In this article, Raghav Vaid pursuing M.A, in Business Law from NUJS, Kolkata discusses The Insolvency And Bankruptcy Process In India.

Insolvency is a situation when an individual or a company is unable to repay its outstanding financial loan to its lender in due time. A solution to such a situation is by modifying the repayment method or by writing the loan off. In the event such a situation is unresolved, then insolvent’s assets are sold off in order to pay off or to recover the outstanding debts. This is done by way of a legal action in Court of law. The Court appoints an official liquidator whose primary job is to liquidate all the assets of the insolvent and pay off the proceeds to the creditors.

Although the term sounds similar to insolvency, Bankruptcy is a different concept. Bankruptcy is a concept which is like voluntary surrender. It this case, the person voluntarily goes to the Court and officially declares that he is unable to pay any further debts. In such a scenario, the Court takes the responsibility of liquidating a person’s assets and distributes the proceeds to his creditors. The primary difference between an insolvent and a bankrupt is that a bankrupt can post the distribution of proceeds to creditors can have a new lease of life.

BACKGROUND

The research shows that India has about 11% of bad debt records out of the total lending and it is increasing day by day. Mr Vijay Mallya is one such example. The time taken to resolve a case of insolvency is very high as compared to many other countries of the world. Due to this issue, India ranks 130^th in ease of doing business in the world. More than 50% of bad debts are that of Corporates who have taken such loans from nationalised banks. The recovery from such defaulters is generally next to impossible because of a number of reasons like overlapping jurisdictions etc. Hence, these cases continue for years and years but the recovery remains zero. Previously there were about twelve laws which dealt with insolvency. Basis on those twelve laws, it took more than four years to wind up a corporation in our country.

Due to lack of required institutional and legal setup, the defaulters started considering India as a safe haven for such activities which clearly depicted incompetence on the part of our country when compared to global standards. Although 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) and so on has failed miserably to recover to the outstanding dues from the defaulters. The aforesaid laws had many loopholes which kept the defaulters fear free and safe. If there is no fear of law, this scenario is likely to happen.

Based on the abovementioned increasing issues, the government finally decided to take some stand. 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 and also set an example for the people of the country who considered this activity of wilful defaulting as a gag. It was on 11^th of May, 2016, when the Insolvency and Bankruptcy Code, 2016 was passed by both the houses and received the assent of the President on 28^th of May, 2016.

Insolvency and Bankruptcy Code – An overview

The primary motive of launching the Insolvency and Bankruptcy Code, 2016, was to amend and consolidate the laws relating to insolvency resolution from a number of acts into one single code. The key emphasis of this Code is to provide revival and resolution in a time bound manner thereby maximizing the value of defaulter’s properties. This legislation clearly provides a structure to aid sick companies to either wind up their business or come up with a modified plan in order to revive. It also aims to safely depart the investors from such companies without making them lose their investments. This new Code has also vested the operational creditors like suppliers and workmen with the power to initiate insolvency proceeding against a company if the default takes place.

Another great feature about the code is that it considers no difference between the rights of domestic and international creditors or among the varied classes of economic organizations. The Code has a hit the nail on the head by balancing the interest of the involved shareholders including modification in the order of primacy of payment of Government dues. This new law is drafted keeping in mind the international standards bearing a broad philosophy that any future insolvency proceedings must be professionally and commercially driven rather than Court driven. The intention is to ensure that the role of the adjudging authorities is to ensure the due procedure rather than refereeing on the merits of the insolvency resolution.

The new Insolvency and Bankruptcy Code, 2016 has repealed a number of outdated acts like the Provincial Insolvency Act, 1920, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. It further amends certain legislation like the Indian Partnership Act, 1932, the Companies Act 2013, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Limited Liability Partnership Act 2008 and Sick Industrial Companies (Special Provisions) Repeal Act 2003. In order to sidestep any further litigation in insolvency proceedings, this new Code shall overrule all other laws and Acts. The Code clearly states that the Courts shall not have the authority to grant any injunction as it shall not be a part of their jurisdiction. The new law in the form of Code has replaced a number of laws which were earlier prevailing thereby proving to be an important step in developing the procedure of recovery of bad debts. With the launch of this new law, there is a sudden surge in economic growth because of the unbending timeframe prescribed in the Code in order to resolve the insolvency and liquidation proceedings.

STEP BY STEP INSOLVENCY RESOLUTION PROCESS

The new Code makes a departure from the typical outdated regime by shifting the onus on the creditor in order to initiate the insolvency resolution procedure against a corporate defaulter. Whereas in the earlier Code, the responsibility to initiate a proceeding was with the debtor and the creditor was to pursue parallel actions for recovery of debt.

PROCESS OF LIQUIDATION FOR CORPORATES

In case the default is for an amount over and above Rs. 1 lakh, the creditor has the authority to initiate insolvency process as per the new Code. The Code recommends two autonomous stages:

1. Resolution Process for Insolvency: Under this stage, the financial creditors make an assessment of whether the debtor’s business is worthy of continuing or not. The creditors come up with options for restructuring the business model to avoid any further losses.
2. Liquidation: In the event the abovementioned Insolvency Resolution Process fails, the creditors make a unanimous decision to wind down and sell the debtor’s assets in order to recover their dues.

RESOLUTION PROCESS FOR INSOLVENCY

In case a corporate debtor makes a default in repayment of dues of the creditors, a financial creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any authorised member, a person who has the controlling capacity over the financial affairs of the corporate debtor has the power to start the insolvency resolution process. In order to initiate the resolution process, an application has to be made to National Company Law Tribunal (NCLT). A ten days demand notice has to be given to the corporate debtor by the operational creditor before he approaches the NCLT. However, an operational creditor can directly approach the NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing difference.

The new Code states that the insolvency process of a Corporate must be concluded within 180 days from the date of initiation by the NCLT. The claims of the Creditors shall be frozen for a period of six months on admission of application by NCLT. During this time, the NCLT shall listen to the options to revive and decide the future course of action. It is further clarified that unless a resolution plan is made or liquidation process is initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court. When the application for insolvency is accepted, the NCLT within fourteen days appoints an Insolvency Professional (IP) on receiving a confirmation from Board of Insolvency and Bankruptcy. The appointed IP then takes up the responsibility of the debtor’s properties and functioning. He also collects all the information that is relevant with regard to the financial condition of the debtor from information utilities. IP is appointed for a term of thirty days only within which he does all the necessary scrutinization.

The next step is to make a public announcement about the commencement of corporate insolvency process so that claims from any other creditors can also come forward, if any. A creditor’s committee is constituted by the IP post receiving any claims by public announcement. In the event any financial creditor is a related party of the defaulting debtor, such a creditor will not have the right to represent, participate or vote in the committee of creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average dues of the operational creditors must be at least ten percent of the debt. The Committee of Creditors shall first seven days of its incorporation decide through seventy five percent votes whether the interim IP should be used as a Resolution Professional or should be replaced with someone else. After the Committee finalizes the Resolution Professional, he is appointed by the NCLT. The Resolution Professional so appointed can be replaced anytime by the Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with regard to insolvency resolution by seventy five percent majority voting.

In the event majority (75%) of the financial creditors are of the view that the case is very complex and more time extension is required, the NCLT may grant a one-time extension of up to a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole responsibility of the Resolution Professional to manage and conduct the corporate insolvency resolution procedure during such a term. To enable the resolution applicant for preparing a resolution plan, the Resolution Professional shall compile a statistics note. A resolution applicant can be defined as an individual who has the duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s Committee further receives the plan from the Resolution Professional for its approval.

On the resolution being approved, the next step by the Creditor’s Committee is to come up with options on restructuring which can be either coming up with a modified repayment plan or to simply liquidate the properties of the company in order to recover dues. If the Creditor’s Committee fails to take any binding decision with regard to the repayment by the debtor, the debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for resolution, the same shall be sent to NCLT for approval and implementation.

LIQUIDATION

The liquidation process commences only if:

1. The Committee fails to submit the resolution plan with the provided time frame to the NCLT.
2. The Resolution Plan is rejected because of non-adherence to the Code.
3. The Creditor’s Committee takes a decision for liquidating the assets by a majority vote.
4. The resolution plan is flouted by the debtor.

As mentioned above, no suit can be instituted by or against the corporate debtor during liquidation process. The only exception, in this case, can be through the liquidator representing the corporate debtor based on the permission of the NCLT. The liquidator shall be the same person as the Resolution Professional lest replaced. The liquidator so appointed shall constitute the liquidation estate which shall comprise of all the properties, whether financial or immovable, of the corporate debtor. The claims of the creditors may be received, verified, admitted or rejected based on the final decision of the liquidator within a prearranged time. In order to appeal to the adjudicator, the creditor gets a total of fourteen days.

Based on the priority, a security creditor may receive the proceeds from sale of assets or realize the security interest by enforcing or dealing with the secured asset as per the applicable laws related to him. He may either relinquish his security interest or realize it based on his intent. Any supplementary sum so realized shall be submitted to the liquidator. Although the security creditors will be paid by the liquidator on priority basis out of the corporate debtor’s assets, his claim shall be considered subordinate to the unsecured creditors to the extent of deficit. The distribution shall be in manner laid down in the Code. All those persons who have any sort of individual rights over the assets of the debtor shall also form a part of the liquidation procedure. There are certain funds which cannot be attached to the estate of the debtor for recovery of debts. Such funds are provident fund, gratuity fund and the pension fund because this amount belongs to the employees and workmen and hence they are given the priority with regard to these funds. Once all the assets of the corporate debtor are liquidated, the NCLT passes an order to finally liquefy the corporate debtor.

FAST TRACK INSOLVENCY RESOLUTION PROCESS

Nowadays the government is providing fast track procedures in a number of divisions like passport etc. The new Insolvency and Bankruptcy Code also provides a similar feature wherein the process shall be concluded in ninety days with a maximum extension of forty-five days. This fast track insolvency provision applies to the process of insolvency. This particular feature is made with an intention to woo the start-ups of our country so that they can complete the resolution process as soon as possible and move on.

VOLUNTARY LIQUIDATION BY CORPORATE PERSON

The Insolvency and Bankruptcy Code also provides a section wherein the corporate person can take a decision of liquidating itself if it has not committed any default and has the capacity to pay its creditors through liquidation of its assets. In order to proceed with such a liquidation process, it is mandatory for majority of the directors of the said corporate to give a declaration stating that such activity is not taking place in order to defraud any person. Such a resolution shall be approved the creditors of the company who are signifying at least two thirds value of debts of the company. The commencement of voluntary liquidation takes place on approval received by the creditors. Even in case of voluntary liquidation, provisions of liquidation process apply. On the assets being totally liquidated, NCLT passes an order for dissolution of the corporate.

BANKRUPTCY AND INSOLVENCY RESOLUTION IN CASE OF INDIVIDUAL AND PARTNERSHIP FIRMS

In case of individuals and partnerships, the Code does not provide any specific time frame within which a resolution decision has to be structured. The reason behind this leniency is that individual businesses are of diverse types and there are no set rules for functioning of their activities. Also, it is a fact that corporate person is an artificial legal entity, hence can be liquidated. But an individual is a real person, there is no way the term liquidation will fit him, he has to be declared a bankrupt. The Code applies to all those individuals and partnerships that make a default above Rs. 1000.

DISTINCT FEATURES AND EVALUATION OF THE NEW CODE

The new Code clearly demarcates the commercial facets of insolvency proceedings from that of judicial facets. The role of the Insolvency Professionals is to deal with commercial aspects i.e. to manage the affairs of the corporate debtor, facilitate formation of committee of creditors, to organise their meetings, to examine the resolution plan etc. Whereas, judicial aspects are taken care of by the National Company Law Tribunal. This helps in reducing the burden on judiciary thereby eliminating delays.

The very basis of the new Code is that, in case of default by a corporate person, the control of the said person must shift to the creditors. This Code also emphasises to do things in a time bound manner. The idea behind this is if the things are done in a time frame, there are greater chances to save a corporate from liquidation and the assets of the corporate entity can be used to best use before they are exhausted.

CONCLUSION

As India is at the bottom of the list of countries as per the World Bank’s Index on ease of resolving issues, this Code shall make a definite difference in the overall ease of doing business in our country. The Code aims at giving the power to the creditor in case of default by the debtor. It is exactly the opposite of the earlier acts and laws which is a welcome move. The stringent procedure if the Code will definitely bring a wave of positivity among the individuals and corporates. It will, in turn, attract foreign capital as most of the foreign firms have a set standard which shall be met with the help of such Codes.

The Code also covers provisions with regard to cross-border insolvency through various types of reciprocal and bilateral arrangements with other countries. The unified Code envisions an organized and time-bound procedure for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revive the ailing Indian corporate bond markets. Although the changes are a welcome move, too many changes have also caused apprehensions. But in the end, there is no doubt it is one of the best moves by the lawmakers and a wish come true for better economy.