Economics For Everyone: The Insolvency And Bankruptcy Code In India And The National Company Law Tribunal

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act has come into force from 5 August and 19 August 2016.

India had numerous acts in place to punish the defaulters like the Indian Contract Act, the Recovery of debts due to Banks and Financial Institution Act 1993, the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). The Government decided to replace the existing insolvency laws with new stringent laws which would take care of the existing defaulters in a time bound manner.

The proposed bankruptcy legislation seeks to address the issues faced currently in the context of insolvency and winding up. The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).

After passing the bankruptcy code in Parliament for time-bound settlement of insolvency cases in non-financial firms, the finance ministry has released a draft bill to set up a resolution corporation to address similar issues among financial firms.

To quote the Finance Minister Mr. Arun Jaitley” “A systemic vacuum exists with regard to bankruptcy situations in financial firms. This code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance firms and financial sector entities. This code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy,” Unquote.

The proposed legislation will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism. It is widely believed that this legislation, when implemented in letter and spirit, will change the negative perception of NPAs, recovery and litigation associated with India.

The new bankruptcy law will be a useful tool for international creditors and investors from the perspective of PE funds continuing to grow their investments in India

According to the World Bank's Ease of Doing Business report, it takes more than four years on an average to resolve insolvency in India. The proposed insolvency and bankruptcy law seeks to cut down the time to less than a year. This will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism in the country. It is widely believed that this legislation will change the negative perception of recovery and litigation associated with India.

The Government has formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate stress-free and time-bound closure of businesses. The draft legislation, since the report issued in November 2015 by a panel headed by former law secretary Mr. T.K. Viswanathan, has gone through various changes, including changes recommended by the Joint Parliamentary Committee in April 2016. The Insolvency and Bankruptcy Code, 2016 has now been passed by the Lok Sabha and the Rajya Sabha.

Process

Here, we will discuss some of the key features and Institution associated with the bankruptcy code

Key Features

• Insolvency and Bankruptcy Board of India
• The Board will be set up as the regulator under the Code.

Insolvency Professionals:

The Bill proposes to regulate insolvency professionals and insolvency professional agencies. Under the oversight of the Board, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role. Three sets of Resolution Professionals are sought to be appointed Interim Resolution Professional, Final Resolution Professional and Liquidator.

Insolvency Information Utilities:

The Code proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies as well as financial and operational creditors of companies. An individual insolvency database is also proposed to be set up for the purpose of providing information on the insolvency status of individuals. It is not clear whether this will dovetail into the existing Central Registry of Securitisation Asset Reconstruction and Security Interest of India and/or Central Repository of Information on Large Credits or end up adding to the plethora of registries in India.

Insolvency Adjudicating Authority:

The adjudicating authority will exercise jurisdiction over cases by or against the debtor.

The Debt Recovery Tribunal shall be the adjudicating authority with jurisdiction over individuals and partnership firms other than Limited Liability Partnerships. Appeals from the order of the DRT will lie to the Debt Recovery Appellate Tribunal.

The National Company Law Tribunal shall be the Adjudicating Authority with jurisdiction over companies, other limited liability entities (including LLPs.). Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal and NCLAT shall be the appellate authority to hear appeals arising out of the orders passed by the Regulator in respect of insolvency professionals or information utilities.

Moratorium:

One of the most significant features of the Code is the grant of moratorium during which creditor action will be stayed. This is not automatic and has to be granted by the Adjudicating Authority on the recommendation of the Resolution Professional.

Corporate Liquidation:

One of the most significant features of the Code is the grant of moratorium during which creditor action will be stayed. This is not automatic and has to be granted by the Adjudicating Authority on the recommendation of the Resolution Professional.

Corporate Liquidation:

• The commencement of liquidation process takes place on:
• Recommendation of the resolution plan.
• On account of failure to submit the resolution plan within the prescribed period or contravention of the resolution plan.
• Based on vote of majority of the creditors.

Liquidation Estate:

To the extent assets held by the debtor belong to it, then will form part of the liquidation estate. Assets will be distributed by the liquidator in the manner of priorities laid in the law. Individual claimants or those claiming to have any special rights on assets of the debtor will form part of the liquidation process.

Priority:

The following debts will be paid in priority given below:

• Insolvency Resolution cost and liquidation cost
• Debts to secured creditor (who have relinquished their security interest) and workmens’ dues (for 24 months before commencement)
• Wages and unpaid dues to employees (other than workmen) (for 12 months before commencement)
• Financial debts to unsecured creditors and workmen’s dues for earlier period
• Crown debts and debts to secured creditor following enforcement of security interest
• Remaining debts
• Preference shareholders
• Equity Shareholders or partners
• The priority being given to secured creditors relinquishing security needs specific attention, especially on account of the same having the potential to be misused, especially if the debtor and the secured creditor can collide and impair the collateral.