In this blogpost, Sonal Srivastava, Student, Amity Law School, Lucknow, writes an overview of the Insolvency and Bankruptcy Code, 2015.
There is a saying that “Capitalism without bankruptcy is like Christianity without hell” and in India, the pursuit of bankruptcy proceedings can be a stressful event. The reason for the same is that India does not have a single bankruptcy code; instead, it works on an assortment of law that governs insolvency proceedings. The present laws are inefficient because they operate at a painfully slow pace as the courts try to interpret the various laws governing insolvency. The Government of India thereby decided to bring forth a new code on bankruptcy and thus introduced the Insolvency and Bankruptcy Code, 2015 in the Lower House of the Parliament on 22nd December 2015 to consolidate and amend the laws relating to insolvency. The present article aims to cover the various aspects of insolvency process and the new code on bankruptcy.
What does the term “bankruptcy” mean?
“Bankruptcy” connotes to a legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets.
The two main objectives of bankruptcy proceedings are- (1) a fair settlement of the legal claims of the creditors through an equitable distribution of debtor’s assets and (2) to provide the debtor an opportunity for a fresh start.
Why does India need a bankruptcy law?
The failure of business impacts employees, shareholders, creditors and the economy on a whole. In a country like India because of the delay in making decisions on the viability of businesses, the tactics involved by the promoters in delaying the process of reorganization, attempts to stop selling off assets, the changes in management and the litigation that goes on and on makes the drag on the new business units, economic growth and income generation a significant issue. Though there are laws on bankruptcy such as Security and Enforcement, Corporate Debt Restructuring (CDR), Sick Industries Act (SICA) yet they have proved to be inept in working because of inefficient and weak enforcement and court delays.
India’s plan for new bankruptcy code
PROPOSALS BY T.K VISHWANATHAN COMMITTEE– A committee headed by former Law Secretary T.K Vishwanathan had proposed the following-
- A time period of 180 days, extendable by 90 days to deal with resolving cases of Insolvency and Bankruptcy.
- During the period of resolving the issue of bankruptcy, the management of the business or the firm would vest in the hands of a Resolution Professional that is a new class of professional equipped to deal with such cases and who would be supervised by a proposed New Regulator.
- The proposal also envisages them getting into talks to revive firms and work out a repayment plan.
FINANCIAL SECTOR INSOLVENCIES– The Financial Sector Legislative Reforms Commission (FSLRC) had recommended the creation of a resolution corporation to monitor financial firm and intervene before they go bust. It envisages the aim to either close the firms that cannot be revived or change their management to protect the investor or depositors. The proposal was to promote the Deposit Insurance and Credit Guarantee Corporation (DICGC) as Resolution Corporation.
- THE INSOLVENCY AND BANKRUPTCY CODE, 2015– The Union Finance Minister Arun Jaitley introduced The Insolvency and Bankruptcy Code, 2015 in the Lower House of the Parliament on 22nd December 2015, paving the way for a complete overhaul of the current insolvency and bankruptcy system in the country. The bill seeks to consolidate and amend the laws relating to reorganization and insolvency resolution and would also apply to partnership firms and individuals. The bill being a money bill connotes that there would be a limited role of Rajya Sabha, thereby brightening its chances of passage.
Important aspects of the insolvency and bankruptcy code, 2015
- The code would apply to Limited Liability Partnerships (LLP’s), partnership firms and companies.
- National Company Law Tribunal and the Debt Recovery Tribunal shall be the designated bodies.
- Insolvency and Bankruptcy Board of India shall regulate the agencies and the professionals involved.
- An Insolvency and Bankruptcy Fund of India would be set up.
How the law would work
Start of proceedings
On default of debt, the financial creditor, operational creditor or the corporate itself can start insolvency proceedings.
- The Financial Creditor can file proceedings with the National Company Law Tribunal along with the proof of default.
- The creditor shall also suggest an interim resolution professional to manage the defaulter.
They have to give a 10-day notice to the debtor for repayment before taking action.
The defaulting company can start proceedings by making a reference to the Adjudicating Authority.
Time to recognize default
Tribunal or the Adjudicating Authority to determine the default within 14 days.
Admission of application
On satisfaction of the default and the antecedents of Resolution Professional by the tribunal, it shall admit the application.
Declaration of moratorium
The Adjudicating Authority shall declare the moratorium to protect the assets and allow the company to function.
Interim resolution professional
The Interim Resolution Professional shall be appointed within 14 days from the date of admission to run the company.
Committee of creditors
The committee of creditors shall be set up to draft resolution plan and shall include all financial creditors of the debtor. They need to take the decision by at least 75% vote.
Appointment of resolution professional
The committee of the creditor shall confirm to the Interim Resolution Professional one or may appoint a new one who shall be responsible for managing resolution process.
Any stakeholder can present a resolution plan, and the committee of creditors shall approve one plan and present it before the Adjudicating Authority.
Sanctionaing of plan
On being satisfied with the plan, the Adjudicating Authority may approve the same, and the plan shall be binding on all the stakeholders.
Liquidation: Adjudicating authority can order liquidation if-
- Resolution plan is not as per rules.
- No resolution plan submitted within the specified time limit.
- Committee of Creditors request for liquidation.
- Debtor Company violates the terms of a resolution
- Resolution Professional shall be appointed as Liquidator.
- The law enumerates the details of Liquidation Process.
Strict time limit
- The code provides for 180 days time limit for completing insolvency process.
- In certain cases, the time limit of 180 days could be extended by 90 days.
Fast track insolvency resolution
- It is available for a certain class of debtors.
- The insolvency process has to be completed within 90 days with maximum 45 days extension.
How will thw law help
- It shall protect the interests of the lenders and creditors of the company.
- It shall ensure that the productive assets are released quickly.
- It shall allow failed businesses to wind up.
- It shall help entrepreneurs by quick exits.
Thus the Insolvency and Bankruptcy Code, 2015 once passed shall provide for an efficient and swift insolvency regime and shall ensure greater availability of credit and funds for businesses by freeing up capital thereby boosting innovation and productivity.