Decoding the Insolvency and Bankruptcy Code, 2016

April 21,2017
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Suraj Nangia, Partner, Nangia & Co

Bankruptcy is a state or condition of a person, be it an individual, partnership or corporate, who is unable to pay its debts as they are or become due. In India, since long, there was no single law to deal with this state of Insolvency and Bankruptcy. Under the extant provisions of law, i.e. Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and Companies Act, 2013, provisions relating to Insolvency and bankruptcy for companies were dealt with, though not effectively and efficaciously, hence were seen as inadequate. The Insolvency and Bankruptcy Code, 2016 (‘the Code’) enacted on May 28, 2016, consolidates and amends the slew of legislations governing the legal framework relating to reorganization and insolvency resolution of Corporates; Partnerships; and, Individuals in a time bound manner for maximization of value of assets of such persons.

But Why Code and not Act? a ‘Code’ is meant to be a collection of laws, rules or regulations that are consolidated and classified according to a particular subject matter. The Code in the instant case is also a compendium of 255 section bifurcated in 5 parts and a set of rules and regulations prescribed thereunder.

The Code is set to promote entrepreneurship, balance the interests of all the stakeholders and making the much needed credit available in the market.  Very finely, the Code has drawn a line between the commercial and judicial aspects of insolvency and bankruptcy proceedings. The Code paves way for much needed reforms while focusing on creditor driven insolvency resolution, making it easier to wind up a failing business and recover debts. Interestingly, as per the waterfall provided under the Code, government dues would rank below those of secured creditors, workmen, employees and unsecured financial creditors.

The Code shift control from shareholders and promoters to creditors, whose money is at stake. Under the Code, insolvency test has moved from ‘erosion of net worth’ to ‘payment default’. The Code provides for a time bound resolution of the state of insolvency and bankruptcy by providing a timeline of 180 days with one extension of upto 90 days. Ensuring that the resolution process is conducted in a professional manner, it has been provided under the Code that Insolvency Professional (‘IP’), members of Insolvency Professional Agencies (‘IPAs’) registered with the Insolvency and Bankruptcy Board of India (‘IBBI’), shall take over the management and operations of the corporate person under insolvency during the resolution process. IBBI has notified the ‘Limited Insolvency Examination’ to qualify as and IP. National Company Law Tribunal (‘NCLT’) and Debt Recovery Tribunal (‘DRT’) have been designated as the Adjudicating Authority for corporate persons and partnership & individuals, respectively. Information utilities (‘IUs’) have been established to collect, collate and disseminate financial information to facilitate flow of information for timely insolvency resolution. IUs shall play a key role here by ensuring that neither the NCLT or DRT not the stakeholders will have to run around to gather information to establish the default.Under the Code, insolvency proceedings can be initiated on a mere occurrence of default of Rs. 1 lakh even for a single day and application in this regard can be filed by the creditors of the corporate person, be it financial creditor, operation creditor, workmen, employees, and even the corporate person himself. Upon initiation of the insolvency proceedings, the board of directors shall stand suspended and the powers of the board shall vest in the IP who shall manage the business of the corporate person maintaining its ‘going concern’.  IP shall act at the instance of the Committee of Creditors (‘CoC’), which comprises of the financial creditors and shall take the necessary decisions as approved by 75% of the CoC. The IP shall strive to draft the best possible ‘Resolution Plan’ (‘Plan’) and file it with the NCLT for its approval. If the Plan is not submitted to NCLT OR the Plan is not approved by NCLT OR CoC so decides OR the Plan is not properly implemented, the liquidation order shall be passed. IP shall act as the liquidator unless otherwise decided by the CoC and shall form liquidation estate, take custody & control of all assets, consolidate, verify, admit and determine value of creditor’s claims and carry on the business of the corporate person for its beneficial liquidation.

Under the Code, insolvency proceedings can be initiated on a mere occurrence of default of Rs. 1 lakh even for a single day and application in this regard can be filed by the creditors of the corporate person, be it financial creditor, operation creditor, workmen, employees, and even the corporate person himself. Upon initiation of the insolvency proceedings, the board of directors shall stand suspended and the powers of the board shall vest in the IP who shall manage the business of the corporate person maintaining its ‘going concern’.  IP shall act at the instance of the Committee of Creditors (‘CoC’), which comprises of the financial creditors and shall take the necessary decisions as approved by 75% of the CoC. The IP shall strive to draft the best possible ‘Resolution Plan’ (‘Plan’) and file it with the NCLT for its approval. If the Plan is not submitted to NCLT OR the Plan is not approved by NCLT OR CoC so decides OR the Plan is not properly implemented, the liquidation order shall be passed. IP shall act as the liquidator unless otherwise decided by the CoC and shall form liquidation estate, take custody & control of all assets, consolidate, verify, admit and determine value of creditor’s claims and carry on the business of the corporate person for its beneficial liquidation.

Implementing the Code has become government’s “highest priority”. IBBI has already registered 977 Insolvency professionals, 3 Insolvency Professional Entities, 3 Insolvency Professional Agencies, so far, which show its popularity amongst the professionals who are keen to tap these new set of professional service line.  

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