Purpose Behind IBC

Author: Utkarsh Srivastava
Advocate-on-Record, Supreme Court of India

Insolvency and Bankruptcy Code 2016 (IBC) was enacted to consolidate and amend the laws relating to reorganization and insolvency of corporate persons, partnership firms and individuals in a time bound manner. The purpose is to maximize value of assets of such individuals, to promote entrepreneurship, to keep the credit available, and to balance the interests of all stake holders.

In Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17, Hon’ble Supreme Court of India observed that IBC is a beneficial legislation which attempts to put the Corporate Debtor back on its feet. It is not mere recovery legislation for individual creditors, but it considers the interests all stake holders. The relevant paragraph of the judgment is,

“28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”

…(Emphasis Supplied)

Note: Corporate Debtor is the person or company against whom the insolvency proceedings have been initiated, i.e. the one who has taken the loan or debt. Section 3(1) of IBC defines Corporate Debtor as a corporate person who owes a debt to any person. Debt can be both Financial Debt or Operational Debt.

In Arun Kumar Jagatramka v. Jindal Steel & Power Ltd. (2021) 7 SCC 474, Hon’ble Supreme Court held that IBC perceives insolvency not as an isolated problem of an individual but as a proceeding founds on public interests which facilitates economic growth by balancing the diverse interests of all the stakeholders, i.e. the Creditors, Corporate Debtor and Promoters as well as employees and shareholders of the Corporate Debtor which is in Insolvency Proceedings.

It was further held that it gives primacy to business decisions taken by Creditors acting as a collective body on the premise that timely resolution of Corporate Insolvency is necessary to ensure growth of credit markets and encourage investments. It also ensures that the interests of Corporate Enterprise are not conflated with the interests of their promoters.

The relevant paragraph of the judgment is,

“41. … First and foremost, the IBC perceives good corporate governance, respect for and adherence to the rule of law as central to the resolution of corporate insolvencies. Second, the IBC perceives corporate insolvency not as an isolated problem faced by individual business entities but places it in the context of a framework which is founded on public interest in facilitating economic growth by balancing diverse stakeholder interests. Third, the IBC attributes a primacy to the business decisions taken by creditors acting as a collective body, on the premise that the timely resolution of corporate insolvency is necessary to ensure the growth of credit markets and encourage investment. Fourth, in its diverse provisions, the IBC ensures that the interests of corporate enterprises are not conflated with the interests of their promoters; the economic value of corporate structures is broader in content than the partisan interests of their managements. These salutary objectives of the IBC can be achieved if the integrity of the resolution process is placed at the forefront. Primarily, the IBC is a legislation aimed at reorganisation and resolution of insolvencies. Liquidation is a matter of last resort. These objectives can be achieved only through a purposive interpretation which requires courts, while infusing meaning and content to its provisions, to ensure that the problems which beset the earlier regime do not enter through the backdoor through disingenuous stratagems.”

…(Emphasis Supplied)

While considering the above decisions, Hon’ble Supreme Court of India has very recently in Glas Trust Company LLC v. BYJU Raveendran & Ors. 2024 INSC 811, has concluded that,

“39. From the above, the following guiding principles emerge, which we must keep in mind while determining the issues raised in the present appeal:

1. 1. 1. 1. 1. A significant change brought about by the IBC was the consolidation of the pre-existing fragmented insolvency framework, The aim was to eliminate parallel proceedings by various creditors before different fora, given that all creditors would be a part of a single insolvency process under the IBC;
            2. The above consolidation also sought to implement the principle of ‘collective distribution’, where the interests of all stakeholders were considered. The CIRP envisaged by the IBC is premised on the principle that each creditor of the same class should receive a share that is proportionate to the debt owed to him;
            3. IBC must not be used as a tool for coercion and debt recovery by individual creditors. Improper use of the IBC mechanism by a creditor includes using insolvency as a substitute for debt enforcement or attempting to obtain preferential payments by coercing the debtor using insolvency proceedings. That the mechanism under the IBC must not be used as a money recovery mechanism has been reiterated in a consistent line of precedent by this Court; and
            4. The interests of the corporate debtor must be detached from those of its promoters/those who are in management. A “recalcitrant management” must be prevented from taking advantage of undue delays and preventing an inevitable insolvency. In other words, as noted by this Court in Arun Kumar Jagatramka (supra), the economic value of corporate structures is broader than the partisan interests of their management.”

Note: The term “Recalcitrant Management” comes from the judgment passed by Hon’ble Supreme Court of India in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353. The term means a management which does not want to get the insolvency proceedings completed within the time frame specified in the IBC and wants to drag the proceedings to keep their personal interests alive.