Turnaround Strategies for Companies under IBC Scenarios CS Dr. Ahalada Rao Vummenthala, Insolvency Professional, Company Secretary in Practice […]
Treatment of dues to any workman and employee from the Provident Fund, Pension Fund and Gratuity Fund under IBC
What exactly does it mean for a company to be solvent, and how does the Insolvency and Bankruptcy Code affect its operations? As we explore these questions, we’ll uncover essential insights and debunk common misconceptions. Throughout this article, we’ll shed light on how solvent companies cannot be admitted under CIRP.
In this article: (i) advent of mediation as a Dispute Resolution Mechanism in India, (ii) the framework of mediation under the Code as suggested by the Expert Committee, and (iii) dissect the framework as considered and discussed under the Report[3] in light of the groundbreaking Mediation Act, 2023.
It can be concluded that a little deviation from the waterfall mechanism can create conundrum between the legislative intent and effectiveness of the law. The deviation leads to prolonged litigation and takes valuable time of courts and tribunals. Safeguarding the interests of stakeholders must not jeopardize the effectiveness of the insolvency resolution process. Any interventions by the judiciary or legislature should be cautious not to disrupt the delicate balance established under the IBC through thorough deliberation. Incremental weakening of the Section 53 increases risks destabilizing the fundamental principles of the IBC.
Recent amendments to the Companies Act (2023) prioritize corporate transparency and responsible conduct by addressing the issue of undisclosed beneficial ownership. Through mandatory disclosure forms, designated responsible persons, and stringent non-compliance penalties, the revised framework aims to combat financial opacity and potential malpractices. While maintaining India’s attractiveness for foreign investments, stricter regulations for FDI, particularly from sensitive jurisdictions, ensure enhanced due diligence. On the whole, these adjustments foster a more robust business environment, prioritizing genuine ownership and deterring concealed control structures.
Vidarbha was the first case to deal exclusively with the question of the nature of the S. 7 provision, whereby the Apex Court applied its judicial mind to interpret the legislative intent behind the use of the words “may” in S.7 in comparison to “shall” in S. 9. Although the reasoning provided for differentiation created between FC and OC is partially correct, by providing discretion to the AA, the ratio undermined the importance of the twin test of debt and default used by the AA for determining the admission of a CIRP application initiated by a FC. It further heightened the scope of misuse of such power and ambiguity, resulting in conflicting precedents. To tackle such issues, provide clarity to its legislative intent, and reinstate the objectives of IBC, the parliament needs to introduce an amendment in S. 7, mandating the admission of CIRP on the twin test.
The waterfall arrangement tries to ensure that there is a structured framework for the distribution of proceeds. There are a total of 8 stakeholder levels in descending order of distributing proceeds. The mechanism is majorly focused on the welfare of vulnerable operational creditors ranking equally with secured financial creditors. The arrangement keeps in mind that the IRP costs shall be paid in full before being it to other stakeholders. This is a very important aspect as the interim finance provider is also a creditor who is taking a major risk by lending to a defaulting company and if his payments are not made in full with interest if any then the lenders will lose faith in the code. Even though some areas require proper definition so that there are no loopholes under IBC. The code has successfully ensured that there is ease in doing business by ensuring that all the stakeholders get fair treatment.
Diving into the waterfall of Insolvency & Bankruptcy Code 2016 – By Yug Thatere Read Post »
The legal problem addressed in the case is regarding the applicability of the Limitation Act in initiating application under the IBC to which the Court firmly held that it is and when default occurs, attracts ‘the right to sue’ and that section 5 of the Limitation Act could be called upon to condone any delay to file application under IBC. The Court further clarified that the applicability is from the inception of the IBC.
The decision by the Supreme Court did give clarity with regards the position of section 238A read with section 7 and section 9 of IBC and the rationale behind paves way out for those finding disparity in the provisions of IBC. Yet, the NCLT might be overwhelmed with time barred applications under IBC after this judgment. There is surely a further need for more clarification on this.
It is true to say that the dictum laid down in Narendra Kumar Maheshwari is considered to be good law. Yet prior to classifying debentures as being typical debt instruments, it should be noted that every kind of debenture also meets the IBC’s definition of debt. The interest of the parties always comes down to the CCDs being converted into company shares at the end of their maturity period. However, for the same to be effective, uniformity in legal precedent is dire. Moreover, by integrating explicit provisions and detailed guidelines for CCDs at different stages of their lifecycle, particularly before maturity, we can ensure greater legal certainty and consistency in insolvency proceedings. Such reforms have the protentional of not only streamlining the resolution process but also bolster investor confidence by reducing risks and ambiguities associated with hybrid financial instruments, as their classification stands today.
