{"id":196892,"date":"2022-07-22T19:33:05","date_gmt":"2022-07-22T14:03:05","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=196892"},"modified":"2022-07-22T19:33:05","modified_gmt":"2022-07-22T14:03:05","slug":"recent-supreme-court-judgment-on-ibc-may-weaken-insolvency-regime","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/recent-supreme-court-judgment-on-ibc-may-weaken-insolvency-regime\/","title":{"rendered":"Recent Supreme Court judgment on IBC may weaken insolvency regime"},"content":{"rendered":"\n

Source<\/span><\/b>: The post is based on an article \u201cRecent Supreme Court judgment on IBC may weaken insolvency regime\u201d<\/strong> published in the Indian Express<\/strong> on 22<\/strong><\/span>nd<\/strong> July 2022<\/strong>.<\/span>\u00a0<\/span><\/p>\n

Syllabus<\/span><\/b>: GS 3 Issues and Challenges pertaining to growth and development of Indian Economy; Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.<\/span>\u00a0<\/span><\/p>\n

Relevance<\/span><\/b>: Insolvency and Bankruptcy Code<\/span>\u00a0<\/span><\/p>\n

News: <\/span><\/b>Recently,<\/span> the <\/span>Supreme Court of India<\/span><\/b> passed an important judgment on insolvency and bankruptcy in the <\/span>Vidarbha Industries Power Ltd. v. Axis Bank Case.<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/p>\n

SC recently\u00a0held that the <\/span>National Company Law Tribunal (NCLT<\/span><\/b>) 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.\u00a0<\/span>\u00a0<\/span><\/p>\n

What are the concerns associated with the judgment?<\/span><\/b>\u00a0<\/span><\/h5>\n

A critical element for any corporate insolvency law is <\/span>the point of trigger. It means<\/span><\/b> the law must clearly provide the <\/span>grounds<\/span><\/b> on which an <\/span>insolvency application<\/span><\/b> against a corporate debtor should be admitted. If there is any confusion at this stage, <\/span>precious time<\/span><\/b> could be wasted in <\/span>litigation<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

On the other hand, if the law is <\/span>clear<\/span><\/b> and <\/span>litigation<\/span><\/b> can be minimised, the distressed business could be resolved faster. Its value <\/span>could<\/span><\/b> be preserved. And all stakeholders collectively would <\/span>benefit<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

Therefore, the government should develop <\/span>objective legal criteria <\/span><\/b>for an effective corporate insolvency law.<\/span>\u00a0<\/span><\/p>\n

What were the points of triggers that can be used for initiating insolvency proceeding?<\/span><\/b>\u00a0<\/span><\/h5>\n

(1) The <\/span>balance-sheet test<\/span><\/b> is one method for determining insolvency at the point of trigger. However, the balance-sheet test is vulnerable to the quality of accounting standards. Therefore, the Bankruptcy Law Reforms Committee (BLRC) did not favour this test in the Indian context<\/span>\u00a0<\/span><\/p>\n

(2). The BLRC recommended a <\/span>twin-test<\/span><\/b>. In this, a filing creditor should only provide a record of the liability (debt), and evidence of <\/span>default on payments<\/span><\/b> by the corporate debtor. It provides a clear and objective trigger for insolvency resolution. This test was expected to <\/span>minimise litigation<\/span><\/b> at the admission stage of the <\/span>insolvency application<\/span><\/b>, and enable <\/span>quicker resolution<\/span><\/b> of distressed businesses.<\/span>\u00a0<\/span><\/p>\n

Possible Implication of the SC ruling<\/span><\/b>\u00a0<\/span><\/h5>\n

(1) The SC interpretation of the law could <\/span>fundamentally reshape<\/span><\/b> a crucial innovation in the IBC framework.<\/span>\u00a0<\/span><\/p>\n

(2) The SC\u2019s latest ruling is likely to cause failure of the<\/span> twin-test<\/span><\/b>, recommended by the BLRC. 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.\u00a0<\/span>\u00a0<\/span><\/p>\n

(3) Now, the corporate debtors are likely to use this precedent to the fullest to <\/span>resist admission<\/span><\/b> into IBC.<\/span>\u00a0<\/span><\/p>\n

(4) There would be <\/span>more litigation<\/span><\/b> and <\/span>delay<\/span><\/b> at the <\/span>admission stage<\/span><\/b>, enhancing the risks of <\/span>value destruction<\/span><\/b> in the underlying distressed business and all stakeholders collectively would suffer.\u00a0<\/span>\u00a0<\/span><\/p>\n

(5) The IBC may well end up like the <\/span>Sick Industrial Companies (Special Provisions) Act, 1985 (SICA<\/span><\/b>). The SICA was also subjected to <\/span>pro-revivalist judicial approach<\/span><\/b> in various judgments. This led to the establishment of the <\/span>Board for Industrial and Financial Reconstruction (BIFR<\/span><\/b>) as a specialist tribunal to ensure <\/span>speedy resolution<\/span><\/b> of distressed industrial companies. The BIFR became a haven where companies could seek shelter from their creditors for years. This led to a lot of delays as well as facilitating the managers to siphon off assets in the interim.\u00a0<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cRecent Supreme Court judgment on IBC may weaken insolvency regime\u201d published in the Indian Express on 22nd July 2022.\u00a0 Syllabus: GS 3 Issues and Challenges pertaining to growth and development of Indian Economy; Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on… Continue reading Recent Supreme Court judgment on IBC may weaken insolvency regime<\/span><\/a><\/p>\n","protected":false},"author":10308,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1566,9],"tags":[216,10500],"class_list":["post-196892","post","type-post","status-publish","format-standard","hentry","category-daily-factly-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1700495245},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/196892","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10308"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=196892"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/196892\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=196892"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=196892"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=196892"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}