INTRODUCTION
Corporate hardship/distress is a situation where a business entity fails to generate enough revenue or income, which becomes a burden. Corporate distress should not be ignored because it can lead to a catastrophic event. This means that the company would be unable to recover since the liabilities have accumulated to levels that cannot be serviced. This will ultimately usher in bankruptcy.
CAUSES OF CORPORATE DISTRESS
When an organization is unable to fulfil its obligations, it experiences corporate distress. It could be brought on by rising competition, high fixed costs, illiquid assets, economic slowdowns, significant resignations of finance staff, low sales growth or declining revenues, large contingent liabilities, unresolved short-term debt maturities, decreasing EBITDA/margin, and industry-specific factors. The level of distress may rise as a result of any of these factors. Neglecting these warning signs could result in serious consequences. To avoid corporate difficulties, these concerns need to be addressed as soon as possible.[1]
THE INSOLVENCY AND BANKRUPTCY CODE (IBC) 2016
In 2016, the IBC was enacted to guarantee the survival of businesses and the rescue of their assets in times of trouble. The bankruptcy cycle is a bound-together code where data in regards to indebtedness is gathered in an extremely nitty gritty and explicit way which is supposed to be sure or dependable. Creditors take precedence in this code when it comes to the settlement of liabilities by the debtor or distressed entities. When it comes to corporate bankruptcy proceedings, corporate debtors have rights over operational creditors as well as financial creditors. Any authorized financial creditor can initiate a corporate insolvency resolution process if a corporate debtor defaults on a loan under Section 7[2] of the IBC. A monetary bank can sue a corporate indebted person for himself.
Companies can be sued by creditors under Section 7 of the IBC if they default on loans. In E.S. Krishnamurthy v. Bharath Hi-Tech Builders (P) Ltd.[3], the Supreme Court established the primary criteria for an adjudicating authority’s default. If this appeal has been recorded totally with “default” laid out indeed it ought to be conceded. Also, the rule makes arbitrating and investigative specialists give them legal status. However, they are only able to facilitate settlement, not force it.
RECENT AMENDMENTS IN SECTION 7
Section 7 is the most important section where most of the insolvency process is initiated and has gone through various amendments in the recent years of 2019,2020, and 2021.
Key amendments involve the following[4]:
- Minimum Threshold: Section 7(1) of the Code now has three Provisos, which require some financial creditors to meet the minimum threshold before applying under the Code.
- Clarification on deadline: The proposed change clarifies the 14-day limit set out in section 7 of the code.
- Interference with Supreme Court ruling: The amendment requires real estate allottees to institute claims against developers under section 7 of the code, thus contradicting a Supreme Court ruling.
- Limitations on Allottee Rights: Pioneer had held that this change to the Code restricts allottee rights.
JUDICIAL INTERPRETATIONS
It was expressed that NCLT and NCLAT shouldn’t meddle in the IBC’s fundamental standards, yet legal impedance or advancement should be limited[5]. In the case of Manish Kumar v Union of India[6] it was held that the activity under the Code started through an application under section 7 is an activity in rem. The Code’s primary objective is not to recover money paid.
The amendment to Section 7 of the IBC has raised the threshold amount of default for a financial creditor to initiate a corporate insolvency resolution process against a corporate debtor up to Rs. One crore.[7]
In the notable judgment of Swiss Ribbons (P) Ltd. v. Union of India[8], the Court made several key observations. Section 7(5) of the Code, held that an application filed with the adjudicating authority should be accompanied by a copy served on the corporate debtor, who may file objections and appear at the hearing before orders admitting the application are delivered. The Court emphasized the necessity to protect the corporate debtor from being forced into an insolvency resolution process without a legal basis or right. This is why Section 65 of the Insolvency and Bankruptcy Code (IBC) prescribes penalties for offences. If an insolvency resolution process or liquidation proceedings are initiated fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or liquidation, the adjudicating authority can impose a penalty. Furthermore, the Court noted that Section 75 of the IBC prescribes punishment for providing false information in an application made by a financial creditor, which also serves to deter a financial creditor from wrongly invoking Section seven.
In the case of Hytone Merchants (P) Ltd. v. Satabadi Investment Consultants (P) Ltd[9]., “Section 7 of the Insolvency and Bankruptcy Code (2016) establishes the groundwork for the inception of the corporate insolvency resolution process interaction, engaging monetary foundations to make a legitimate move against corporate borrowers. This section has been further refined with efficiency-enhancing amendments like establishing a minimum threshold for certain financial creditors and increasing the timeline’s clarity. Legal interpretations have shed light on this provision’s scope and duration, advocating for prudent bankruptcy procedure. The objective of these arrangements is to accomplish a fair and proficient goal process that takes care of the requirements, everything being equal. Notwithstanding resulting changes to the Insolvency and Bankruptcy Code, Section 7 is supposed to keep being a foundation of India’s bankruptcy regulations.”
CONCLUSIONS
Section 7 of the Insolvency and Bankruptcy Code (2016) establishes the groundwork for the inception of the corporate insolvency resolution process interaction, engaging monetary foundations to make a legitimate move against corporate borrowers. This section has been further refined with efficiency-enhancing amendments like establishing a minimum threshold for certain financial creditors and increasing the timeline’s clarity. Legal interpretations have shed light on this provision’s scope and duration, advocating for prudent bankruptcy procedure. The objective of these arrangements is to accomplish a fair and proficient goal process that takes care of the requirements, everything being equal. Notwithstanding resulting changes to the Insolvency and Bankruptcy Code, Section 7 is supposed to keep being the foundation of India’s bankruptcy regulations.
Author(s) Name: Reet Parihar (Lovely Professional University, School of Law)
References:
[1] Ruchi Gandhi, ‘Meaning of Corporate Distress – Factors contributing to Corporate Distress’ (Enterslice 21 December 2012) <https://enterslice.com/learning/factors-contributing-to-corporate-distress/>accessed 11 June 2024
[2] Insolvency and Bankruptcy Code 2016, s 7
[3](2022) 3 SCC 161.
[4] Ministry of Corporate Affairs March 2020 <https://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf>
[5] Pratap Technocrats (P) Ltd. v. Reliance Infratel Ltd. (Monitoring Committee (2021) 10 SCC 623.
[6] (2021) 5 SCC 1.
[7] Ibid 4
[8] (2019) 4 SCC 17.
[9] 2021 SCC OnLine NCLAT 598.
