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The Supreme Court recently passed an important judgement on the regime of Insolvency and Bankruptcy Code in Vidarbha Industries Power Ltd. v. Axis Bank.
Insolvency and Bankruptcy Code.
- It is a 2016 reform that was put into effect.
- It establishes simplified and faster insolvency procedures to aid in the recovery of unpaid debts and the avoidance of bad loans, a major drag on the economy for creditors like banks.
- A scenario known as insolvency occurs when people or businesses are unable to pay their existing debts.
- Bankruptcy is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent
- Objectives of the Insolvency and Bankruptcy Code.
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximisation of the value of assets of corporate persons.
Salient features of the Insolvency and Bankruptcy Code, 2016.
- Insolvency and Bankruptcy Board of India.
- Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
- Insolvency professionals handle the commercial aspects of the insolvency resolution process.
- Insolvency professional agencies develop professional standards, code of ethics and be first level regulator for insolvency professionals members.
- Information utilities collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings
- Coverage.
- It covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms
- Adjudicating authority.
- National Company Law Tribunal (NCLT) for companies and LLPs.
- Debt Recovery Tribunal (DRT) for individuals and partnership firms.
What was the Judgement
- The Supreme Court (SC) held that the National Company Law Tribunal (NCLT) cannot admit an insolvency application filed by a financial creditor merely because a financial debt exists and the corporate debtor has defaulted in its repayment.
- Instead, the NCLT must consider any additional grounds that the corporate debtor may raise against such admission.
Determining Insolvency
- The balance-sheet test.
- This is when a company’s total liabilities outweigh its total assets.
- However, the quality of accounting standards has an impact on the balance-sheet test.
- As a result, the Bankruptcy Law Reforms Committee (BLRC) opposed these criteria in the context of India.
- The Bankruptcy Law Reforms Committee (BLRC) recommended a twin-test.
- In this, a filing creditor should only provide a record of the liability (debt), and evidence of default on payments by the corporate debtor.
- It offers a distinct and neutral trigger for insolvency settlement.
- This test was designed to reduce litigation during the insolvency application’s admission phase and speed up the recovery of struggling enterprises.
Potential Effects of the SC Judgement
- Resisting the admission by the debtor.
- Due to the Supreme Court’s decision, the NCLT may no longer admit a case for resolution even if it is convinced that a financial debt exists and that the corporate debtor has defaulted if the corporate debtor objects on any other basis.
- Risk of value destruction due to delay.
- More lawsuits and delays at the admission stage are expected outcomes, increasing the risks of value destruction in the underlying struggling firm.
- It may cause the failure of the twin test.
- Now, even if the NCLT is satisfied that the corporate debtor has defaulted, it would not be able to admit the case for resolution if the corporate debtor resists admission on any other grounds.
Content Source: Indian Express