Short Note on Insolvency and Bankruptcy Code, 2016

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Short Note on Insolvency and Bankruptcy Code, 2016 (IBC, 2016)

What is Insolvency and Bankruptcy Code, 2016 (IBC)?

“In One line we can say that in case of a default by the equity owners to meet their debt obligations, control is transferred to the creditors and equity owners take a back seat.”

The Insolvency & Bankruptcy Code 2016 (“IBC”), enacted to address the troubling shortcomings in existing staggered insolvency laws in India and to bring them under one umbrella, is set up to face a monumental challenge and equally monumental expectations. At present, according to the data available with the World Bank in 2016, insolvency resolution in India takes around 4.3 years on average, compared with United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). India was ranked 135th/190 countries in the World Bank Ease of Doing Business Index 2015 on the ease of resolving insolvency. Thus it is apparent that the Code is perhaps one of the most critical legislations introduced in the recent years impacting the ease of doing business in India.

The Insolvency and Bankruptcy Code 2016, enacted to radically change the process of insolvency resolution in India, is keenly watched by economists and jurists as well as businessmen and investors, for the reason that each aspect of the implementation of law has the potential to critically impact the ease of doing business in India. For this reason, the Code is especially sensitive to interpretation and it is vital that the issues thrown up in its inaugural year of implementation be recognized and the judicial remark on the same be understood. The present article thus traces the emerging jurisprudence of the Code through judgments of the Supreme Court of India and the National Company Law Appellate Tribunal.

It is a comprehensive Code enacted as the Preamble states, to

“consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”.

Legal framework of Indian insolvency and bankruptcy resolution procedures:

There are several laws which regulate insolvency resolution for companies in India. These include (i) Sick Industrial Companies Act, 1985, (ii) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act), (iii) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and Companies Act, 2013.
These laws provide for the restructuring of debt, seizure and sale of the debtor’s assets for repayment of outstanding loans. Similar laws such as the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 regulate insolvency resolution for individuals. While these laws specify processes for resolving insolvency, a creditor may also approach civil courts for recovery of debt.

The Code seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it amends 11 laws including Companies Act, 2013, DRT Act, 1993 and SARFAESI Act, 2002.

Legal framework of Insolvency and Bankruptcy Code, 2016 (IBC):

The Statement of Objects and Reasons of Insolvency and Bankruptcy Code, 2016 (the Code) indicates that the Legislature was of the opinion that the existing framework for insolvency and bankruptcy was inadequate and ineffective and resulted in undue delays in resolution. The Code was proposed with the objective of consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders, including alteration in the priority of payment of Government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. The Code provides for designating the NCLT and the Debts Recovery Tribunal (DRT) as the Adjudicating Authorities for corporate persons, firms and individuals for resolution of insolvency, liquidation and bankruptcy. The Code was published in the Gazette of India dated 28.05.2016. Provisions of the Code were however brought into effect from different dates in terms of the proviso to Section 1(3) of the Code.

The Insolvency and Bankruptcy Code, 2016 (31 of 2016) (“the Code”) came into effect with the assent of the President of India on 28th May 2016. In a notification dated 1st June, 2016, the Central Government had constituted 11 benches of the National Company Law Tribunal (NCLT) in different states. Under Part II, Chapter VI of the Code, National Company Law Tribunal (NCLT) would be adjudicating authority for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs), any entity with limited liability under any law and bankruptcy of personal guarantors thereof.

The Central Government established (powers conferred by sub-Section (1) and (3) of Section 188 of the Code) the Insolvency and Bankruptcy Board of India on 1st October, 2016 which has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies and Information Utilities needed for operation of the Code. It also writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.

The new code promises a better and painless procedure for restructuring or reorganisation of firm’s debt and also speed up the liquidation of a failing business and efficient recovery of creditor’s investment. IBC introduces the much awaited and much-needed creditor driven procedure for resolving insolvency and bankruptcy. While the introduction of new code is a historical reform in the country’s economy, its effect will be seen in years to come and will depend on the infrastructure support and capacity of the implementing authorities and newly formed protocols.

The new code will construct an institutional framework, consisting of:

(1) IBBI (Insolvency & Bankruptcy Board of India) as the regulating authority,
(2) Insolvency professionals (to act as intermediary and help sick units and financial institutions including banks with a smooth takeover or liquidation process),
(3) Information utilities (credit information storing units), and
(4) Adjudicatory mechanisms, to facilitate a timebound insolvency resolution procedure and liquidation if necessary.

The IBC appoints two different authorities to make the procedure for insolvency resolution smoother. The NCLT (National Company Law Tribunal) to deal with cases related to companies and LLP’s and the DRT (Debt Recovery Tribunal) for partnership firms and individual.

Part II of the Code titled ‘Insolvency Resolution and Liquidation for Corporate Persons’ applies to matters relating to insolvency and liquidation of corporate debtors where the minimum amount of default is Rs.1,00,000/-.

The proviso to Section 4(1) in Chapter I of this Part however empowers the Central Government to specify the minimum amount of default, by notification, of a higher value which shall not be more than Rs.One Crore. Section 5 in this Chapter sets out definitions of terms used in Part II. Section 5(1) defines ‘Adjudicating Authority’ to mean the NCLT constituted under Section 408 of the Companies Act, 2013, for the purposes of Part II. Section 5(11) defines ‘initiation date’ to mean the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating the corporate insolvency resolution process. Section 5(12) defines ‘insolvency commencement date’ to mean the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under Sections 7, 9 or 10, as the case may be. Section 5(17) defines ‘liquidation commencement date’ to mean the date on which proceedings for liquidation commence in accordance with Sections 33 or 59, as the case may be. Section 5(20) defines ‘operational creditor’ to mean a person to whom an operational debt is owed and includes any person to whom any such debt has been legally assigned or transferred. ‘Operational debt’ is defined under Section 5(21). Originally, this definition was to the effect that an ‘operational debt’ meant a claim in respect of the provision of goods or services, including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government or any State Government or any local authority. However, by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, published in the Gazette of India dated 06.06.2018, Section 5(21) of the Code was amended by substituting the word ‘payment’ for the word ‘repayment’. Therefore, ‘operational debt’, as defined under Section 5(21) of the Code, presently means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any Local Authority.

Chapter II in Part II is titled ‘Corporate Insolvency Resolution Process’. Section 6 therein states that where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate the corporate insolvency resolution process in respect of such corporate debtor in the manner provided in Chapter II. Section 7 deals with ‘Initiation of corporate insolvency resolution process by a financial creditor’ and sub-section (6) thereof stipulates that the corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5). Section 8 deals with ‘Insolvency resolution by operational creditor’ and Section 9 pertains to ‘Application for initiation of corporate insolvency resolution process by operational creditor’. Section 9(6) makes it clear that the corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of Section 9. Similar provision is made in Section 10(5) in relation to corporate insolvency resolution process commenced at the behest of the corporate debtor itself.

Chapter III deals with ‘Liquidation Process’. Section 33 thereunder provides for ‘Initiation of liquidation’. Section 33(1) reads to the effect that where the Adjudicating Authority does not receive a resolution plan or rejects the resolution plan, it shall pass an order requiring the corporate debtor to be liquidated in the manner laid down in Chapter III; issue a public announcement stating that the corporate debtor is in liquidation; and require such order to be sent to the authority with which the corporate debtor is registered. Section 33(5) provides that, subject to Section 52, when a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the corporate debtor, except with the prior approval of the Adjudicating Authority. Section 34 deals with ‘Appointment of a liquidator’ and provides that where the Adjudicating Authority has passed an order for liquidation of the corporate debtor under Section 33, the resolution professional appointed for the corporate insolvency resolution process under Chapter II shall act as the liquidator for the purposes of liquidation, unless replaced by the Adjudicating Authority. The powers and duties of such liquidator are specified in Section 35 of the Code. One such power under Section 35(1)(f) is to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified. Section 36 deals with ‘Liquidation Estate’. Section 36(1) provides that for the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in Section 36(3) which would be called the liquidation estate in relation to the corporate debtor.

Section 52 provides protection to a secured creditor of the corporate person in liquidation. Section 52(1) provides that a secured creditor in the liquidation proceedings may either relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in Section 53 or realize its security interest in the manner specified thereunder. Section 52(9) stipulates that where the proceeds of realization of the secured asset are not adequate to repay the debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of Section 53(1). Section 53 deals with ‘distribution of assets’ by the liquidator.

Section 54 deals with ‘Dissolution of a corporate debtor’ and provides that where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor and upon such an application, the corporate debtor shall be dissolved by the Adjudicating Authority from the date of that order. A copy of such order shall be forwarded to the authority with which the corporate debtor is registered within seven days from the date of the order.

Part V of the Code deals with ‘Miscellaneous’ provisions under Sections 224 to 255. Section 238 stipulates that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

 

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