debtor, Aditya Enterprises applied. The adjudicating body stated that just receiving a loan cannot be considered an operational/financial obligation; nevertheless, the purpose of the loan is equally significant. Because the receipt makes no indication of the corporate debtor taking the loan for commercial purposes. The presence of a disagreement does not preclude the occurrence of a default; there is no indication that a due date exists.

In Sree Metaliks Limited and another V. UOI and Anr.⁵, The petitioner had challenged Section 7 of the 2016 Insolvency and Bankruptcy Code, as well as the provisions governing it, in the 2016 Law of Insolvency and Bankruptcy (Application to the Adjudicating Authority). In a petition lodged under section 7 of the IBC, the petitioner contended that IBC 2016 did not provide any chances to hear from a corporate debtor. The Calcutta High Court stated that the necessity for NCLT and NCLAT to follow natural justice principles may be found in Section 7(4) of the Code and Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. It was decided that the NCLT must provide the financial debtor a reasonable chance to present his or her case before admitting the petition filed under Section 7 of the Code.

In Bank of Baroda V.Rotomac Global Pvt. Ltd and Rotomac Exports Pvt Ltd⁶ The COC was suggested by the resolution professional for a 90-day extension of the CIRP. The COC, on the other hand, voted against it. As a result, the RP filed for the corporate debtor’s liquidation. The Competent authority held that the resolution to extend CIRP failed because no resolution plan was submitted within 180 days of the program’s start. As a result, the liquidation of a corporate debtor was acknowledged.

CONCLUDING OBSERVATIONS

Since the inception of the Insolvency and Bankruptcy Code in 2016, the issues relating to creditors and debtors have vastly improved. It has recognized the competent authority for the implementation of more efficient laws since the existing insolvency legislation does not demonstrate reliability due to issues such as delays in appointment and permissions, stock of non-performing assets, and so on. It needs to strengthen the process by attracting a broader variety of strategic purchasers who are prepared to bid on assets and present resolution plans following the code. It can also improve by putting in place more and more effective Asset Reconstruction Companies to help with dispute settlement.

References:

1. https://housing.com/news/ibc-insolvency-and-bankruptcy-code/
2. https://journalsofindia.com/nclat-ibc-and-companies-act/#:~:text=Its%20role%20under%20IBC%3A%20NCLT%20is%20the%20adjudicating,or%20operation%20creditors%20or%20the%20corporate%20debtor%20itself.
3. https://gamechangerlaw.com/ibc-2016-overview-of-the-insolvency-and-bankruptcy-code-2016/
4. https://indiankanoon.org/doc/33528420/
5. https://indiankanoon.org/doc/164560992/
6. https://www.soolegal.com/rc/bank-of-baroda-vs-rotomac-global-pvt-ltd-and-roromac-exports-pvt-ltd-cp-no-ib-70-ald-2017-with-ca-no-74-2018-

Written by Hemant Bohra student at School of Law, Lovely Professional University, Punjab.