India’s Bankruptcy Law Reinforced by Supreme Court Judgment

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By Srinivas Raman

India’s Supreme Court (SC) recently delivered its first detailed judgment pertaining to the interpretation of the Insolvency and Bankruptcy Code, 2016.

The most important takeaway from the SC judgment was its implications for the implementation of bankruptcy regulation in the country.

The Court clarified that the Insolvency and Bankruptcy Code (henceforth, Code) will supersede all other insolvency related laws in existence.

Additionally, the judgment highlights the importance of compliance with key provisions of the Code.

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Key features of the Insolvency and Bankruptcy Code

The purpose of the Code is to consolidate multiple insolvency laws into one single statute, and to ensure time-bound resolution process to maximize debt recovery.

Some of the key aspects under the Code are as follows:

  • Financial thresholds for default: In order to initiate proceedings under the Code, corporate debtors must have defaulted by at least US$1,495 (Rs 100,000). In case of individuals and unlimited partnerships, the threshold is US$15 (Rs 1,000).
  • Two stage resolution process: This allows creditors to determine the financial viability of the debtor, and decide whether to revive the business or opt for liquidation.
  • Priority of claims after liquidation: After paying the administrative costs, the Code lays down a priority structure for recovery of debts. Accordingly, the secured creditors and workmen’s dues during the past 24 months are the first priority. They are followed by unsecured creditors, and federal and local government dues.
  • Institutional framework: The Code establishes an institutional framework comprising of a regulator, insolvency resolution professionals (IRP), information utilities, and a dispute resolution mechanism in order to enable speedy resolution and liquidation process.

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Insolvency Code overrides all other bankruptcy laws in India

One of the major roadblocks hindering the implementation of the Code was the co-existence of multiple federal and state laws governing insolvency and liquidation.

Since the inception of the Code, defaulting parties often sought to stall recovery proceedings under the Code by claiming recourse to the provisions of other laws on the subject.

This strategy resulted in delaying the time-bound resolution process under the Code, thereby reducing debt recovery ratios.

Against this backdrop, the SC has categorically held that the Code shall have an overriding effect over all other conflicting legislations.

In this regard, the Court also reiterated that in case of conflict between the provisions of a state law and a federal law, the latter shall prevail over the former.

Powers of insolvency resolution professionals in India

The Court also ruled that as per the Code, once an IRP has been appointed, the defaulting company’s management shall have no role to play in the resolution process.

This is because the IRP will be vested with all the rights to manage the insolvency resolution process in order to ensure maximum debt recovery.

Therefore, the former directors of the defaulting company cannot challenge the decisions of the IRP in this regard.

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Bankruptcy reform in India – Impact on doing business

The implementation of the Code significantly reforms India’s distressed credit situation by reducing systemic inefficiencies prevalent under the erstwhile regime.

The Code empowers creditors to make an early assessment of the situation, and take commercially prudent decisions to maximize debt recovery ratios.

Country Manager Rohit Kapur of Dezan Shira & Associates observes that “the SC’s judgment is a positive signal as it recognizes the importance of compliance with the Code to strengthen India’s debt markets, and improve ease of doing business in India. Financial institutions and corporate debtors are strongly urged to adhere to the provisions of the Code and not seek recourse under any other insolvency law”.

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