Discuss the key provisions of the Insolvency and Bankruptcy Code. Present a case for its significance and how the recent judgment on Essar Steel is important. (15 Marks)

Mentors Comments:

1. Introduce by defining IBC
2. Touch upon its key provisions
3. Mention the significance of IBC. Highlight the limitations
4. Discuss the ESSAR case and it’s link to IBC mechanism
Answer:

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. 

Key aspects of the Insolvency and Bankruptcy Code

  • IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
  • IBC aims at consolidating all existing insolvency-related laws as well as amending multiple legislation including the Companies Act.
  • The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
  • Moratorium period of 180 days (extendable up to 270 days) for the Company. For startups and small companies, the resolution time period is 90 days which can be extended by 45 days.
  • Introduce a qualified insolvency professional (IP) as intermediaries to oversee the Process
  • Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & Bankruptcy Law; and Information Utilities as a depository of financial information.

IBC helped

  • Due to the institution of IBC, we have seen that many business entities are paying upfront before being declared insolvent. The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
  • 4452 cases were dismissed at the pre-admission stage. Hence, it shows the effectiveness of IBC.
  • Presently, there are 1332 cases before NCLT.
  • Realization by creditors around Rs 80,000cr in resolution cases.
  • Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
  • The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
  • 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr.

Significance of the Judgment:

  1. Easing the NPAs of the Banks: The profitability of banks is set to get a major boost in the current quarter, with the Supreme Court paving the way for the acquisition of Essar Steel by ArcelorMittal. Banks have an exposure of about ₹50,000 crores to Essar Steel
  2. Upholding the primacy of CoC: Now that the Committee of Creditors (CoC) has the final say, it will lead to more certainty when a plan is accepted and there will be less challenge to the orders of NCLTs.
  3. The impetus to financial creditors: The recognition of the superior right of the financial creditors in proportion to their security interest in an insolvency resolution process would show a positive attitude of such class of financial creditors in taking the insolvency resolution process to its logical end
  4. Impact on operational creditors: This landmark judgment will bring a paradigm shift in the way operational creditors now deal with companies for their supplies in the eventuality of default to secure their interest.
  5. Upholding the spirit of IBC: The SC has struck down the ‘mandatory’ time-limit of 330 days for completion of the resolution process. It is marked as a violation of Article 14 (right to equal treatment) of the Constitution and an “excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution”.
  6. Impact on the steel sector: The Supreme Court’s decision in the Essar Steel case sets a precedent for other cases under the Insolvency and Bankruptcy Code (IBC) especially for the steel sector which is under stress and this judgment will show the way ahead for the sector.
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