Role of Erstwhile Directors under IBC, 2016

Role of Erstwhile Directors under IBC, 2016

Case: Innoventive Industries Ltd v. ICICI Bank [2017] GCtR 1171 (SC)

Principle Laid Down

Once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company 

Aim of IBC, 2016

One of the important objectives of IBC, 2016 is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process. As per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). The World Bank’s Ease of Doing Business Index, 2015, ranked India as country number 135 out of 190 countries on the ease of resolving insolvency based on various indicia.

Foreign Jurisdictions

USA has adopted the Bankruptcy Reform Act of 1978, which has since been codified in Title XI of the United States Code. The US Code continues to favour the debtor. In a reorganization case under Chapter 11, the debtor and its existing management ordinarily continue to operate the business as a “debtor in possession” – See USC 11, Sec. 1107-1108. The Court can appoint a trustee to take over management of the debtor’s affairs only for “cause” which includes fraud, dishonesty or gross mismanagement of the affairs of the debtor – See USC 11, Sec. 1104. 

Provisions and Overview of IBC

Under Section 4 of the IBC, Part II applies to matters relating to the insolvency and liquidation of corporate debtors, where the minimum amount of default is rupees one lakh. Sections 6, 7 and 8 form part of one scheme. Under Section 20 of the Act, the interim resolution professional shall manage the operations of the corporate debtor as a going concern. Section 21 is extremely important and provides for appointment of a committee of creditors.

The scheme of IBC is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. 

Difference between Financial Creditor and Operational Creditor

A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5 (21) means a claim in respect of provision of goods or services. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. 

Analysis : This decision has brought a radical shift. Under IBC, 2016 there are different classes of creditors and time-bound process is made the hallmark. What distinguishes IBC from other loan - recovery laws is the revival aspect. Under the provisions of IBC, revival is done and provisions of IBC are not a method for recovery suit. This case highlights the reasons behind enactment of Code.