Insolvency and Bankruptcy Code, 2016

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Introduction

The Insolvency and Bankruptcy Code, 2016 (Code) aims to consolidate laws relating to liquidation and insolvency of corporate persons, partnership firms and individuals in India. The provisions of the Code aim to maximize the value of assets of such persons in order to promote entrepreneurship in the country and also increase the availability of capital and credit in the economy.

Background

The Code has been passed by both the houses of Parliament and received the President’s assent on 28 May 2016. The Code comes into force once a specific notification to that effect is made in the official gazette. On 5 August 2016, the Ministry of Corporate Affairs notified certain sections of the Code, i.e., sections 188 to 194 of the Code.

The introduction of this Code answers the longstanding call for a uniform legislation consolidating the law relating to insolvency and bankruptcy. Currently, the High Courts, Company Law Board, Debt Recovery Tribunal and Board for Industrial and Financial Control have overlapping jurisdiction in relation to the resolution of insolvency proceedings; thereby, giving rise to substantial delays and complications in the whole process of insolvency resolution. Therefore, the Code will assist in remedying these issues.

Scheme of the Code

The Code creates separate provisions for dealing with insolvency resolution in relation to: (a) corporate persons; and (b) individuals and partnership firms.

Insolvency resolution for corporate persons

The insolvency resolution process (IRP) includes steps, which have to be followed once a creditor or a corporate debtor (CD) initiates a resolution process in order to deal with the CD’s financial crisis. The Code provides a two-step process for a CD, which are (i) corporate IRP and; (ii) liquidation

IRP: Under IRP, the Code provides a structure to deal with the status of a CD. When any CD commits a default (minimum amount of default is INR100,000), a financial creditor or operational creditor or the CD itself, may initiate corporate IRP by making an application to the National Company Law Tribunal (NCLT). The IRP has to be completed within 180 days from the date of admission of such application. However, a single extension of 90 days may be granted by the NCLT, provided a resolution has been passed by at least 75% of the members of the committee of the creditors. The Code provides for the appointment of a resolution professional who is responsible for not just preserving and protecting the assets of the CD but also for formulating a resolution plan. Furthermore, this resolution plan has to be approved by at least 75% of the members of the creditor’s committee. Thereafter, the resolution plan needs to be approved by the NCLT.

The Code further provides for a “moratorium” to be declared by the adjudicating authority on the commencement of the IRP, i.e., no suits, proceedings, recovery or enforcement action can be taken against the CD during this period.

Liquidation: The NCLT passes an order of liquidation if (a) the resolution plan is rejected by the NCLT; (b) if majority of the creditor’s committee agree to liquidate the CD; or (c) if the resolution plan is not approved within the timelines specified in the Code. The liquidator appointed by the NCLT takes charge of the business of the debtor to distribute its assets in order of priority. The Code also provides for a process for voluntary liquidation and fast track resolution in certain specified cases.

Insolvency Resolution for individuals and partnership firms

In relation to individuals and partnership firms, the Code is applicable where the minimum amount of default is INR1,000. The Code offers individuals and partnership firms two different mechanisms, which can be undertaken (i) fresh start process; and (ii) IRP.

In relation to individuals and partnership firms, the Code is applicable where the minimum amount of default is INR1,000. The Code offers individuals and partnership firms two different mechanisms, which can be undertaken (i) fresh start process; and (ii) IRP.

IRP: Under this process, the debtors or the creditors initiate the insolvency resolution process by making an application to the Debt Recovery Tribunal (DRT). The debtor is then required to formulate a repayment plan subject to approval of the creditors. The repayment plan is then submitted to the DRT for its approval. If the DRT approves the repayment plan, it becomes binding on the debtors and the creditors

Bankruptcy: If the repayment plan is rejected by the DRT, the debtors and the creditors are entitled to file an application for bankruptcy. The DRT then appoints a bankruptcy trustee who is responsible to administer the estate of the bankrupt after an order of bankruptcy is passed by the DRT.

Regulatory authorities

In addition to the DRT and the NCLT, the Code envisages the constitution of the Insolvency and Bankruptcy Board of India for the purpose of regulating the functioning of insolvency professionals, insolvency professional agencies and information utilities.

Implications

The Code provides for a common platform for all the types of creditors and further assists in increased speed of detection of failure of companies to pay dues. This will create an opportunity to trigger the resolution process at a stage when chances to recover amount of dues are high.

The Code will resolve the issue of overlapping jurisdictions by providing a single platform for insolvency resolution.

The time-bound resolution of insolvency and bankruptcy cases will assure efficient capital flow in the Indian market as the creditors, upon realizing their investments, will further re-invest, which will result in added efficient capital flow.

The Code also provides for the protection of worker’s/employee’s interest as it excludes pension fund, provident fund and gratuity fund from the estate of the bankrupt company or individual.