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Innovation of ‘Zero Period’ in the Insolvency and Bankruptcy Code, 2016

Innovation of ‘Zero Period’ in the Insolvency and Bankruptcy Code, 2016

The preamble of the Insolvency and Bankruptcy Code, 2016 (‘Code’) states its objectives, which are maximisation of value of assets, promote entrepreneurship, within the stipulate time frame. Apart from the initiation of Corporate Insolvency Resolution Professional (‘CIRP’) or the Liquidation Process, the Code also provides for a class of transactions which can be ‘avoided’ or ‘undone’ by the appointed Resolution Professional (‘RP’) or the Liquidator, by preferring an Application before the Adjudicating Authority. This piece looks to develop the law of avoidance transactions for the benefit of the stakeholders.

The Code apart from providing for rehabilitation and turnaround also provides for avoidance of transactions which are entered by the Corporate Debtor with third parties before the initiation of the Insolvency Commencement Date (‘ICD’), this practice also seeks to help in value maximisation of the recovery made by the stakeholders. The Code outlines a procedure for the avoidance of transactions, including the ability of the RP to review transactions entered one year before the ICD and, for transactions involving related parties, up to two years prior to the ICD, this is also known as the ‘lookback period’ or ‘umbrella period’. Nonetheless, the RP has the authority to investigate transactions older than these limits if they are fraudulent in nature, i.e., covered under Section 66 of the Code.

The said provisions regarding avoidance of the transactions can only be invoked when CIRP or liquidation proceedings are ongoing, accordingly, to admit/ initiate the CIRP and Liquidation Process, the Adjudicating Authority will first decide an Application filed under Section 7, 9 or 10 of the Code.  

Although the provisions of the Code provide for a timeline for adjudicating an Application under Section 7, 9 or 10, however, the said timelines are held to be directory by the Hon’ble Supreme Court in M/s Surendra Trading Company vs. M/s. Juggilal Kamlapat Jute Mills Company Limited and Others[i]. The Hon’ble Supreme Court has held that the time period prescribed under the Code for admission/ rejection of CIRP admission Application is only directory in nature and not mandatory. Pursuant to this interpretation of the Hon’ble Supreme Court, there has been considerable amount of delay in admission of the CIRP proceedings against the Corporate Debtor.

In fact, the Insolvency and Bankruptcy Board of India (‘IBBI’) has also acknowledged that the ‘Stage of admission of Application under CIRP’ often exceeds the time limit specified in the legislation.[ii] The IBBI paper includes a survey outlining the timeline for the admission of CIRP Applications, as follows:

DAYS

PERCENTAGE

Less than 14 days

1%

14 – 30 days

7%

30 – 90 days

18%

More than 90 days

74%

The above figures clearly provide that it takes more than the stipulated time for to admit/ reject an application filed seeking to initiate CIRP. This not only violates the timeline provided under the Code but also creates the problem for the appointed Insolvency Professional to dig out the financial transaction in order to file applications seeking avoidance of transactions.

As explained above, that the Code provides avoidance of certain transactions entered by the Corporate Debtor with third parties, when such transactions are within the lookback period. Now the problem arises when an application to initiate insolvency is filed before the NCLT and is pending for more than 90 days, it gives ample amount of time for the management of the Corporate Debtor to ‘clean up’ the books of the Corporate Debtor and also not to further enter into any kinds of transactions which can be avoided.

The appointed Insolvency Professional often loses a crucial period of 90 days or more during which avoidance transactions might have occurred, primarily due to delays in initiating the CIRP. Indeed, it’s a fact that applications for initiating CIRP can sometimes take over a year to process, leading to significant disruptions. This delay prevents the insolvency professional from investigating transactions that may be preferential, undervalued, or extortionate credit transactions effectively.

The proposed way forward entails the declaration of a ‘zero period’ when an application seeking initiation of CIRP is filed. That when the Adjudicating Authority issues notice to the Corporate Debtor/Respondent during the adjudication process. Simultaneously, the Adjudicating Authority can also order for initiation of zero period, from the date of filing of the application till the disposal of the said application seeking to initiate insolvency. Pertinently, this zero period shall be excluded while calculating the look back period for assessing the avoidance transactions of the Corporate Debtor under Section 43(4), 46, 50(1). This approach would enable the appointed Insolvency Professional to thoroughly review transactions that may have been overlooked due to inevitable delay in initiating the CIRP.

The implementation of a ‘zero period’ will also advantage the appointed transaction auditors by facilitating the discovery of transactions executed by the suspended management of the Corporate Debtor before the anticipation of an insolvency application. Moreover, such a directive from the Adjudicating Authority aligns with the fundamental goal of the Code, which is to maximize the value for stakeholders. Essentially, this means that funds that might have otherwise been irrecoverable could potentially be recuperated through the institution of a ‘zero period’.

The Adjudicating Authority, in declaring a ‘zero period’, can draw guidance from the judgment rendered by the Hon’ble Appellate Authority in the matter of NIU Pulp and Paper Industries Pvt. Ltd. vs. M/s Roxcel Trading GMBH[i], wherein it was emphasized that under Rule 11 of the NCLT Rules, 2016, the Adjudicating Authority has the jurisdiction to issue ad-interim orders prior to admitting an application under Section 7, 9, or 10 of the Code. This approach would not only assist the Corporate Debtor in revitalizing but also in recovering better sums from the CIRP of the Corporate Debtor.

[i] [Civil Appeal No. 8400 of 2017].

[ii] IBBI Research Initiative, RP- 01/2021, ‘Assessment of Corporate Insolvency and Resolution Timeline’, available at https://ibbi.gov.in/uploads/publication/2021-02-12-154823-p3xwo-8b78d9548a60a756e4c71d49368def03.pdf

[iii] NIU Pulp and Paper Industries Pvt. Ltd. vs. M/s Roxcel Trading GMBH, [Company Appeal (AT) (Ins.) No. 664 of 2019]

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