THE INSOLVENCY AND BANKRUPTCY CODE, 2016
Updated: Mar 20
Author: Navya Airachia, BBA.,LL.B, from Banasthali University, Rajasthan, LL.M (Intellectual Property Rights), from Amity University, Noida
The Parliament introduced the ‘Insolvency and Bankruptcy Code 2016’ on May 28, 2016. Bankruptcy is a legal status usually imposed by a court on a firm or individual unable to meet debt obligations. India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process for businesses, either by coming up with a viable survival or by speedy liquidation.
It also envisages a new regulator, The Insolvency and Bankruptcy Board of India, which will regulate professionals, agencies, and information utilities engaged in the resolution of insolvencies. It also proposes to establish a fund called the Insolvency and Bankruptcy Fund of India.
This Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body as specified by the government.
In India, it takes anywhere between five years to fifteen years for lenders to recover money in the event of default, and even then they manage to get back only a fraction, usually about a fourth of the amount lent. India’s existing laws that clear with corporate insolvency are not in sync with each other and do not add ress of all stakeholders in one forum. This leads to delays and the destruction of value for the stakeholders in one forum. The new bankruptcy code will also help India improve its ‘Ease of Doing Business rankings which is currently at 130, as resolving insolvency is a key criteria in the World Bank’s survey.
In case of insolvency resolution, negotiations between the debtors and creditors shall be supervised by an insolvency professional. The adjudicating authority will have the jurisdiction to hear and dispose the cases. The Debt Recovery Tribunal (DRT) shall be the adjudicating authority for the individuals and unlimited liability partnership firms. Appeals from it will lie in the the Debt Recovery Appellate Tribunal. The National Company Law Tribunal (NCLT) shall be the adjudicating authority over companies and limited liability entities. Appeals from it will go to the National Company Law Appellate Tribunal (NCLAT).
The code also provides for the fast-track insolvency resolution process which may be applicable to a category of entities. Regarding the transfer of proceedings, the company in respect of which such proceedings stand abated may make a reference within 180 days from the date of commencement. The bill also lays down a transition provision during which the Central Government shall exercise all the powers of the regulator till the regulator is established.
The Code proposes to establish information utilities which will maintain a range of financial information about the firms. The code also provides for the penalties for the offences committed by the debtor, which is imprisonment upto five years and fine up to one crore rupees. For most of the offences, the fine will not exceed five lakh rupees in case of an individual for offences like providing false information etc.
There is a need for this code to be introduced in the country as India is a capital starved country and therefore it is essential that capital doesn’t get frittered away. This new code will streamline and consolidate all the earlier laws which are related to this. It will provide an easy exit to the firms which are sick or insolvent. The code can ensure a quick and good resolution to the bad loan problems in public sector banks. The new code will matter to the private sector too. Since the code also provides for the penalties against debtors who are misbehaving, it will prove to be a good way in maintaining the fittest firms in the market. Currently, there are no single laws dealing with insolvency and bankruptcy in India.
Many cases are dealt under the earlier acts of 1909, 1920 etc. Thus, the introduction of this code will lead to uniformity in the rules and procedures of the various acts dealing with the provisions of bankruptcy. A strong code can lead can help in overcome the following challenges which are faced by our tribunals day to day. The code also seeks to balance the interest of the stakeholders and the priority of the payment of government dues.
The Code proposes the following steps to resolve insolvency:
Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period .
Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
Liquidation: If the debtor goes into liquidation, and insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.
The Insolvency and Bankruptcy Code will improve India’s ease of doing business ranking as it will point out the sick or the insolvent firm and provide a clear picture to the investors, etc that which company is suitable for them to enter in transactions with. Usually, it is the poor research or the company is so manipulative that the investors are the ones who suffer losses at the end. Thus, with the help of this Code, the investors will be able to take decisions in the right directions. With this code, the sick companies or the weak companies can be easily identified. Since, this bill aims at preparing an effective legal framework for timely resolution of insolvency and bankruptcy would support the development of credit markets and encourage entrepreneurship.
Insolvency And Bankruptcy Code (Amendment) Act, 2020
The Code has been amended from time to time since its enactment to remove bottlenecks and to streamline the Corporate Insolvency Resolution Process ("CIRP") under the Code. The aim was to provide and revamp the framework for insolvency resolution in India in a time-bound manner and for the promotion of entrepreneurship, credit availability and balancing of different interests of each and every stakeholder of a Company. In December, 2019, the legislature introduced "The Insolvency and Bankruptcy Code (Amendment) Bill, 2019, however, the same could not be passed during the then parliament session and was implemented by way of an ordinance w.e.f. 28.12.2019. In 2020, the parliament passed the Insolvency and Bankruptcy Code (Amendment) Act, 2020 [No. 1 of 2020] ('Amendment Act') and it received President's assent on March 13, 2020. As per Section 1 (2) of the Amendment Act, the amendments are deemed to have come in force on December 28, 2019. The Amendment Act has amended Sections 5, 7, 11, 14, 16, 21, 23, 29A, 32A, 227, 239 and 240 of the Code.
The highlight of amendments are:
insolvency commencement date is now the date of admission of an application for initiating CIRP;
IRP to be appointed on the date of admission of the application itself;
IRP shall continue to manage the affairs of a Corporate Debtor till the time the resolution plan is approved by the Adjudicating Authority or an order for liquidation of Corporate Debtor is passed ;
a minimum threshold has been provided for the Financial Creditors falling under sub-section 6A of Section 21 and in respect of real estate allottees.
During moratorium there shall not be termination of any licence, concession, permit, quota, clearance or any other similar right during the moratorium period, unless the Corporate Debtor does not default in the necessary payment;
protection from prosecution granted to new management/ officials for offences committed prior to commencement of CIRP;
protection granted in respect of the properties of Corporate Debtor from attachment/ seizure/ retention etc. for the offences committed prior to the commencement of CIRP.
The minimum threshold now introduced, shall result in making the remedy provided under the Code to a real estate allottee, completely toothless, in as much as a real estate allottee is a person, who invested his hard earned money in buying a property and shall now feel harassed to find out 99 more buyers or 10% of the total number of buyers, before he could approach the Court for redressal of his grievances. Ultimately, this ought to have been kept in mind by the legislature that real estate allottees were included in the definition of 'financial creditor' after a huge number of defaults by real estate developers across the country.
This legislation so brought was a welfare legislation, which has been diluted substantially to the grave prejudice of real estate allottees. As a matter of fact, the validity of this amendment was challenged before the Hon'ble Supreme Court of India and the Hon'ble Court has granted a status quo order in respect of pending matters.
Having said that, undoubtedly the amendments that were brought in the Code by the Amendment Act of 2020 are a step forward towards the effective implementation of this Code and I will help in removing the hindrances or obstades in the way of its implementation.