An act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, 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 order of priority of payment of Government dues and to establish an insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

Why the code is imperative now:-

  1. Improve ‘Ease of Doing Business’ ranking for India.
  2. The stressed assets in the Indian banking system have peaked at US$ 150 billion or over Rs. 10 lakh crores (15% of gross advances)
  3. Heightened focus on the resolution of the problem by the Reserve Bank of India (RBI) and the Supreme Court. The previous RBI Governor had stated that “Our intent is to have clean and fully provisioned bank balance sheets by March 2017”.
  4. There is a dire need of capital today – not just for stressed companies but for growth in general.
  5. Long time for resolution and recovery; Doing away with a fragmented framework.
  6. The average life of cases recommended for restructuring in 2002 was 7 years and the average life of cases recommended for winding up to the court was 6.5 years.
  7. Improve the confidence of the International investor in the debt market.

Applicability:-

The act is extends to whole India except part-III of the code to Jammu and Kashmir. The act was enacted and came into force with effect from 28th May 2016. It applicable to : individuals, unlimited partnership firms, Limited liability partnerships, Companies (as  per Companies act 2013 or  as per any previous law), Companies governed by any special act except so far the said provisions are not inconsistent with the provision of such special act and such other persons as may be notified by the govt.

Debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

Default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

The four pillars of infrastructures to make the process work effectively are;

  • The regulator -( The insolvency and Bankruptcy board of India (IBBI)).
  • The Adjudicating authority- (National company law Tribunal NCLT for corporate, National company law appellate tribunal NCLAT, Debt Recovery Tribunal for individuals and partnership firms).
  • Information utilities (IUs)- a person who is registered with the Board as an information utility (for centralized repository of financial and creditors information).
  • A private industry of insolvency professionals(IPs) monitored by private insolvency professional agencies(IPAs). 

Highlights of IBC-2016 (Premise of the code) :-

  • The IB code aims at constituting Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.
  • The code will shift the existing ‘Debtor in possession’ to a ‘Creditor in control’ era.
  • Precisely defined ‘order of priority’ or priority of payment mechanism.
  • The code aims at consolidating all existing insolvency related laws as well as amending multiple legislations.
  • The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.
  • The code proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
  • Introduce a qualified insolvency professional (IP) as intermediaries to oversee the process
  • The code aims to resolve insolvencies in a strict time scheduled manner – the evaluation and viability determination must be completed within 180 days.
  • Moratorium period of 180 days (extendable up to 270 days) for the Company.(Under fast track case of corporate debtors(low income and assets) the period will be 90 days (extendable up to 135 days)).
  • Insolvency professional to take control over the management of the Company.
  • Cross border insolvency can also be addressed through this process.
  • Importance on identification of financial failure and maximizing the asset value of insolvent firms.
  • Material transactions can be investigated and in case of any illegal diversion of assets personal contribution can be ordered by court.

Corporate Insolvency Resolution Process (CIRP):-

CIRP can be initiated when a minimum amount of default of INR 1 Lakh or such higher amount as may be prescribed by the govt but which shall not exceed INR 1 Crore.

These three can initiate CIRP:-

a) Financial Creditor (means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to).

b) Operational Creditors (means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred).

c) Corporate debtors (means a corporate person who owes a debt to any person).

Creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder;

These persons cannot initiate CIRP:-

a) Corporate debtor undergoing the CIRP.

b) Corporate debtors having completed CIRP twelve months prececding the date of application.

c) Corporate debtors against whom a liquidation order has been made.

d) Corporate debtors or financial creditors who has violated any term of the Resolution plan which has approved before twelve months of the application.

Resolution process of corporate debtors:-

Default of payment of debt.

Application against default.

Appointment of Insolvency Professionals by regulator and approved by Creditors.

Declaration of moratorium period of 180days, which may extend up to 270 days.

A committee of creditors excluding relatives would be constituted and the decision would be taken based on more than 75% of favourite vote.

Implement the plan.

Otherwise, liquidation process.

Liquidation Process:-

 In case of failure in the resolution process within the prescribed days will lead to liquidation. Even debtors can voluntarily apply for liquidation by passing special resolution in meeting. The insolvency professional may act as liquidator and can act as the board of the directors. The IP shall prepare an information memorandum and invite resolution plans from the committee of creditors. The committee of creditors shall then devise an insolvency resolution plan and if 75% of the members of the committee approve the plan, the NCLT will implement it and the corporate debtor’s business will be restructured according to the process approved by such majority. The liquidators will prepare the list of assets, creditors, debtors, and arrange the liquidation process as per the code.

The priority of payment in liquidation shall be as follows;

  1.  Insolvency related costs and the liquation cost.
  2.  The secured creditors and workmen dues upto 24 months (rank equally).
  3.  Outstanding salaries of other employees and dues upto 12 months.
  4.  Dues of unsecured creditors.
  5.  Government dues upto 2 years and Unpaid amount of secured creditors (rank equally).
  6. Remainder of debts and dues.
  7. To Preference shareholders.
  8. To equity shareholders.

Conclusions:-               

For becoming a good Insolvency professionals one should have practical working knowledge of the followings; Company law, Banking law, Insolvency law, Taxation, Stake holder management, Valuation/sale of assets, Cash flow management, Negotiation skills, Commercial and Business. The intention is to strike the right balance of interests of all stakeholders of the business enterprise so that the corporate and other business entities enjoy availability of credit and at the same time the creditor do not have to bear the losses on account of default. The success of the entire code is absolutely depending on its implementation and rapid disposal or resolution of cases.

Source: iiipicai.in.

Author Bio

Qualification: CA in Practice
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Location: Andhra Pradesh, IN
Member Since: 24 Apr 2017 | Total Posts: 3
The author is a qualified Chartered Accountant in CA Practice. Practicing in the filed of taxation,audit assurance and other management services. He may be reached at camanasrout@gmail.com. View Full Profile

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