Misuse of Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016 (IBC, 2016 or referred as ‘Code’ in this article) is made with certain objectives which can be understood from the preamble of the code. It is rightly said that preamble is the key to open the minds of people who made it (it was mentioned in respect to constitution though)[1]. If the Preamble of IBC, 2016 is read in parts to understand the aims and objective of the code then some of them may be considered as mentioned below: –

  1. [To strengthen the reorganization and insolvency resolution of corporate person, partnership firms and individuals and amend the laws relating to it.
  2. Maximization of value of assets by following a time-bound procedure.
  3. To promote entrepreneurship.
  4. Availability of credit.
  5. Also, the interests of all stakeholders are taken into consideration and alterations have been done in priority of payment of dues.
  6. Establishment of Insolvency and Bankruptcy Board of India.][2]

The Code is divided into five parts where part II describes insolvency resolution and liquidation procedure for a corporate person. According to this, the insolvency petition can be filed by three categories of people- Operational Creditor, Financial Creditor, and Corporate Debtor himself, and then the further procedure follows. This whole mechanism is laid so that the companies which are in debt, pay it and if not possible to pay because of financial difficulties suffered, then insolvency procedure is initiated so that creditors do not suffer.

The real situation: – Creditors are given the right to file the insolvency petition with the intent that they do not suffer because of the inability of Corporate Debtor to pay the debt. But there have been several cases where Creditors file insolvency petition merely to recover their dues. This was the same case with the winding up petition. Statutory notice under section 433(e) of Companies Act, 1956 were to be issued followed by winding up petition filed if the same(notice) is not replied or defaulted amount was not paid. Winding up petition u/s 433(e) can be related to insolvency petition as both are filed when default in payment occurs.

It was in the case of Pawan Khaitan V. Rahul Commerce Private Limited that the Hon’ble High Court of Calcutta in Para 5 opined that “..the process of winding up could not be used as a tool for debt collection, it is not a debt collecting court.”[3]

Now, when analyzed with respect to the usage of Insolvency and Bankruptcy Code, 2016 out of the major applications filed, most of them are by creditors, operational and financial both, but for small amounts (in compare to debt recovery amount of banks) and only a few of them are by banks and other financial institution.

This also happens because the minimum amount of default is one lakh rupees.

Obviously, the courts/ NCLT adjudicate the matters on the basis of merit and then may admit, but Judiciary and all quasi-judicial bodies are already overburdened with cases and in that, petitions like this make it more difficult to adjudicate other important matters which may be required to be considered on a priority basis.

Conclusion:- To stop the misuse of the right given there should be certain set criteria to file a petition except for the monetary value of 1 lakh rupees.[4] Also, when the central Government has right to set the minimum value by the issue of notification in the official gazette then the appropriate amount should be set so that people do not use the Code and the machinery therein to recover their debt.

[1] In Re Berubari v. Union of India, AIR 1960 SC 845

[2] Preamble, The Insolvency and Bankruptcy Code, 2016-An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

[3] [2015]190 CompCase236 (cal)

[4] Section 4, Insolvency and Bankruptcy Code, 2016- (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:
Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore.


ABOUT THE AUTHOR

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MANSI CHHAYA

Mansi is a law student from Unitedworld School of Law. She has always believed that life is about challenging oneself and living outside one’s comfort zone. Be it music or national level examinations, her focus has always been on trying to develop herself holistically. A consistent high performer and student of the year, she wishes to use her knowledge to ensure justice for people who deserve it.

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