Decoding the Insolvency & Bankruptcy Code, 2016

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. The Code seeks to overhaul the laws regulating insolvency amid a surge in bad loans.

This article deals with the major highlights of the Insolvency & bankruptcy code, 2016 and how the code is going to affect the Indian Economy.

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.

The New Code: The new code i.e. Insolvency & bankruptcy code, 2016 will replace the existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms.

It will amend laws, including The Companies Act, to become the overarching legislation to deal with corporate insolvency. And, it will also help creditors recover debt faster.

Applicability:

A) Any company incorporated under the Companies Act, 2013 or under any previous company law.

B) Any other company governed by any special Act for the time being in force.

C) Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008.

D) Any other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf.

E) Partnership firms and individuals.

Objective of the Code:

India currently has multiple laws to deal with insolvency, which leads to significant delays in winding up a company. The Insolvency & Bankruptcy Code will consolidate the existing framework and create a new institutional structure.

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.

The Code proposes the setting up of a new entity, the Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals and information companies — those which will store all the credit information of corporates.

The Bankruptcy Code proposes two authorities to deal with insolvency:

1. The National Company Law Tribunal will adjudicate cases for companies and limited liability partnerships
2. The Debt Recovery Tribunal will do the same for individual and partnership firms.

Both will have appellate tribunals.

Pillars of Insolvency and Bankruptcy Code, 2016:

1. The Insolvency Professionals: They would play a key role in the efficient working of the bankruptcy process. They would be regulated by Insolvency Professional Agencies.

The term Insolvency Professionals has been defined in the Code under Section 3 (19) as:  A person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207.

Section 207: Every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations. (2) The Board may specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field, as it deems fit.

2. Information Utilities: These would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.

3. Adjudication: The NCLT will be the forum where firm insolvency will be heard and DRTs will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate bodies, viz., NCLAT and DRATs will expedite the bankruptcy process.

4. Regulator: The Insolvency and Bankruptcy Board of India. This body will have regulatory over-sight over the Insolvency Professional, Insolvency Professional agencies and information utilities.

• The Board shall be a body corporate having perpetual succession and a common seal, with power, subject to the provisions of this Code, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.
• The head office of the Board shall be at such place in the National Capital Region with offices at other places in India.
• Constitution of the Board: A: Chairperson, B: three members from amongst the officers of the Central Government not below the rank of Joint Secretary or equivalent, one each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex-officio; C: one member to be nominated by the Reserve Bank of India, ex officio D) five other members to be nominated by the Central Government, of whom at least three shall be the whole-time members.

Functions of the Board:

• Register insolvency professional agencies, insolvency professionals and information utilities and renew, withdraw, suspend or cancel such registrations.
• Specify by regulations standards for the functioning of insolvency professional agencies, insolvency professionals and information utilities.
• Carry out inspections and investigations on insolvency professional agencies, insolvency professionals and information utilities and pass such orders as may be required for compliance of the provisions of this Code and the regulations issued hereunder

5. Committee of Creditors:

As per the new law, when a firm defaults on its debt, control shifts from the shareholders/promoters to a Committee of Creditors. The Committee would have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation.

Benefits of the Code:

1. 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.

2. Cross-border insolvency

The bankruptcy code has provisions to address cross-border 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.

3. 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 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.

4. 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.

5. 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.

6. Concept of operational creditor

Another unique feature of the Code is that it gives right to operational creditor to initiate procedure and the right is not limited to big creditors only who want their money back. Thus making it easier for creditors to get their dues cleared with a corporate.

7. Simple Procedure to resolve insolvency:

The Code proposes the following steps to resolve the insolvency:

Initiation: 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 will be formed 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 180 days, the debtor’s assets go to liquidation

Liquidation: If the debtor goes to liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to 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.

Conclusion: The Insolvency and Bankruptcy Code is thus 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.

The Code, in short, will ensure that creditors are secured in India and could usher in a new economic era, where India could attract investors more than ever.

Author: CS Rahul Harsh, from Kolkata is an Associate Member of the ICSI & can be reached at csrahulharsh@gmail.com