India has a new law on bankruptcy

A historical economic reform in India took place when the Rajya Sabha on 11th of May, 2016 passed the Insolvency and Bankruptcy Code, 2016. Insolvency & Bankruptcy code, 2016 (IBC) received the assent of president on 28/05/2016. The code has become an Act and provisions will be effective from a date to be notified, which is not yet been notified.

The Code as a new law, replacing over a dozen laws

The government’s efforts to clip the wings of high-profile debtors suffered a setback in March when tycoon Vijay Mallya flew to London as bankers pressed him to repay about Rs.9,000 crore owed by his defunct Kingfisher Airlines.

Let us first discuss what is Insolvency?

Insolvency is a situation where Individuals or Companies are unable to repay their outstanding debt. It may be resolved by changing the repayment plan of the loans, or writing off part of the debt. If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay the outstanding debt.

Technically, what exactly does bankruptcy amount to India?

Insolvency is the situation where the debtor is not in a position to pay back the creditor. Bankruptcy is the legal declaration of Insolvency. So the former is a financial condition and latter is a legal position. All insolvencies need not lead to bankruptcy. The new code has a sequential procedure of Insolvency resolution, failing which, it leads to Bankruptcy.

Being bankrupt is a state of inability to repay debts to creditors. Under the proposed law, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority that has passed a bankruptcy order. The adjudicating authority would be the National Company Law Tribunal (NCLT) for companies and limited liability partnerships, and the Debt Recovery Tribunal (DRT) for individuals and partnership firms.

Legislature Background:

The Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act,1920. In addition, it seeks to amend 11 laws.

  • Announcement at Budget Speech 2014-15
  • Viswanathan Committee August 2014
  • Introduced at Lok Sabha on Dec 21 2015
  • Referred to Joint Parliamentary Committee
  • Laid down at Rajya Sabha on April 28, 2016
  • Passed on Lok Sabha on May 05, 2016
  • Passed by Rajya Sabha on May 11, 2016
  • Assent of the Horn’ble President on May 28, 2016
  • Notified on May 28, 2016

BACKGROUND:

The code is also helpful for ‘Ease of Doing Business”.

According to the World Bank’s Ease of Doing Business report, on the parameter of resolving insolvency, India is ranked 136 among 189 countries. Company in India typically takes four years, or twice as long as in China and Russia, with an average recovery of 25.7 cents on the dollar, one of the worst rates in emerging markets.

The proposed insolvency and bankruptcy law seeks to cut down the time to less than a year. This will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism in the country.

The move is expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index. The Insolvency and Bankruptcy Code 2016, a vital reform that will make it much easier to do business in India.

The Insolvency and Bankruptcy Code 2016 is one of the most forward-looking and contemporary legislations in recent times. It will establish some very basic principles of doing business in India.

This Law promises to make it easier to wind up a failing business and recover debts in Asia’s third-largest economy.

The Code extends to the whole of India except Part III of this Code shall not extend to the State of Jammu and Kashmir. The Code contains 255 Sections and 11 Schedules.

Bankruptcy – position under the “Constitution of India”

Under the Constitution of India ‘Bankruptcy & Insolvency’ appears at Entry 9 in List III being the Concurrent List which means that both Centre and State Governments can make laws relating to bankruptcy.

NEED OF THE CODE/ OBJECTS:

The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, LLPs, partnership Firms, individuals and other Body Corporate.

One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.

 The objective of the new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders  by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms  and individuals in a time bound manner and for maximization of  value of assets of such persons and matters connected therewith  or incidental thereto.

“This is something which should put company promoters on guard, They will think twice before committing a default.”

 To attract Foreign Investment:

  • This Code in specific will, when implemented in letter and spirit, provide a major boost to the India economy, especially on account of timely resolution and certainty in recovery.
  • It would be of specific interest to international creditors and Investors, who are generally looking at Indian opportunities
  • According to the government data top 50 defaulters of public sector banks had exposure in excess of Rs 1.21lakh crore as on December 2015. “Because this law ensures time bound recovery foreign lenders will be more open to lend to Indian Corporate.
  • Strict Timelines: The strict timelines for resolution of insolvency and liquidation proceedings would definitely be an incentive and provide the requisite impetus for economic growth.
  • Closure of Business: Facilitate stress-free and time-bound closure of businesses.
  • It’s a key reform that will make it much easier to do business in India and help the recovery of bad loans for banks.

Implementation:

The implementation will remain the key, analysts point out, as the new code is presaged on the creation of a complementary eco-system including insolvency professionals, information utilities and a bankruptcy regulator.

Along with the proposed changes in India’s two debt recovery and enforcement laws, it will be critical in resolving India’s bad debt problem, which has crippled bank lending.

I. Whether there is any challenge before new Law?

The new bankruptcy law isn’t a “magic wand”. It sees the benefits flowing in after 3-5 years from now.

The main challenge will be creating a large pool of insolvency professionals who will help with the fast implementation of the law. The new regulators will also need to draft procedural rules for insolvency professionals and information utilities among others.

II. There weren’t any laws dealing with this problem until now?

There are, in fact, several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple of laws dating from the time of the British Raj for dealing with individual debtors.

However, this multiplicity of laws has been a problem in the way of banks failing to recover their loans.

III. How This New Bankruptcy Law Will Help Banks?

As per the new Bankruptcy Law, banks are now entitled to recover their loan from defaulters within a period of 180 days. In case majority of creditors agree, then this period can be extended to 90 days and, in case recovery of loans doesn’t happen within this period, then the concerned company shall be liquidated by default.

Combined with bank cleanup, potential game changer in long run

VI. Why is a bankruptcy law such a big deal for Bank?

India’s banking industry is in the throes of a crisis. Bad debts are piling up at banks. According to central bank data, stressed assets (which include gross bad loans, advances whose terms have been restructured and written-off accounts) rose to 14.5% of banking sector loans at the end of December 2015. That’s almost Rs 10 trillion of loans that are stuck. Freeing up this money is crucial for the banking sector to go about its business.

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Applicability

  • Companies under Companies Act
  • Special Companies under special Act
  • Limited Liability Partnerships
  • Other body Corporate as notified by CG
  • Individuals
  • Partnership Firms

There were different laws for different entities—a company, limited liability partnership, an individual, etc. That makes the task of creditors cumbersome. But now there is one law for all.

For what Matters:

(1) Insolvency, (2) liquidation, (3) voluntary liquidation and (4) Bankruptcy

Creditors Power enhanced under Insolvency and Bankruptcy Code 2016:

  • The Insolvency and Bankruptcy Code 2016 empowers the operational creditors (workmen, suppliers etc.) also to initiate the insolvency resolution process upon non-payment of dues.
  • In order to develop the credit market in India, in case of liquidation, financial debts owed to unsecured creditors have been kept above the Government’s dues in the list of priorities (waterfall).

V. How Much Time Will the Law Save?

Currently, it takes an average of 4.3 years to resolve insolvency in India. The new law introduces a time limit on the bankruptcy process. In the case of a default, the time-limit is 180 days, within which the resolution has to be completed. This can be extended by another 90 days by the adjudicator, depending on the process. Analysts say the new time frame will help India improve its World Bank insolvency ranking.

Time – Limit for completion of Insolvency Resolution Process:

180 Days + 90 Days (one time extension) = 270 Days

Key Changes: This note sets out certain key changes introduced by the Code, which are summarized below:-

S. No.Name of ChangeParticular
1.Insolvency and Bankruptcy Board of India (“Board”)The Code provides for establishment of an Insolvency and Bankruptcy Board of India (“IBBI /Board”) who will act as the insolvency regulator. The Board will perform the role of a regulator for insolvency and bankruptcy matters similar to the
role the Securities and Exchange Board of India performs for the securities market. The Board will exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities
2.Insolvency ProfessionalsThe Bill proposes to regulate insolvency professionals and insolvency professional agencies.
3.Insolvency Information UtilitiesThe Code proposes for information utilities,

which would collect, collate, authenticate and disseminate financial information from listed companies as well as financial and operational creditors of companies.

An individual insolvency database is also proposed to be set up for the purpose of providing information on the insolvency status of individuals.

4.Insolvency Adjudicating AuthorityThe adjudicating authority will exercise jurisdiction over cases by or against the debtor.
5.MoratoriumOne of the most significant features of the Code is the grant of moratorium during which creditor action will be stayed. This is not automatic and has to be granted by the Adjudicating Authority on the recommendation of the Resolution Professional
6.Corporate LiquidationThe commencement of liquidation process takes place on:

a) recommendation of the resolution plan;

b) on account of failure to submit the resolution plan within the prescribed period or contravention of the resolution plan; and

c) Based on vote of majority of the creditors

7.Liquidation EstateTo the extent assets held by the debtor belong to it, then will form part of the liquidation estate. Assets will be distributed by

the liquidator in the manner of priorities laid in the law

8.Cross border insolvencyThe Code provides that the Central Government can enter into agreements with any country outside India for enforcing provisions of the Code and notify applicability of the same from time to time. Further, assets of the debtor located outside India (in countries with whom India has reciprocal arrangements) may also be included for the purpose of the insolvency resolution process and/or liquidation before the Adjudicating Authority.
9.TimelinesShortening time required in the insolvency process from filing a bankruptcy application to the time available for filing claims and appeals.

The entire process of resolution to be completed within 180 days, extended by 90 days with the consent of 75% of the creditors if required. Failure to resolve insolvency within this time frame may result in selling of debtors assets to recover the dues.

♠ Insolvency Professionals: A pool of licensed ‘Insolvency Professionals’ (IPs) will be responsible to carry out the resolution process on behalf of affected entities. Under the oversight of the Board, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role.

Three sets of Resolution;

i. Professionals are sought to be appointed – Interim Resolution Professional,

ii. Final Resolution Professional

iii. Liquidator

  Insolvency Adjudicating Authority:

Untitled

DRT: The Debt Recovery Tribunal (“DRT”) shall be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (“DRAT”).                                                                .

NCLT: The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities and other entities with limited liabilities. The jurisdiction of the NCLT shall be based on the registered office of the debtor. Appeals from the order of NCLT shall lie to NCLAT.                                               .

NCLAT: The National Company Law Appellate Tribunal (“NCLAT”) shall be the appellate authority to hear appeals arising out of the orders passed by the Board in respect of insolvency professionals or information utilities.

Supreme Court: The Supreme Court will have appellate jurisdiction over the orders of the DRAT or the NCLAT.

Benefits of the Code:

i. Code to help wind up sick businesses: On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.

ii. Crossborder: insolvency The bankruptcy code has provisions to address crossborder insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National Company Law Tribunals and courts.

iii. Protect workers of a bankrupt Company: To protect workers’ interests, the code has provisions  to ensure that the money due to workers and employees from the provident fund, the

iv. pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.

v. Fast Track Corporate Insolvency Resolution Process: The Code has provisions for fast track corporate insolvency resolution process shall be completed within a period of ninety days from the insolvency commencement date.

vi. Voluntary Liquidation of Corporate Persons, Firms and Individuals: The Code also provides ways for a corporate person, Firms & Individuals who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings.

Conclusion:

The intention of the Code is to do away with the antiquated existing laws covering aspects of insolvency and bankruptcy. Though the Code sets out certain provisions to amend and override the existing laws to avoid future litigation, a clear provision needs to be introduced to explicitly state the existing laws being repealed by the introduction of this legislation.

Thus it is a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.

CS Divesh Goyal(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

Read Other Articles Written by CS Divesh Goyal

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the author are personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority without the written consent of the author.

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