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.
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.
Although current cross-border insolvency frameworks implicitly address the considerations, there is room for further development to provide clearer and more comprehensive solutions. However, such developments also pose the risk of introducing a one-size-fits-all solution or unduly prioritizing solutions based solely on cooperation or minimal coordination between multiple proceedings. It is hoped that pragmatic optimal approaches will continue to prevail, even if the frameworks end up appearing restrictive to group solutions by emphasizing cooperation and coordination.
In the present case, the Hon’ble Supreme Court (Apex Court) adjudicated upon following issues:
i) whether the forfeiture of the earnest money deposit under Rule 9(5) of the SARFAESI Rules can be only to the extent of loss or damages incurred by the bank in accord with the underlying provisions of Section 73 and 74 of the Indian Contract Act 1872;
ii) whether the quantum of forfeiture under the SARFAESI rules is limited to the extent of debt owed; and
iii) whether a case of exceptionable circumstances could be said to have been made out by the respondent to set aside the order of forfeiture of the earnest money deposit?
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.
The order delivered by the Mumbai Bench of the NCLT in the case involving Kalyan Janata Sahakari Bank Ltd. and Cicil Biochem Private Limited underscores the importance of clarity and specificity in resolution plans regarding profit distribution during the CIRP. It highlights the necessity for adaptability in legislation to address evolving circumstances and ensure fairness among stakeholders.
The order sets a precedent for future cases by recognizing the contributions and sacrifices of financial creditors throughout the insolvency process. It emphasizes the need to balance the interests of various stakeholders, prioritizing fairness and equity in resolving insolvency matters. Furthermore, the order underscores the significance of comprehensive resolution plans that cover all aspects of insolvency proceedings, including profit distribution. The absence of explicit provisions in the resolution plan led to ambiguity, reinforcing the importance of clarity and precision in such documentation.
While courts and tribunals are ruling on profit distribution during the CIRP, the author suggests that bringing an amendment to IBC could provide clearer guidelines and address any remaining ambiguities. This would enhance consistency and fairness in resolving similar issues in the future.
