Legal Law

Insolvency and Bankruptcy Code, 2016

INTRODUCTION

The Bankruptcy and Insolvency Code 2016, India’s new bankruptcy law, aims to consolidate existing laws by framing a single law for the insolvency and bankruptcy of legal persons, partnerships and individuals. With the promulgation of the code, the 1909 Law on Insolvency of the Presidency Towns and the 1920 Provincial Insolvency Law are repealed. In addition, 11 laws are modified. These include the DRT Act 1993, the SARFAESI Act 2002, the SICA Repeal Act 2003, the LLP Act 2008, and the Companies Act 2013. Multiple overlapping laws and awarding authorities currently operating in India that are Dealing with financial defaults and insolvency of corporate companies, partnerships and individuals give rise to a number of conflictive situations. Therefore, the existing framework does not provide creditors, debtors and other interested parties with certainty about the outcome and time frame regarding the resolution process. In this context, the code legislation, which is part of the second generation economic reforms in India, has been designed with a view to resolving the existing difficulties with the timely resolution of the insolvency resolution process. The current legal and institutional framework does not help in the effective and timely recovery or restructuring of non-performing assets that cause undue stress on the Indian credit system. Recognizing these difficulties, the Code, within its legal framework, aims to complete the entire resolution process within a specified period. The Code, if used correctly, can improve the business environment and alleviate troubled credit markets.

PURPOSE OF THE CODE:

In the preamble to the Code, the objective has been very clear. “An Act to consolidate and amend the laws relating to the organization and resolution of insolvency of legal persons, partnerships, and individuals on a time-limited basis in order to maximize the value of the assets of such persons, to promote entrepreneurship, the availability credit and balance the interests of all these interested parties, including altering the order of priority of payment of government debts and the establishment of an Insolvency and Bankruptcy Board of India, and for matters incidental or related thereto” .

KEY POINTS:

• The code has five parts. While Part I and Part V have no chapters, each of the other Parts contains seven chapters. Part III, which deals with the resolution of insolvency and bankruptcy of sole proprietorships and partnerships, contains a maximum number of sections (110), followed by Part II, which deals with the resolution of insolvency and liquidation of legal persons, contains seventy-four (74) sections. Part IV, which deals with the regulation of insolvency professionals, agencies and information services, contains six thirty (36) sections. Part V, which deals with various, contains thirty-two (32). Part I, which deals primarily with definitions, contains three (3) sections.

• The code does not address the legal framework for the resolution of bankruptcies of financial institutions and financial service providers.

• The code has introduced the concept of a few entities for the first time in Indian bankruptcy and insolvency law. These entities are Professional Insolvency Agencies (IPA), Insolvency Professionals (IP), Interim Resolution Professionals (IRP), Resolution Professionals (RP), Resolution Applicants (RA), Information Services (IU), Creditors Committee (CC ), Financial Creditors (FCs), Operational Creditors (OCs), Corporate Debtors (CDs).

• Creditors have been classified as financial, operational, guaranteed, unsecured and holders of decrees.

• The Awarding Authority (AA) for legal persons is NCLT, while the same for partnership firms and individuals is DRT.

• The term to complete the contest resolution process is 180 days with an extension of another 90 days – a total of 270 days.

• The AA would order a moratorium for the entire term of the bankruptcy resolution process by virtue of which no coercive action may be taken by anyone who causes damage to the operation of the debtor company as a going concern.

• The first track corporate insolvency resolution process has been introduced for certain categories of corporate debtors.

• Anyone involved in the resolution process of the company aggrieved by the AA order may prefer an appeal to the National Company Law Appeals Tribunal (NCLAT). The interested person aggrieved by the NCLAT order may prefer an appeal to the Honorable Supreme Court.

• The same for individuals and partnerships are the Court of Debt Recovery Appeals and then the honorable Supreme Court.

STEPS TO FOLLOW FOR THE RESOLUTION PROCESS OF CORPORATE BANKRUPTCY BY FINANCIAL CREDITOR

1. The Financial Creditors (FC), individually or jointly with the other FCs, submit an application to AA with all the required details.

2. AA receives request/rectification of defects.

3. AA sends a notice for the rectification of defects within 7 days.

4. AA admits the request within 14 days subject to meeting all requirements under the Code and notifies the secured creditor and corporate debtor.

5. The Bankruptcy Resolution process (ICD) begins.

6. AA completes an IRP within 14 days of the ICD.

7. IRP is in charge of managing DC affairs.

8. IRP collects all necessary information/data/claims and determines CD’s financial position.

9. IRP constitutes a CC.

10. CC accepts IRP as RP or designates new RP through AA.

11. RA presents a resolution plan.

12. RP reviews the plan and submits it to CC for approval.

After this, two situations can arise.

state 1:

1. CC approves the plan with a vote of not less than 75% of the voting shares of FC.

2. PR presents the approved plan to AA.

3. AA approves the plan that will be binding on the DC and other interested parties, including the guarantors.

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3. AA rejects the plan and orders its liquidation.

4. The liquidation process begins, RP carries out all the procedures for the liquidation of the company in accordance with the provisions of the code.

Situation 2:

1. CC rejects the plan by majority vote.

2.AA Liquidation Orders.

3. The liquidation process begins, RP carries out all the procedures for the liquidation of the company in accordance with the provisions of the code.

In the case of the operating creditor, the steps are almost the same except that the documents that must be submitted to AA are different. In the case of a corporate client, the steps are almost the same as those for financial creditors.

REORIENTATION OF THE CENTRAL GOVERNMENT POLICY TO DEAL WITH OCCUPATIONAL ILLNESS AND THE CONSEQUENTIAL INCREASE IN DOUBTFUL ASSETS

In any economy, a favorable industrial climate should provide a favorable situation for doing business and a quick exit route should an industrial unit fail to perform well. In the early 1980s, when the government took notice, it began to loosen control over industries. Incompetent industries, which were receiving government protection, came in for a serious discussion. It was agreed that nationalization as a solution would be ineffective. At the same time, in the absence of adequate bankruptcy laws and an exit policy, restructuring through market-driven forces also proved ineffective in the country. Due to pressure from various political sectors, the government finally opted for a middle path. The promulgation of SICA, 1985 was the result of a policy resolution of this type at the central government level. However, the BIFR, which was set up to operationalize SICA provisions, did not work as policymakers had hoped. SICA was heavily abused by corporate debtors to the extent that it was used as a protective shield for not meeting creditor commitments. This was mainly due to the provisions contained in Section 22 of the SICA of 1985. Meanwhile, other laws, namely the DRT Law of 1993, the SARFAESI Law of 2002, were enacted mainly not with a view to restructuring and rehabilitating the companies sick but with the main objective of recovering what is owed by the secured creditors. Even then, there were no tangible results either with regard to the reactivation or the recovery of delinquent debts. The result was a sharp increase in NPA growth. In such an economic environment, investors did not show much interest in investing in India. The government was also under pressure from international agencies, namely the IMF and the World Bank to carry out second generation economic reforms. The result was the enactment of the Bankruptcy and Insolvency Code of 2016.

Conclusion

India’s ranking regarding insolvency resolution is 136 out of 189 countries. It takes about 4.3 years to resolve insolvency in India as against the global average of 2.6 years. World Bank data shows that there is a positive correlation between the rate of creditor recovery and the strength of the legal framework for insolvency. In this perspective, the code promises to bring about far-reaching reforms with a focus on the creditor-driven insolvency resolution process. Notwithstanding the code, which is a unified law, which provides for a structured and time-bound process for the resolution and liquidation of insolvency, it will be seen over a period of time whether the various provisions and steps incorporated in the Code will make any difference to address the growing problem of industrial disease. When a specialized body of experts, ie the BIFR, fails, it must be seen how the NCLT with combined and composite functions will be effective enough to address the range of problems related to the country’s underperforming industrial activities. On the other hand, the review of the literature on the insolvency system prevailing in the different countries suggests that a well-designed insolvency law does not necessarily guarantee the recovery of debts to the extent expected. Again, there are economies that have well-designed laws but face challenges in implementing them effectively. However, the promulgation of the Code, which establishes a collective, linear and time-limited process for the resolution and liquidation of insolvency, is a right step in the right direction.

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