A brief introduction to the Insolvency and Bankruptcy Code

Chapter-13-Bankruptcy

The Insolvency and Bankruptcy Code(Insolvency Code) was introduced in the Parliament in December 2015 and was referred to the Joint Committee of Parliament. The Committee has submitted its report on 28th April 2016 (read the summary of the Joint Committee Report here). Both houses of Parliament have passed the Code in the Budget session and the Code has received the assent of the President on 28th May 2016. Insolvency is a situation where individuals or organisations are unable to meet their financial obligations. The Insolvency Code seeks to create a unified framework for resolving insolvency and bankruptcy in India.  The Insolvency Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government.

The Insolvency Code, which will replace the existing bankruptcy laws, lays down a comprehensive law to deal with the insolvency of corporates and simplify investors’ exit. The objective of the Insolvency Code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate entities, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund. An effective legal framework for the timely resolution of insolvency and bankruptcy would support the development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.

Here we take a brief look into the reason for enactment and some of the salient features of the Insolvency Code.

Why is Insolvency Code necessary?

There is no single law in India that deals with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. These statutes provide for the creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is handled by the High Courts. Individual bankruptcy and insolvency are dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is dealt with by the Civil Courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective and results in undue delays in resolution, therefore, the new legislation.

 What are the changes proposed to the existing laws by the Insolvency Code?

The Insolvency Code seeks to provide for amendments to the Indian Partnership Act, 1932, the Central Excise Act, 1944, Customs Act, 1962, Income-Tax Act, 1961, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Finance Act, 1994, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Payment and  Settlement Systems Act, 2007, the Limited Liability Partnership Act, 2008, and the Companies Act,  2013.

In addition, the Insolvency Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

What are the features Insolvency Code?

The Insolvency Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate entities and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Insolvency Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Insolvency Code also seeks to provide for the establishment of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the Board is established, the Central Government shall exercise all powers of the Board or designate any financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist in the completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. Information Utilities would collect, collate, authenticate and disseminate financial information to facilitate such proceedings. The Insolvency Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India for the purposes specified in the Insolvency Code.

Insolvency Resolution Process

 The insolvency resolution process for individuals varies from that of companies. These processes may be initiated by either the debtor or the creditors.

  •  Resolution process for companies and limited liability partnerships:

The resolution process will have to be completed within a maximum period of 180 days from the date of registration of the case. This period may be extended by 90 days if 75% of the financial creditors agree. The process will involve negotiations between the debtor and creditors to draft a resolution plan.

 The process will end in two circumstances, (i) when a resolution plan is agreed upon by a majority of the creditors and submitted to the adjudicating authority, or (ii) the time period for negotiation has come to an end. In case a plan cannot be negotiated upon, the company will go into liquidation.

 There will be provision for a fast track insolvency resolution process for companies with smaller operations. The process will have to be completed within 90 days, which may be extended if 75% of financial creditors agree.

  •  Resolution process for individuals and partnerships:

Before going in for insolvency resolution, the debtor may apply for forgiveness of a specified amount of debt, provided that his assets are below a limit set by the central government. This process will have to be completed within six months.

 In the case of insolvency resolution, negotiations between the debtor and creditors will be supervised by an insolvency professional. If negotiations succeed, a repayment plan, agreed upon by a majority of the creditors, will be submitted to the adjudicator. If they fail, the matter will proceed to bankruptcy resolution.

Insolvency professionals and agencies

The insolvency resolution process will be managed by a licensed professional. The professional will also control the assets of the debtor during the process. The Insolvency Code also proposes to set up insolvency professional agencies. These agencies will admit insolvency professionals as members and develop a code of conduct and evolve performance standards for them.

Information Utilities

 The Insolvency Code proposes to establish information utilities which will maintain a range of financial information about firms. These utilities will collect, collate and disseminate this information to facilitate insolvency resolution proceedings.

Insolvency regulator

 The Insolvency Code seeks to establish the Insolvency and Bankruptcy Board of India, to oversee insolvency resolution in the country. The Board will have 10 members, including representatives from the central government and Reserve Bank of India. It will register information utilities, insolvency professionals and insolvency professional agencies under it, and regulate their functioning.

Insolvency and Bankruptcy Fund

 The Insolvency Code creates an Insolvency and Bankruptcy Fund. Deposits to the Fund will include: (i) grants made by the central government, (ii) amount deposited by persons, and (iii) interest earned on investments made from the Fund. Any person who has contributed to the Fund may apply for withdrawal, in the case of proceedings against him.

Bankruptcy and Insolvency Adjudicators

The Insolvency Code proposes two separate tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law: (i) the National Company Law Tribunal will have jurisdiction over companies and limited liability partnerships, and (ii) the Debt Recovery Tribunal will have jurisdiction over individuals and partnership firms. Appeals against orders of these tribunals may be challenged before their respective Appellate Tribunals, and further before the Supreme Court.

 Offences and penalties

The Insolvency Code specifies that for most offences committed by a debtor under corporate insolvency (like concealing the property, defrauding creditors, etc.), the penalty will be imprisonment of up to five years, with a fine of up to one crore rupees. For offences committed by an individual (like providing false information), the imprisonment will vary based on the offence. For most of these offences, the fine will not exceed five lakh rupees.

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1 The Insolvency and Bankruptcy Code was passed by the Lok Sabha on 05th May 2016 and by the Rajya Sabha on 11th May 2016. The Code has received the assent of the  President of India and will come into effect on the date notified in the Gazette of India.

 

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About maheshspeak

I write randomly on law, jurisprudence, polity, travel, food and anything else interesting. You can also visit my personal homepage at maheshsreenivasan.com
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7 Responses to A brief introduction to the Insolvency and Bankruptcy Code

  1. RAFFIUDDIN KHAN says:

    thanks a lot for such important articles discussed nicely

    Like

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