The Insolvency and Bankruptcy Code, 2016 (‘Code’) reconceptualised the framework for insolvency resolution in India. It provides a mechanism for the insolvency resolution of debtors in a time bound manner to enable maximisation of the value of their assets, with a view to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. – Dr. M.S. Sahoo, Chairperson, Insolvency and Bankruptcy Board of India.
Before the introduction of Insolvency Code, there were plenty of different legislations which used to deal with insolvency of corporates, firms and individual. This plethora of legislations had created many hurdles, contradictions and they used to consume longer time for insolvency process to end. Hence, Insolvency code came into picture, it over ruled many of the legislations and compiled all the laws and regulations and became a code which contains provisions for the insolvency of Corporates, firms and individuals.
The Insolvency Code applies to corporates, firms and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
Also as per the section 238 of the IBBI code is a non-obstante clause and states that notwithstanding anything inconsistent therewith in any other law for the time being in force or any instrument having effect by virtue of any other law, the provisions of the Code shall have full effect.
The Code created various institutions to facilitate resolution of insolvency. These are as follows:
- Insolvency Professionals: A specialised cadre of licensed professionals are created. These professionals administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
- Insolvency Professional Agencies: The insolvency professionals are registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
- Information Utilities: Creditors report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults. Information utilities keep record of all the data and information of debtor, creditor and other persons relating to insolvency process.
- Adjudicating authorities: The proceedings of the resolution process are adjudicated by the National Companies Law Tribunal (NCLT), for corporates; and the Debt Recovery Tribunal (DRT), for firms and individuals. The duties of the authorities include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
- Insolvency and Bankruptcy Board: The Board regulates insolvency professionals, insolvency professional agencies and information utilities set up under the Code. The Board consists of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.
Code proposes the following steps to resolve insolvency:
- Initiation of insolvency process: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
- Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor form by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in given time or on happening of other defined events, the debtor’s assets go into liquidation.
- Role of Adjudicating authorities: adjudicating authority role is to monitor the fair play of resolution process, appointment the insolvency professional, and approve the final decision of creditors.
- Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence:
i) Insolvency resolution costs, including the remuneration to the insolvency professional,
ii) Secured creditors, whose loans are backed by collateral, dues to workers, other employees,
iii) Unsecured creditors,
iv) Dues to government,
v) Priority shareholders and
vi) Equity shareholders.
This Acts sums up the various aspects of other law and override effect over so many laws however it is still in the transition phase, and it still is a hot potato for the judicial as well for the corporate world, however the effect of over riding is still in evolution phase and is evolving with every judgement or enactment.
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