[The following
post is contributed by Rahul Sibal,
3rd Year, and Deep Shah,
2nd Year, students of NALSAR, Hyderabad. They can be contacted at [email protected] and [email protected].
post is contributed by Rahul Sibal,
3rd Year, and Deep Shah,
2nd Year, students of NALSAR, Hyderabad. They can be contacted at [email protected] and [email protected].
In this post,
they analyze certain anomalies with respect to provisions concerning antecedent
transactions under the recently enacted Insolvency and Bankruptcy Code, 2016.]
they analyze certain anomalies with respect to provisions concerning antecedent
transactions under the recently enacted Insolvency and Bankruptcy Code, 2016.]
The Insolvency and
Bankruptcy Code, 2016 (the ‘IBC’) has been enacted with the intent to streamline
the insolvency process through the consolidation of fragmented (and outdated) legislation
that previously governed insolvency proceedings in India. It has been partially
brought into force through several notifications, as detailed here
and here.
Interestingly, the IBC has been significantly influenced by the Insolvency
Act, 1986 (the ‘UK Act’). However, the correlation between the two statutes
is not limited to mere conceptual influence. In fact, with respect to some
provisions, the drafters of the IBC have employed a ‘drag and drop’ approach by
adopting specific provisions of the UK Act without any substantive
modifications. While there do exist minor alterations, such changes are
predominantly syntactic. Even so, alterations in the language or syntax can unintentionally
result in significant changes in the meaning of the provision that is sought to
be adopted.
Bankruptcy Code, 2016 (the ‘IBC’) has been enacted with the intent to streamline
the insolvency process through the consolidation of fragmented (and outdated) legislation
that previously governed insolvency proceedings in India. It has been partially
brought into force through several notifications, as detailed here
and here.
Interestingly, the IBC has been significantly influenced by the Insolvency
Act, 1986 (the ‘UK Act’). However, the correlation between the two statutes
is not limited to mere conceptual influence. In fact, with respect to some
provisions, the drafters of the IBC have employed a ‘drag and drop’ approach by
adopting specific provisions of the UK Act without any substantive
modifications. While there do exist minor alterations, such changes are
predominantly syntactic. Even so, alterations in the language or syntax can unintentionally
result in significant changes in the meaning of the provision that is sought to
be adopted.
Section 164(6)(b) of the IBC is illustrative of the
proposition that slight changes or errors in syntax and structure at the time
of incorporating foreign provisions into domestic statutes could result in significant
deviations from the original legislative intent behind the provision. This statutory
provision is concerned with the regulation of ‘undervalued transactions’
undertaken by individuals prior to the onset of bankruptcy.
proposition that slight changes or errors in syntax and structure at the time
of incorporating foreign provisions into domestic statutes could result in significant
deviations from the original legislative intent behind the provision. This statutory
provision is concerned with the regulation of ‘undervalued transactions’
undertaken by individuals prior to the onset of bankruptcy.
As is evident from the interim
report of the Bankruptcy Law Reform Committee (BLRC), the drafters of the
IBC intended to regulate undervalued transactions on the lines of corresponding
provisions of the UK Act.[1] Curiously
enough, a minor alteration in structure has translated into a scenario where section
164(6)(b) suggests the very opposite of the corresponding provision in the UK
Act. However, it is necessary to first understand the concept of ‘undervalued
transactions’ before this error is expounded upon.
report of the Bankruptcy Law Reform Committee (BLRC), the drafters of the
IBC intended to regulate undervalued transactions on the lines of corresponding
provisions of the UK Act.[1] Curiously
enough, a minor alteration in structure has translated into a scenario where section
164(6)(b) suggests the very opposite of the corresponding provision in the UK
Act. However, it is necessary to first understand the concept of ‘undervalued
transactions’ before this error is expounded upon.
The division of assets in insolvency proceedings is governed
by the principle of pari passu. Simply
put, this principle requires that every creditor of the same class must inter se receive a proportionate share
from the bankrupt’s property in return for the debt owed. However, before an
individual is deemed to be bankrupt, he might enter into a transaction (‘the antecedent
transaction’), in which the consideration received by the individual is ‘significantly’[2]
lesser than the consideration the transaction commands. Given that such
transactions could result in the preferential payment (or discharge) of debt in
favour of the counterparty, in contrast to a pro rata satisfaction of claims, such arrangements would be in
derogation of the pari passu
principle.
by the principle of pari passu. Simply
put, this principle requires that every creditor of the same class must inter se receive a proportionate share
from the bankrupt’s property in return for the debt owed. However, before an
individual is deemed to be bankrupt, he might enter into a transaction (‘the antecedent
transaction’), in which the consideration received by the individual is ‘significantly’[2]
lesser than the consideration the transaction commands. Given that such
transactions could result in the preferential payment (or discharge) of debt in
favour of the counterparty, in contrast to a pro rata satisfaction of claims, such arrangements would be in
derogation of the pari passu
principle.
The unfairness, inherent in such arrangements, creates the
need to regulate and avoid such transactions. Proceeding on this understanding,
the error in Section 164(6)(b) is apparent. The relevant sub-clauses of the UK
Act and the IBC have been reproduced below:
need to regulate and avoid such transactions. Proceeding on this understanding,
the error in Section 164(6)(b) is apparent. The relevant sub-clauses of the UK
Act and the IBC have been reproduced below:
|
Section 339 of the UK
Act |
Section 164 of the
IBC |
|
(3) For the purposes of this section
and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if-
…………………………………….
(c) he makes a gift to that person or he
otherwise enters into a transaction with that person on terms that provide for him to receive no consideration, |
(6) For the purposes of this section, a bankrupt
enters into an undervalued transaction with any person if–
(a) he makes a gift to that person;
(b) no consideration has
been received by that person from the bankrupt; |
According to section 339 of the UK Act, should a bankrupt
‘X’ enter into a transaction with an individual ‘Y’, which involves the sale of
property by X to Y without the receipt of any consideration by X in return, then
X would be held to have entered into a ‘transaction at undervalue.’ However, clause
(b) of sub-section (6) of section 164 of the IBC states that a bankrupt would
be deemed to have entered into an undervalued transaction with any person if ‘no consideration has been received by
that person from the bankrupt.’
‘X’ enter into a transaction with an individual ‘Y’, which involves the sale of
property by X to Y without the receipt of any consideration by X in return, then
X would be held to have entered into a ‘transaction at undervalue.’ However, clause
(b) of sub-section (6) of section 164 of the IBC states that a bankrupt would
be deemed to have entered into an undervalued transaction with any person if ‘no consideration has been received by
that person from the bankrupt.’
Therefore, in India, as per section 164(6)(b) of the IBC, an
undervalued transaction would have been entered into if the above situation
were reversed, that is, if there were a sale of property by Y to X without the
payment of any consideration by X.
undervalued transaction would have been entered into if the above situation
were reversed, that is, if there were a sale of property by Y to X without the
payment of any consideration by X.
An analysis of other clauses under section 164(6) reveals that
such a result was not intended. For instance, sub-clause (a) holds that a
bankrupt would have entered into an undervalued transaction with any person if
‘he makes a gift to that person.’ Admittedly, this clause suggests that
a transaction is ‘undervalued’ if it involves a loss to the bankrupt, and not
to the individual transacting with the bankrupt. Sub-clause (d) further
reinforces this proposition since it defines an undervalued transaction as one
in which the consideration for the bankrupt is of a value significantly lower
than the value in money or money’s worth of the consideration provided by the
bankrupt. Both these provisions indicate that the result under clause (b) is
not reflective of the legislative intent, but is an outcome of an isolated
error.
such a result was not intended. For instance, sub-clause (a) holds that a
bankrupt would have entered into an undervalued transaction with any person if
‘he makes a gift to that person.’ Admittedly, this clause suggests that
a transaction is ‘undervalued’ if it involves a loss to the bankrupt, and not
to the individual transacting with the bankrupt. Sub-clause (d) further
reinforces this proposition since it defines an undervalued transaction as one
in which the consideration for the bankrupt is of a value significantly lower
than the value in money or money’s worth of the consideration provided by the
bankrupt. Both these provisions indicate that the result under clause (b) is
not reflective of the legislative intent, but is an outcome of an isolated
error.
The error seems to have stemmed from the fact that clause
(c) of Section 339(3) of the UK Act was incorporated by the drafters of the IBC
in the form of two different clauses. It is at the time of splitting up the
clause that this error arose. For instance, an individual is held to have
entered into an undervalued transaction under clause (c) of Section 339 of the
UK Act if:
(c) of Section 339(3) of the UK Act was incorporated by the drafters of the IBC
in the form of two different clauses. It is at the time of splitting up the
clause that this error arose. For instance, an individual is held to have
entered into an undervalued transaction under clause (c) of Section 339 of the
UK Act if:
“(c) he makes a gift to that person or he
otherwise enters into a transaction with that person on terms that provide for
him to receive no consideration,”
otherwise enters into a transaction with that person on terms that provide for
him to receive no consideration,”
For reasons not known, the drafters split clause (c) into
two distinct clauses that have been reproduced below:
two distinct clauses that have been reproduced below:
“(a)
he makes a gift to that person;
he makes a gift to that person;
(b) no consideration has been received by that person from the bankrupt;”
Therefore, the reversal in the effect of the clause vis-à-vis
the UK Act, as illustrated above, is a consequence of the change in the use of
pronouns on account of the splitting of clause (c). Interestingly, this error
can be located in the Draft
Insolvency and Bankruptcy Bill, 2015 as well as in the Joint
Committee Report on the Insolvency and Bankruptcy Code, 2015. It appears
that the error was left unquestioned by the Joint Committee on account of the
presumption of accuracy in favour of the UK Act.
the UK Act, as illustrated above, is a consequence of the change in the use of
pronouns on account of the splitting of clause (c). Interestingly, this error
can be located in the Draft
Insolvency and Bankruptcy Bill, 2015 as well as in the Joint
Committee Report on the Insolvency and Bankruptcy Code, 2015. It appears
that the error was left unquestioned by the Joint Committee on account of the
presumption of accuracy in favour of the UK Act.
Strikingly, the textual connotation would not only be
divergent from the purpose of section 164, but antithetical to it, since the rationale
behind the incorporation of provisions pertaining to antecedent transactions is
to prevent the shrinking of the asset pool available for distribution, so as to
enable all creditors to be paid back
to the greatest extent possible. However, section 164(6)(b), as it exists now, disallows
transactions which would have had the effect of enlarging the asset pool.
divergent from the purpose of section 164, but antithetical to it, since the rationale
behind the incorporation of provisions pertaining to antecedent transactions is
to prevent the shrinking of the asset pool available for distribution, so as to
enable all creditors to be paid back
to the greatest extent possible. However, section 164(6)(b), as it exists now, disallows
transactions which would have had the effect of enlarging the asset pool.
Therefore, what has been observed is a case of a drafting
error which has unintentionally altered and, in fact, reversed the ambit of the
provision. This particular provision has not been brought into effect as yet,
and there remains a possibility that the Government could attempt to rectify
the error before this provision is brought into force.
error which has unintentionally altered and, in fact, reversed the ambit of the
provision. This particular provision has not been brought into effect as yet,
and there remains a possibility that the Government could attempt to rectify
the error before this provision is brought into force.
– Rahul Sibal & Deep Shah
[1] While the interim report was limited to corporate insolvency, its
recommendations are indicative of the intent to adopt the provisions of the UK
Act into the Insolvency Code. See pp.
27, 98 and 99 of the Interim Report.
recommendations are indicative of the intent to adopt the provisions of the UK
Act into the Insolvency Code. See pp.
27, 98 and 99 of the Interim Report.
[2] There is no clear standard or test which emerges from the existing
case law to determine what constitutes ‘significantly’ lesser value. See E
Bailey and H Groves, Corporate Insolvency: Law and Practice (LexisNexis
Butterworths 2007) 940–42.
case law to determine what constitutes ‘significantly’ lesser value. See E
Bailey and H Groves, Corporate Insolvency: Law and Practice (LexisNexis
Butterworths 2007) 940–42.
Indeed an insightful article.
Thank You.