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I have some concerns about the Insolvency & Bankruptcy Code recently notified by the government. The law aims to boost the restructuring and realization process in case of inability to repay financial debt or operational debt and thereby creating market for bonds, speed up the insolvency process and thereby creating a healthy business environment. It was pending for a long time and indeed, was a need of an hour. Due credit to the NDA Government which took up the issue and brought about the law in a record time with a completely new infrastructure set up to administer the law in a effective manner. However, there are certain aspects which, in my view, need to be addressed in the law. Lack of clarity or specific provisions, I apprehend that the law could become an instrument in the hands of creditor to pull a company, which is otherwise completely solvent, to the insolvency resolution unnecessarily.

As per the provisions, any person to whom Rs. 100,000 or more is outstanding from a corporate debtor, can issue a notice of 10 days to the corporate debtor for settling the outstanding dues. If the Corporate debtor could not make the payment of outstanding dues within 10 days, the creditor has right to file an application with the NCLT for admitting his application for initiating the insolvency resolution process against the corporate debtor and on it being found that the debt was outstanding and was not paid by the corporate debtor within said 10 days, NCLT shall be required to pass an order for admission of application for initiating the insolvency resolution process against the corporate debtor! There is no reverse gear or no provision for withdrawing the application filed or to make prayer by the corporate debtor to make payment within some agreed time in order to withdraw the application or provision for achieving the settlement and filing consent terms with a prayer not to process the application filed.

Consider a case of a genuine company which has been facing a temporary liquidity problems may be due to macro-economic environment or due to happening of an unforeseen event which lead to drying off its liquidity for the time being. In such case, even a small operational creditor can ruin its destiny if the debtor could not manage the repayment of dues within 10 days!!

Just imagine the Resolution Professional taking over the charge of business from the otherwise genuine promoters of the debtor, appointing his persons as consultants, advisors or accountants, asking the management of the Company to remain present and provide support in all valuation exercises, instructing the bank to change the authorized signatories of bank account operations, and so many other things.

 

What do you think the company which is genuine in its intentions but has been facing temporary liquidity problem, should meet with such a harsh treatment which can certainly draws it near insolvency and in worst case, to liquidation? This can have a snow ball effect such as the talented and core employees who can find jobs elsewhere easily, will leave the company soon, other employees will also be affected adversely if the Company goes into liquidation, the reputation which takes years to build will be destroyed in hours, the material suppliers and credit suppliers will turn their faces away from the company, the bankers will not put confidence in further financing and starts looking into their interest in realizing the assets secured, and so on.

These all together are more than enough to give a death blow to the company. There could also be cancellation of outstanding orders as most of the contracts provide right to cancel the order in certain event of defaults and needless to say that insolvency proceedings is one of the events of default. In nut shell, the Company will not be able to rise from the unwarranted blows and will suffer a certain death for no intentional fault on its part.

It seems the lawmakers have not envisaged such situation while framing the law. They could have taken into account the business dynamics as well since this law affects the business processes. In our country, as we have been witnessing in many fields, the negative activism always finds a way out (may be due to weaknesses of over democratic process) and ruin the object of subject matter. Take an example of shareholders negative activism in AGMs of the companies wherein they used to move a resolution for appointment as director just to force the management to shelve with some money or to give some favourable treatment personally. The same way, we have also seen use of filing case or claim or stay order in judiciary system with an intention to damage the reputation of some person or as a tool to restrain others to file some claim against us. This provision of bankruptcy law could also be used not in the right perspective (i.e. the object as envisaged by the law makers) but for malafide intentions.

The Government needs to intervene and provide some measure to curb such unethical and unhygienic practice to make business environment a really robust that the business can flourish without any fear from such elements.


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Category LAW, Other Articles by - Sitansh Magia 



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