Anil Kumar Popli, FCS
Introduction of Insolvency and Bankruptcy Code 2016 (hereinafter referred to as IB Code 2016) is welcome step and need of hour being part of ease of doing business in India. It will boost lengthy winding up process and reduce the time and good exit option in case business could not get success. In present scenario, winding up of a Company is next to difficult and took 10-15 years time and still the Company could not be dissolved and during this long period nobody virtually could get anything, the asset lost its significance and even if something is realized the secured creditor gets something and unsecured creditors, employees and others get nothing.
There are many laws and avenues are available with the lender but because of lot of legal hassles and lack of administrative machinery and implementation, winding up of corporate is not a success in India. Under the provisions of Companies Act, 1956 procedure is lengthy and time consuming and not successful because of piling of winding up cases with the Official Liquidator. Sick Industrial Companies Act is also failure because of its slow administration and non revival of industry/ies. In Debt Recovery Tribunals, due to high number of cases pile up in Courts, justice is delayed. The provisions of SARFAESI are strict and draconian in nature but the lenders are not frequently using the provisions to acquire the assets of the borrower. Further, the unsecured creditors cannot approach SARFAESI.
There is no specific law in India which declares the borrower and its promoters as bankrupt. However, there is law of insolvency and bankruptcy i.e. Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 the provisions of which have now become obsolete, hence same is repealed by IB Code 2016. There are specific provisions of bankruptcy for individuals and partners of unregistered bodies as specified in Part III which specifies the procedure for declaration of individual as bankrupt in case of default and also specifies the provisions of penalty e.g. disqualification to act as director and prohibited from creating any charge as specified in clause 141 but similar kind of provisions of missing for corporate debtor. The Code is silent and fails to specify the circumstances in which corporate debtor is considered as bankrupt. There should also be some restrictions on promoters of defaulter corporate debtors.
I am of the view that still IB Code 2016 is a good achievement whereby consolidating the winding up and insolvency laws for individuals and corporate both. The introduction of IB Code may also boost the confidence of foreign investor, bankers/FIs and other lenders in speedy recovery of its dues/NPAs. In case, Code is implemented in its true spirit and sense, the default cases would also be reduced.
Key Features of new IB Code 2016 are as under:
- Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process for which he is required to deliver a demand notice in such manner as may be prescribed. The corporate debtor is required to reply within 10 days of receipt of demand notice and on expiry of 10 days in case payment is not received, the Adjudicating Authority may pass orders for initiating corporate insolvency resolution process.
- The insolvency resolution process should be completed within 180 days which may be extended up to 270 days.[clause 12]
- Under Fast Track Corporate Insolvency resolution process, completion time is 90 days. The corporate under Fast Track are covered whose asset and income are below a prescribed level that may be prescribed by the Central Government [clause 56]
- Insolvency professionals and agencies
- Licensed insolvency professionals (IPs)
- The role of IPs will control the assets of the debtor during the process.
- Licensed insolvency agencies
- The role of Agencies to regulate IPs and these Agencies will conduct examination to enroll IPs and enforce a code of conduct for their functioning.
- Information utilities
- The role of Information Utilities is to collect, collate and disseminate financial information related to a debtor. This will include a record of debt, assets and liabilities of corporate debtor.
- All these agencies have to get registration with Insolvency and Bankruptcy Board of India (Board). The Board will work as regulator for above Insolvency professionals and agencies. These insolvency professionals are required to report to the Board.
- In case resolution plan is not successful within said 180/270 days and/or within 90 days, the Adjudicating authority appoints the Liquidator i.e. resolution professional who assumes all the powers of Board of Directors and has got all the powers to sold the assets of the corporate debtor. Public announcement is made stating that the corporate debtor is in liquidation. Thereafter, the Liquidator starts process to realize all such assets and then distribute the proceeds for payment of creditors in the following preference:[clause 33]
- Fee of insolvency professional and cost relating to resolution process;
- Workmen dues and secured creditors;
- Employee wages and dues of preceding one year;
- Unsecured creditors’
- Government dues
- Remaining secured creditors i.e. interest, penal interest etc. if they enforce their collateral;
- Shareholders …[as per clause 53]
- Subject to section 52, when a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the corporate debtor. ..[Clause 33(5)]
- The Liquidator shall also form an estate of the assets which includes all immovable and movable assets of corporate debtor. [clause 36]
- The Liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of commencement of the liquidation process and thereafter verifies the same within such time as may be prescribed… [clause 37 and 38]
- The Liquidator has right to accept or reject the claim in whole or in part as the case may be. [clause 40]
- On completion of liquidation process, the Liquidator shall make application to Adjudicating Authority and the Authority in turn shall make an order for dissolution of the corporate debtor.
- There are two Adjudicating e. National Company aw Tribunal which will adjudicate cases of Corporate, LLPs and (ii) Debt Recovery Tribunal which will adjudicate cases of individuals and partnership firms; NCLT/DRT shall such powers to dispose of application or disputes, if any, corporate debtor, corporate person or appeal of any order of the Board.[clause 60 and 61]
- No civil court shall have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered, or under, this Code… [clause 231]
- No suit, prosecution or other legal proceedings shall lie against the Govt. or any officer or Insolvency professional or liquidator for acts done in good faith under this Code. [clause 233]
- The implementation of liquidation can be extended to assets in abroad and for this Central Government may enter into an agreement with the Govt. of any country outside India for enforcing the provisions of this Code [clause 234]
- The code also creates Insolvency and Bankruptcy Fund for the purposes of insolvency resolution, liquidation and bankruptcy of persons under this Code.
- Voluntary Liquidation – a Corporate person who intends to liquidate itself voluntarily and solvent and able to pay its debts and subject to passing of special resolution by its members can appoint Liquidator and starts the liquidation proceedings voluntarily. .[clause 59]
- Offences –Where any officer of corporate debtor immediately preceding twelve month willfully concealed any property or destroyed, mutilated or falsified accounts, such officer shall be punishable with imprisonment for a period of three years which may extend to five years or with fine of Rs.one lakh which may extend to Rs.one crore. Similar kind of offences are there for willful omission and who destroys, mutilate, alters or falsifies any books or records. [Clause 68 to 75].
- It is surprising that the Code has specified time frame work for resolution process, fast track process, giving of notice, confirmation of creditors etc. as mentioned hereinabove but the Code is silent in how much time the Liquidator will complete its process of liquidation. There is also no time frame within which the Liquidator will report final verdict to Adjudicating Authority. The Code specifies time of 180 days which may extend to 270 days for resolution process but when Liquidator is appointed, no such time frame is given within which he has to complete his job. The Govt. should review this point and appropriate amendment be made in the code.
- There should be provision for declaring the corporate debtor who are unable to pay its debts as bankrupt and consequently its directors and promoters should be disqualified to act as directors and some restrictions as the Government deems fit and proper may be imposed.
- There is no such framework for corporate debtors whose cases are already registered with High Court or SICA or other agencies where Liquidator has already been appointed, for transfer or for shifting of such cases under new Code, no such option is given in the Code.
- The secured creditors may not prefer to appoint resolution insolvency liquidator, as under SARFAESI they have option to get speedy recovery than this Code and more so under SARFAESI they can get higher amount of recovery.
The Government should further review the Code and suitable amendments be made to remove the deficiencies mentioned hereinabove.
Overall, the introduction of IB Code 2016 is a good step in right direction under ease of doing business in India and will boost the confidence of lender, foreign companies and creditors at large.
(Author – Anil Kumar Popli, FCS, LLB is a Company Secretary in Practise from Delhi and can be contacted at firstname.lastname@example.org)
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