Insolvency and Bankruptcy Code, 2016

Overview

In India, the legal and institutional machinery for dealing with debt default was not in line with global standards. The recovery action by creditors, through various laws has not been able to aid recovery for lenders nor aid restructuring of firms. The objective of IBC is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximisation of value of assets of such persons and matters connected therewith or incidental thereto.

IBC is a bankruptcy law which seeks to consolidate and amend among others the following legislative framework relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals:

• Recovery of Debts due to Banks and Financial Institutions Act, 1993
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) repealed
• Winding up provisions of the Companies Act, 1956, Companies Act, 2013 and LLP Act 2013
• The Presidential Towns Insolvency Act, 1909
• Provincial Insolvency Act, 1920

The legal framework contains a set of Rules and Regulations framed under this Act. The legal frameworjk is still in its nascent stage. The Insolvency and Bankruptcy Board of India was established on October 1, 2016 as the regulator.

Salient features

1. Applies to Companies, Partnerships, LLPs, Individuals and any other body specified by the Central Government.
2. Provides for clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.
3. Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”.
4. Four pillared institutional infrastructure:-
   1. Insolvency Professionals (IPs’) – the resolution processes will be conducted by licensed IPs. They would play a key role in the efficient working of the bankruptcy process. They would be regulated by ‘Insolvency Professional Agencies (IPA).The Insolvency and Bankruptcy Board of India (‘IBBI’) has recently notified the Model by laws and Governing body of IPAs. As per recently notified regulations, not-for-profit companies having a minimum net worth of ₹10 crore will be eligible to act as an IPA. IBC has become operational with IPAs getting registered.
   2. Information Utilities (IUs’)– IUs will be established to collect, collate and disseminate financial information to facilitate insolvency resolution. This would eliminate delays and disputes about facts when default does take place.
   3. National Company Law Tribunal (NCLT)- it will be the forum where companies insolvency will be heard and Debt Recovery Tribunal (DRT) will be the forum where individual and firms insolvencies will be heard. These institutions, along with their appellate bodies, viz., NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.
   4. The Insolvency and Bankruptcy Board of India– this body will have regulatory over-sight over the IPs, IPAs and IUs.

Insolvency Resolution Process

1. The Code specifies insolvency resolution processes for companies and individuals, which will have to be completed within 180 days. This limit may be extended to 270 days in certain circumstances. The resolution process will involve negotiations between the debtor and creditors to draft a resolution plan.
   The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholders / promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is in complete departure with the experience under the SICA regime where there were delays leading to destruction of the value of the firm.
2. The process will end under two circumstances, (i) when the creditors decide to evolve a resolution plan or sell the assets of the debtor, or (ii) the 180-day time period for negotiations has come to an end. In case a plan cannot be negotiated upon during the time limit, the assets of the debtor will be sold to repay his outstanding dues. The proceeds from the sale of assets will be distributed based on an order of priority.
3. The assets will be distributed in the following order, in case of liquidation: (i) fees of insolvency professional and costs related to the resolution process, (ii) workmen’s dues and secured creditors, (iii) employee wages, (iv)unsecured creditors, (v) government dues and remaining secured creditors (any remaining debt if they enforce their collateral), (vi) any remaining debt, and (vii) shareholders.
4. For cross border insolvency, the Central Government may enter into agreements with other countries to enforce provisions of the Code. (Cross border insolvency relates to an insolvent debtor who has assets abroad).

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 having among relatively weak insolvency regimes to providing businesses a stronger framework. 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.

How to be an Insolvency Professional

Chartered Accountants with 10 years plus experience is eligible to be Insolvency Professional (IP). One need to Pass Limited Insolvency Exam conducted by National Institute Of Securities Market (NISM).

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