CORPORATE INSOLVENCY LAWS IN INDIA (By–Chinmayee Vivek Kulkarni)

CORPORATE INSOLVENCY LAWS IN INDIA

Authored By – Chinmayee Vivek  Kulkarni[1]

Abstract

Corporate companies, private organizations, businesses are the pillars of any nation. A proper or a legal company works on the legal basis which have a legal backing along with certain legislations which can assist the companies and organizations to overcome the failures of a company due to external forces and internal complications. This actually takes place in the financial sector of the company, where loans have been undertaken in order to build a company. The failure to repayment of these loans makes a corporate person burdensome of debts.

For this purpose the Insolvency and Bankruptcy Code of India which was implemented in 2016 comes into picture which assist the companies to tackle such situations and also protect the basic rights of a company. The corporate law in India is considered as the trending and emerging field as it keeps evolving and developing as the surroundings expect. For that matter, it is important to understand and analyze the insolvencies of a company and its measures to come out of this vicious trap.

Hence, the need to understand the corporate insolvency laws, its interrelation between each other, several measures like winding up of a company, rescue, liquidation as well as the Corporate Insolvency Resolution Process (CIRP) is of paramount importance. It is also necessary to understand that these legislations must transform and evolve as the nation changes and the facets of a company develops from time to time.

In this paper, a detail analysis regarding the objectives of the corporate insolvency laws, the meaning of the concepts, its interrelation, CIRP is given along with personal insights.

Keywords: Corporate, Imsolvency, Laws, legislations, companies, India.

Introduction

A country is considered as a developed one if it excels significantly in all of its factors like social, economical, political, etc. India is one of the developing country in the world due to its excellence in these fields which have been transforming in several years. Public sector in our nation has set its benchmark since several years and depicted the functioning of the Government of our nation. Private sector is no exception to the same as private entities, companies, businesses have been flourishing from several decades.

The legal system in India is considered the supreme one as it protects rights of not only an individual person but also these legal bodies. Several statutes have been implemented in order to function the companies and business in a smooth and legal manner. Corporate culture and companies then step in. It is the responsibility of the State to foster a corporate culture respectful of human rights both at home and abroad and is considered as an important element of UN Guiding Principles on Business and Human Rights.[2]

Thus, corporate culture being utmost important in today’s world is necessary to understand and analyze that branch carefully. A corporate company has certain obstacles in repaying its debts and the company is unable to make the same. As a person is under debt and his incapability to repay that debt is considered as insolvency, similarly there is a statute[3], which deals with the insolvency of the companies.

In the following paper, we will understand the basic meaning of corporate laws, insolvency laws, their relation and many other aspects related to corporate insolvency field in the purview of Indian companies.

Objectives

The objective of this research paper is –

To understand the meaning and purpose of corporate and insolvency laws.
To analyze the relation between these two emerging and trending legal fields.
To explain the provisions of Insolvency law and how those can protect a corporation or a company.
To emphasize on some processes where these fields functions effectively.
To provide some insights upon how such laws can improvise in future.
To conclude with the overview of the paper.

Corporate Law In India: A Brief Overview

Corporate Law also known as Business Law or Company Law is the body of the law governing the rights, relations, conducts and working of the companies, organizations and businesses. In other words, Corporate Law deals with the formations and operations of corporations, is related to commercial, and contract law. [4] It basically determines the interconnection of partnerships, stakeholders, directors, employees, business partners, creditors, etc and are examined imperatively under this branch of law.

Factors like legal personality, limited liability, transferable shares, delegated management and investor ownership are of paramount importance in corporate law. Based on these core and other factor the basic function of Corporate Law is to assist businesses and companies with this legal form and regulations. A company, enterprise, organization or business is considered to be legal and authentic if the functioning of the corporate law is imperative.

Through these attributes, corporate law makes an easier way to the partners, owners of the company, entrepreneurs, etc to function their organization smoothly and without any corrupted means. The backing of law is regarded superior in such cases and corporate law has a prime importance in the same.

However, there is no one single corporate law, which assists and maintains these entities. Several statutes fall under this field and based on the type of the entity or organization, the applicability of these laws is determined. Following are some illustrations of the same:

Corporate Social Responsibility: On 1st April 2014, India became the first country to legally mandate CSR (Corporate Social Responsibility). Under this, several initiatives are initiated to integrate social and environmental concerns in the business operations.
Companies Act, 2013: It is the Act on Indian Company, which regulates incorporation of the company, responsibilities of the company, directors and dissolution of the company. This Act is considered as the root of any Corporate Law.
Indian Contract Act, 1872: This Act defines ‘Contract’ and its formation along with its pre-requisites. The Act also provide detail provisions about the terms and conditions of a contract along with types of contract. For e.g. – Contract of Agency, Contract of Guarantee, Pledge, Indemnity, etc.
The Partnership Act, 1932: The Act prominently focuses and deals with the working of a partnership firm, its registration, dissolution processes, etc.
The Securities Contract (Regulation) Act, 1956: The Act is framed to prevent the awkward transactions in securities and which dissolves after regulating the businesses.
Apart from these, several other legislations come under corporate law due to which this sector is considered as a significant one. India is developing in corporate law and corporate governance and hence this field of law is trending one. 

Insolvency Law In India: A Brief Overview

The Insolvency and Bankruptcy Code, 2016 (IBC) is an Indian Statute which creates a consolidated framework that governs insolvency and bankruptcy proceedings for companies, partnership firms and individuals. Before the existence of this code, there were several legislations like the Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, etc.[5]

However, due to presence of multiple laws, their respective provisions and complexities, delay in justice delivery, one definite framework was initiated and the IBC, 2016 appeared in the legal mechanism.

This Code can be considered as an effective solution to resolve insolvencies, protect the interests of small investors and making the business processes less complicated and cumbersome. This IBC process has also transformed the creditor-debtor relationship, which usually play a vital role within companies and businesses. Through this code, a specific duration of time has been incorporated to refrain several in the procedures.

Thus, the Insolvency and Bankruptcy Code, 2016 can be considered as a hallmark in the corporate field where the usage is prominently undertaken. The implementation of Corporate Insolvency Resolution Process (CIRP) is the greatest contribution and aspect of corporate insolvency laws in India.

Corporate Insolvency: A Crucial Legal Aspect

A company is considered as an insolvent if its assets are incapable of discharging its debts and liabilities. In technical words, Corporate Insolvency is understood as the company’s inability to pay its debts to the suppliers and creditors. It is also the process where the assets of a company are categorized, collected and realized by the company’s creditors.[6] Corporate Insolvency is a state where a corporate person fails to pay debt, whether whole or any part or installment, when due and payable.

The provisions applicable to the winding up of a company and the application of insolvency  rules in winding up of insolvent companies are given under Companies Act,1956[7] and it has been amended in the Companies Act, 2013 as well. The importance of this Act clearly emphasizes on the idea that the IBC, 2016 is a part and parcel of the corporate law as the provisions mentioned in the Act are linked towards the Insolvency and Bankruptcy Code, 2016.

The Sick Industrial Companies Act, 1985 did not covered all the types of companies and eventually were unable to solve the insolvency issues. Thus, the IBC, 2016 proved its efficiency by making

several amendments in the debt structure of the companies as well as brought many revolutionary changes in the insolvency proceedings within the companies and various entities. Thus, this code can be said as the inseparable part of the corporate companies.

There were certain key features of Insolvency and Bankruptcy Code, which were implemented under the Corporate Companies. They went as below-

The duration of the repayment of loans was reduced to 180 days and it can be extended to maximum 270 days in the discretion of the creditors.
The dealings with the foreign investors were at peak with the introduction of this Code.
IBC gave special provision to tenants who can suit a file against the owners if there was non-payment of dues.
There was a set period for solving insolvency and bankruptcy cases.
The National Company Law Tribunal (NCLT) had the authority to solve the corporate insolvency cases.
As per the code, the creditors are divided into operational creditors and financial creditors. Financial Creditors refers to any person to whom a business debt is owned or a person to whom such amount is legally assigned or transmitted. Banks or other financial institutions are examples of financial creditors and Operational Creditors refers to a person to whom an operational debt is owed and includes any person to whom such amount has been legally assigned or transferred for goods or services done by them. Vendors and suppliers, employees, government etc. are examples of operational creditors.[8]
All these and many key features are proved to be efficient for the companies to exceed in their businesses and conduct.

There are certain types of corporate insolvency services which are granted to the companies or businesses. They are listed as –

Administration: The insolvency experts or practitioners are appointed to administer the assets of the companies and run the business when it is insolvent.
Company Voluntary Liquidation: The voluntary liquidation of the company rests upon the decision of the shareholder. His consent is taken into consideration and the company is wind up based on his decision.
Creditors Voluntary Liquidation: The directors of the company take the decision of liquidation of a company and a notice is provided to shareholders and creditors.

Compulsory Liquidation: This type of service can be implemented when the company is truly insolvent. It has to be proved before the Court the insolvency of a company and then the liquidation takes place.
These types of services are utilized based on the structure and nature of a company as well as its insolvency issues.

It is important to have an efficacious insolvency system has it can lead to a efficient financial stability of the companies. Thus, a sound framework for restructuring and rehabilitation of companies is important. Along with that, the foundation for winding up and liquidation of companies is also crucial.

Corporate Insolvency Resolution Process (CIRP)

Corporate Insolvency Resolution Process is used for resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Insolvency and Bankruptcy Code. It is basically a recovery mechanism for the creditors. When a corporate becomes insolvent, a financial creditor, operational creditor or a corporate itself may initiate the CIRP.

There is a specific procedure for application of CIRP. The steps goes as follows:

Application to the NCLT: A creditor of the corporate company must show the failure of payment of debt which is more than one lakh rupees to the NCLT. Then, NCLT has to pass as order either accepting or rejecting it within 14 days.
Appointment of Interim Insolvency Resolution Procedure: The corporate debtor when accepted in this procedure, it checks the board of directors and the management is placed under Interim Insolvency Resolution. The management then ceases to control the activities of a company.
Moratorium: Declaration of moratorium is essential to prohibit certain actions and transactions of a company.
Verification and analysis of claims: The interim resolution professional will verify the claims made by the creditors and after 30 days of acceptance a Committee of Creditors will be formed.
Appoinment of resolution professionals: Within 7 days the committee is formed, the interim resolution professional will be appointed as resolution professional or to replace him.
Acceptance of the resolution plans: A resolution plan must be approved within 180 days for the revival of a company. This period can be extended till 90 days by the NCLT.

Thus, these processes must always be executed while initiating the application of CIRP in a company.

There exists a specific duration in which insolvency resolution process must be completed. A per Sec. 12(1) of the Insolvency and Bankruptcy Code, 2016, “the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.”[9]

Thus, the Corporate Insolvency Resolution Process is of prime importance for all the corporate companies to implement with the definite procedure and time stipulation given as per the guidelines. Being the lengthy process, proper implementation of the same is important to understand.

Conclusion & Suggestions

A developing country like India which has many private entities, organizations and companies must have the concept of corporate insolvency to resolve crucial disputes like debts and insolvency.

In terms of resolving insolvency, in 2021 India’s ranking improved by 56 places to 52 from 108 in previous year.[10] The impact of COVID- 19 on private companies was robust and it was indeed a challenging task for these organizations to overcome the effects of the same. However, as a silver lining there was also a positive impact of COVID-19 in the insolvency and bankruptcy context.

The Union Minister of Commerce & Industry, Consumer Affairs & Food & Public Distribution and Textiles, Shri Piyush Goyal has termed the Insolvency and Bankruptcy Code (IBC), 2016 as a “gamechanger reform” that has been the most successful law in insolvency resolution in the country. He also stated, “In view of the Covid crisis, the Government suspended the IBC for a year, from March, 200 to March, 2021. “This helped India bounce back much faster. The economy is doing well and five years down the line the outlook looks very, very bright.”[11]

Thus, we can say that IBC, 2016 has indeed set a benchmark in the corporate arena which has benefitted the companies in their debt recoveries and repayments. IBC is the recent legislation of our nation and it has been developing since then. Several amendments have also been made in this as per the situation expects. The prominent reason for it is the economy. Indian economy fluctuates every year based on several factors. Eventually, this also effects the profits and losses of the private sector companies and varies the debts and loans. Hence, while studying and analyzing about the corporate insolvency it is necessary to gain perspective of this concept from the economic prism as well.

Apart from this, Insolvency and Bankruptcy Code, 2016 has some loopholes as well. There arise certain challenges and obligations as the code is technical to a certain extent. It sometimes may become difficult to understand the provisions of this code to the owners, partners, employers or even lawyers of a company. Thus, an expertise and a well-versed legal person must be appointed for the same who has particular knowledge and solutions for the arising issues.

The courts and tribunals can also assist the resources for the same and deliver justice.

Focusing on the Corporate Insolvency Resolution Process (CIRP) as we have seen earlier it consists of several steps for the application. The code also suggest a specific duration in which this process must be completed. However, it must be observed practically  whether the given stipulated time the whole process is been implemented as well as completed. Based on that requisite changes must be made.

Despite of these and many other loopholes, IBC, 2016 has proved to be efficacious in the field of law. Due to its detailed and simple structure this code formed by the Government of India is been acknowledged and initiated by several companies in order to preserve the company from dissolution. In corporate insolvency, rescue and liquidation are the two options which are considered. Both these options can be worked only upon the functioning of this code.

Thus, it is extremely pertinent that the young lawyers as well as the legal practitioners in a corporate company or organization explicitly understand the concept like corporate insolvency and IBC, 2016. The issues regarding debts, payments shall persist in a company and thus a robust mean to tackle the same is extremely predominant. The only solution and way forward towards the same is the awareness about Insolvency and Bankruptcy laws along with knowledge of corporate laws. Then, the issues will reduce and the main motive behind implementation of this code will be achieved.