Insolvency and Bankruptcy Code, 2016

After the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha on 21st December 2015, it was referred to the Joint Committee. On such a referral the Committee had presented its recommendations and a modified Bill based on its suggestions. In May 2016 both the Houses of Parliament passed the Insolvency and Bankruptcy Code, 2016. The major objective of this economic reforms is to focus on creditor drove insolvency resolution.

Insolvency vs Bankruptcy

Insolvency and bankruptcy are two very different terms and with distinct meanings. Insolvency refers to a situation where a person is going to financial misery due to lack of funds. Bankruptcy is a court directive that outlines exactly how an insolvent borrower would manage his/her responsibilities and/or have resources settled to pay off the creditors. Hence, the Insolvency and Bankruptcy Code, aims to provide comprehensive relief for all stakeholders who are involved in the financial matters of an insolvent person or entity.

Key Highlights

Insolvency Resolution Process: During this process, the financial creditors assess if the debtor’s business is viable enough to continue its business and other options for its revival and rescue.
Liquidation: This is inititated when the insolvency resolution process does no help and eventually fails or when the financial creditors decide that winding down and distributing the assets of the debtor is the best choice forward.

Insolvency Resolution Process (IRP)

The Insolvency Resolution Process offers a collective mechanism to various lenders to deal an overall distressed position of a certain corporate debtor. This is a major change from the exisiting legal framework under which the primary onum to initiate a reorganisation process lies with the debtor, and where lenders may choose to pursue distinct actions for the recovery, security enforcement and debt restructuring.

The Insolvency and Bankruptcy Code states the following steps to execute IRP.

Commencement of the Insolvency Resolution Process

An operational creditor (for an unpaid operational debt) or a financial creditor (for a defaulted financial debt) may inititae an Insolvency Resolution Process against a corporate debtor at the NCLT or the National Company Law Tribunal. The corporate debtor who defaulted, its employees and shareholders may also initate a voluntary insolvency proceedings.

Moratorium

The National Company Law Tribunal has ordered a moratorium on a debtor’s operations for the period of the Insolvency Resolution Process. This generally means a calm period during which there would be no judicial proceedings for recovery, sale or transfer of assets, enforcement of security interest, or the termination of essential contracts that can be inititated against the debtor.

Appointment of a Resolution Professional

The National Company Law Tribunal would appoint an insolvency professional or a resolution professional to administer the Insolvency Resolution Process. The professional’s primary function is to take over the power to manage the corporate borrower and to opearte its business as a going concern under the directions of a committee of creditors. This is very similar to the process of the UK insolvency laws, but varies from the “debtor in possession” where the debtor’s management retains control over the business while the bankruptcy professional has the power to oversee the business to prevent any asset stripping on the part of its promoters.

Therefore, the Code sllows a shift of control from a defaulting debtor’s management to the control of its creditors. Here, the creditors drive the business of the defaulter debtor where the Resolution Professional acts as their agent.

Creditors Committee and Revival Plans

A Resolution Professional would identify the financial creditors and forms a creditors committee. Any operation creditor who are above a certain threshhold would be allowed to attend the meetings of the committee although, they would not be given the power to vote. Every decision taken by the creditors committee would require a 75 percentage of majority vote. The corporate debtor and all its creditors would be bound by the decisions taken by the creditors committee.

The proposals for the rescue and revival of the defaulting debtor would be considered by the creditors. The committee would eventually choose an option to proceed with the revival plan or the liquidation of the entity within a period of 180 days. A one-time extension of 90 days of the time period could be granted. Any individual may submit a proposal to revive, although it must provide for the payment of the operational debts to the extent of the liquidation waterfall necessarily.

The Code does not go in detail about the types of revival plans that may be adopted. Revival plans may include fresh finance, the sale of assets or change of management and so on.

Liquidation

Under the Insolvency and Bankruptcy Code, a corporate debtor may be put to liquidation for the following circumstances.

When 75 per cent of the committee of the creditor finalises to liquidate the corporate debtor at any given time during the during the insolvency resolution process.
When the committee of the creditor does not approve a resolution plan within the given time period of 180 days or within the extended time period of 90 days.
When the NCLT does not agree with the resolution plan that was submitted and rejects it on technical grounds.
When the debtor contravens the resolution plan that was initially agreed upon and an affected individual makes an application before the NCLT to liquidate the corporate debtor.

Once the National Company Law Tribunal sanctions and passes an order of liquidation of the corporate debtor, a moratorium is imposed on the legal proceedings that are pending against the corporate debtor, The assets of the corporate debtor including the proceeds of the liquidation vests in the liquidation estate.

Priority of Claims

The Code brings significant changes to the priority waterfall for the distribution of liquidation proceeds.

Secured debt along with the workmen dues for the preceding 24 months would be ranked the highest in priority after the costs of the insolvency resolution which includes any interim finance. The Central and State Government dues are considered a priority after the claims of the secured creditors, employee dues, workmen dues and other unsecured financial creditors. The Government dues were in priority immediately under the claims of the secured creditors and workmen under the earlier regime.

A secured creditor has the option to choose to realise his security and obtain proceeds from the sale of the secured assets in first priority upon liquidation. The secured creditors must contribute any excess proceeds to the liquidation trust if he enforces his claims outside the liquidation. Furthermore, the secured creditor will be a junior to unsecured creditors, in the case of a shortfall in recovery, to the extent of the shortfall.

Purpose of the Act

Combine and modify the laws involving restructuring and insolvency resolution of corporate persons, partnership firms, and individuals, in a manner which is time-bound.
For expanding the value of the asset of such persons.
To encourage entrepreneurship.
Obtainability of credit.
Poise the interests of all stakeholders including an amendment in a priority order of payment of Government dues.

The Code

he Government of India introduced and implemented TheInsolvency and Bankruptcy Code, 2016 by passing the bill in the November of 2015 after it was recognised that essential reforms were required in the bankruptcy and insolvency regime and to improve the business environment and alleviate distressed credit markets. After the general consultation process and recommendations obtained from a joint committee of the Parliament, the Code was passed by both the houses of the Parliament. The effect of this Code shall be seen in due course of time when the formation of institutional infrastructure and implementing rules as envisioned in the Code.

The Insolvency & Bankruptcy Code provides a uniform and comprehensive insolvency legislation that applies to all companies, individuals and partnerships with an exception to financial firms. The Government has been drafting a proposal for a separate framework for bankruptcy resolution in failing banks and financial sector entities.

One of the primary features of the Code is that it permits creditors to assess the viability of an individual debtor for a business decision and finalise a plan for its efficient revival or a quick liquidation. A new institutional that comprises for a regulator, information utilities, insolvency professionals and adjudicatory mechanisms was created by the implementation of the Code that would facilitate a formal and time-bound liquidation and insolvency resolution process.

Applicability of the Code

Any company incorporated under the Companies Act, 2013 or under any previous law.
Any other company governed by any special act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such Special Act.
Any Limited Liability Partnership under the LLP Act 2008.
Any other body being incorporated under any other law for the time being in force, as specified by the Central Government in this regard
Partnership firms and individuals

Key Objectives of the Code

an interest of all the stakeholders of the company, so that they enjoy the availability of credit
the loss that a creditor might have to bear on account of default

The objective behind Insolvency and Bankruptcy Code, 2016 are listed below-

To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals.
To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e. 180 days).
To maximize the value of assets of interested persons.
To promote entrepreneurship
To increase the availability of credit.
To balance all stakeholder’s interest (including alteration). Balance to be done in the order of priority of payment of Government dues.
To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.
To establish higher levels of debt financing across a wide variety of debt instruments.
To provide painless revival mechanism for entities.
To deal with cross-border insolvency.
To resolve India’s bad debt problem by creating a database of defaulters.

FAQs

What is the role of the Insolvency and Bankruptcy Board of India (IBBI)?

The IBBI is the regulatory body responsible for overseeing the implementation of the IBC. It regulates the functioning of insolvency professionals, insolvency professional agencies, and information utilities.

Who can initiate the insolvency resolution process?

The insolvency resolution process can be initiated by:

Financial creditors
Operational creditors
The debtor itself

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