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Understanding Insolvency and Bankruptcy Code, 2016

By 07/06/2021May 2nd, 2022No Comments
insolvency and bankruptcy code 2016

Insolvency and Bankruptcy Code 2016

India’s bankruptcy legislation, the Insolvency and Bankruptcy Code, 2016 (IBC), intends to consolidate the current framework by adopting a unified insolvency and bankruptcy legislation. The Code was introduced in the parliament in 2015. While, on May 28, 2016, the President of India gave his assent to the Code. From the 5th to the 19th of August 2016, certain parts of the Act came into effect.

The Code provided a one-stop solution for complicated and fragmented insolvency and bankruptcy process. That is varying between the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Companies Act, 1956, the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, the Sick Industrial Companies (Special Provisions) Act, 1985, etc. 

The IBC 2016 provided a unified framework for bankruptcy resolution in the nation, providing a careful balance for all stakeholders to keep the firm running and economic value intact promptly.

In circumstances of CIRP initiation, Section 14 of the IBC, 2016 addresses the idea of a Moratorium. This is a significant policy that tries to safeguard ailing enterprises to aid their resurrection and re-establish themselves in the competitive market.

Moratorium tries to safeguard a Corporate Debtor under Section 14 in Part II of the IBC and the individuals/partnership firms under Section 101 in Part III of the IBC against the Financial Creditors, Operational Creditors, and Corporate Applicants under Section 7, 9, and 10 respectively of the Code.  

Section 14(1) holds the prime key to this postulate while Section 14 (2) and (3) of the Act forms an exception to the former. It states that the Adjudicating Authority shall by order declare a moratorium for prohibiting institution or continuation of suits; transaction of Corporate Debtor’s asset or legal right or any beneficial interest. As mentioned under the SARFAESI Act, 2002; recovery of any property by an owner or lessor currently held in possession of Corporate Debtor.

Canara Bank vs. Deccan Chronicle Holdings Limited

[LSI-1886-NCLAT-2017-(NDEL)], The power of the Hon’ble Apex Court under Articles 32 and 136 of the Indian Constitution, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Indian Constitution, shall be untouched by the moratorium, it was noted.

In Shah Brothers Ispat (P) Ltd. vs. P Mohanraj [2018 SCC Online NCLAT 415], it was established that criminal proceedings being grave shall not be exempted from being affected by the moratorium under Section 14 of the Code. 

In Power Grid Corporation of India vs. Jyoti Structures Ltd. – [LSI-85-HC-2017(DEL)],

The Hon’ble High Court of Delhi observed that the term “proceedings” as used in Section 14(1)(a) did not include “all” proceedings, and thus Section 14 of the IBC,2016 would not apply to proceedings in favor of the Corporate Debtor, as the Code’s goal is to strengthen and flourish the enterprise’s financial position.

The IBC forbids “recovery of any property by an owner or lessor of such property is occupied by or in the possession of the corporate debtor,” according to Section 14(1)(d). From the start of the CIRP to the end, the provision tries to prohibit owners and lessors from recovering “any property” from the Corporate Debtor.

Immovable and moveable property, such as land and buildings, as well as goods and equipment, are all included. It’s best to read “lessor” and “in possession of” together. This means that the corporate debtor has legal possession, which includes both real and constructive possession.

In the case of Rajendra K Bhutta vs. Maharashtra Housing and Area Development Authority and Anr [Civil Appeal No 12248 of 2018], it was observed that the dissolution of agreement in the moratorium to provide a property to the Corporate Debtor for the developmental activity shall be in violation concerning Section 14(1)(d) of the Code.

In the case of Bank of India AND ORS vs. Mr. Bhuban Madan And Ors. [No. 590 of 2020 & I.A. No. 156 of 2020], it was held that merely because the Corporate Debtor had enough liquidity to run the Company as a going concern, the act of the Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

Following a thorough examination of the situation, it may be concluded that the IBC’s moratorium provisions are crucial in protecting corporate debtors and guaranteeing a successful resolution. While this can present significant impediments for third parties, Section 14 has a broad reach, covering a wide range of decisions. Being a newly adopted Code, it is in its evolving stage. Further, re-evaluation of these is demanded from time to time.


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