INSOLVENCY AND BANKRUPTCY CODE, 2016 Ease of Doing Business
MAJOR IMPACT OF
THE INSOLVENCY AND BANKRUPTCY
CODE, 2016 –Ease of Doing Business
India
has a new law on bankruptcy
A historical
economic reform in India took place when the Rajya Sabha on 11th of May, 2016
passed the Insolvency and Bankruptcy Code, 2016. Insolvency & Bankruptcy
code, 2016 (IBC) received the assent of president on 28/05/2016. The code has
become an Act and provisions will be effective from a date to be notified.
Still not date of notification of the same.
The
Code as a new law, replacing over a dozen laws
The
government's efforts to clip the wings of high-profile debtors suffered a
setback in March when tycoon Vijay Mallya flew to London as bankers
pressed him to repay about Rs.9,000 crore owed by his defunct Kingfisher
Airlines.
Let
us first discuss what is Insolvency?

Technically, what exactly
does bankruptcy amount to India?
Insolvency
is the situation where the debtor is not in a position to pay back the
creditor. Bankruptcy is the legal declaration of Insolvency. So the former is a
financial condition and latter is a legal position. All insolvencies need not
lead to bankruptcy. The new code has a sequential procedure of Insolvency
resolution, failing which, it leads to Bankruptcy.
Being
bankrupt is a state of inability to repay debts to creditors. Under the
proposed law, a bankrupt entity is a debtor who has been adjudged as bankrupt
by an adjudicating authority that has passed a bankruptcy order. The
adjudicating authority would be the National Company Law Tribunal (NCLT) for
companies and limited liability partnerships, and the Debt Recovery Tribunal
(DRT) for individuals and partnership firms.
Legislature Background:
The Code
seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial
Insolvency Act,1920. In addition, it seeks to amend 11 laws.
·
Announcement at
Budget Speech 2014-15
·
Viswanathan Committee
August 2014
·
Introduced at Lok
Sabha on Dec 21 2015
·
Referred to Joint
Parliamentary Committee
·
Laid down at Rajya
Sabha on April 28, 2016
·
Passed on Lok Sabha
on May 05, 2016
·
Passed by Rajya Sabha
on May 11, 2016
·
Assent of the Horn’ble
President on May 28, 2016
·
Notified on May 28,
2016
BACKGROUND:
The code
is also helpful for ‘Ease of Doing Business”.
According to
the World Bank’s Ease of Doing
Business report, on the parameter of resolving insolvency, India
is ranked 136 among 189 countries. Company in India typically takes four
years, or twice as long as in China and Russia, with an average recovery
of 25.7 cents on the dollar, one of the worst rates in emerging markets.
The proposed
insolvency and bankruptcy law seeks to cut down the time to less than a year.
This will not only improve the ease of doing business in India, but also
facilitate a better and faster debt recovery mechanism in the country.
The move is
expected to help India move up from its current rank of 130 in the World
Bank’s ease of doing business index. The
Insolvency and Bankruptcy Code 2016, a vital reform that will make it much
easier to do business in India.
The
Insolvency and Bankruptcy Code 2016 is one of the most forward-looking and
contemporary legislations in recent times. It will establish some very basic
principles of doing business in India.
This Law promises
to make it easier to wind up a failing business and recover debts in Asia’s
third-largest economy.
The Code
extends to the whole of India except Part III of this Code shall not extend to
the State of Jammu and Kashmir. The Code contains 255 Sections and 11 Schedules.
Bankruptcy - position under
the "Constitution of India"
Under the Constitution of India 'Bankruptcy & Insolvency' appears at Entry 9 in List III being the Concurrent List which means that both Centre and State Governments can make laws relating to bankruptcy.
NEED OF
THE CODE/ OBJECTS:
The Code offers a uniform, comprehensive
insolvency legislation encompassing all companies, LLPs, partnership Firms,
individuals and other Body Corporate.
One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.

To attract Foreign Investment:
§ This Code in
specific will, when implemented in letter and spirit,
provide
a major boost to the India economy, especially on account
of
timely resolution and certainty in recovery.
§ It would be
of specific interest to international creditors and
Investors,
who are generally looking at Indian opportunities
§ According to
the government data top 50 defaulters of public sector banks had exposure in
excess of Rs 1.21lakh crore as on December 2015. "Because this law
ensures time bound recovery foreign lenders will be more open to lend to Indian
Corporate.
§ Strict Timelines: The strict timelines for resolution of
insolvency and liquidation proceedings would definitely be an incentive and
provide the requisite impetus for economic growth.
§ Closure of
Business: Facilitate stress-free and time-bound closure of businesses.
§ It’s a key
reform that will make it much easier to do business in India and help the recovery
of bad loans for banks.
Implementation:
The implementation
will remain the key, analysts point out, as the new code is presaged on the
creation of a complementary eco-system including insolvency professionals,
information utilities and a bankruptcy regulator.
Along with
the proposed changes in India’s two debt recovery and enforcement laws, it will
be critical in resolving India’s bad debt problem, which has crippled bank
lending.
I.
Whether there is any challenge before new Law?
The new
bankruptcy law isn’t a “magic wand”. It sees the benefits flowing in after 3-5
years from now.
The main
challenge will be creating a large pool of insolvency professionals who will
help with the fast implementation of the law. The new regulators will also need
to draft procedural rules for insolvency professionals and information
utilities among others.
II.
There weren’t any laws dealing with this problem
until now?
There are,
in fact, several laws that deal with insolvency for companies, such as the Sick
Industrial Companies Act, the Recovery of Debt Due to Banks and Financial
Institutions Act, and Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple
of laws dating from the time of the British Raj for dealing with individual
debtors.
However,
this multiplicity of laws has been a problem in the way of banks failing to
recover their loans.
III.
How This New Bankruptcy Law Will Help Banks?
As per the
new Bankruptcy Law, banks are now entitled to recover their loan from
defaulters within a period of 180 days. In case majority of creditors agree,
then this period can be extended to 90 days and, in case recovery of loans
doesn’t happen within this period, then the concerned company shall be
liquidated by default.
Combined
with bank cleanup, potential game changer in long run
IV.
Why is a bankruptcy law such a big deal for Bank?
India’s
banking industry is in the throes of a crisis. Bad debts are piling up at
banks. According to central bank data, stressed assets (which include gross bad
loans, advances whose terms have been restructured and written-off accounts)
rose to 14.5% of banking sector loans at the end of December 2015. That’s
almost Rs 10 trillion of loans that are stuck. Freeing up this money is crucial
for the banking sector to go about its business.
Applicability
§ Companies
under Companies Act
§ Special
Companies under special Act
§ Limited
Liability Partnerships
§ Other body
Corporate as notified by CG
§ Individuals
§ Partnership
Firms
For
what Matters:
(1)
Insolvency, (2) liquidation,
(3)
voluntary liquidation and(4) Bankruptcy
Creditors
Power enhanced under Insolvency and Bankruptcy Code 2016:
§
The Insolvency
and Bankruptcy Code 2016 empowers the operational creditors (workmen,
suppliers etc.) also to initiate the insolvency resolution process upon
non-payment of dues.
§
In order to develop
the credit market in India, in case of liquidation, financial debts owed to
unsecured creditors have been kept above the Government’s dues in the
list of priorities (waterfall).
V. How Much Time Will the Law Save?
Currently, it takes an average of 4.3 years
to resolve insolvency in India. The new law introduces a time limit on the
bankruptcy process. In the case of a default, the time-limit is 180 days,
within which the resolution has to be completed. This can be extended by
another 90 days by the adjudicator, depending on the process. Analysts say the
new time frame will help India improve its World Bank insolvency ranking.
Time – Limit for completion of Insolvency
Resolution Process:
Key Changes: This note sets out certain key changes introduced by the Code, which are summarized below:-
S. No.
|
Name of Change
|
Particular
|
1.
|
Insolvency and Bankruptcy Board of India (“Board”)
|
The Code provides for establishment of an
Insolvency and Bankruptcy Board of India (“IBBI /Board”) who will act as the
insolvency regulator. The Board will perform the role of a regulator for
insolvency and bankruptcy matters similar to the
role the Securities and Exchange Board of India performs for the securities market. The Board will exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities |
2.
|
Insolvency Professionals
|
The Bill proposes to regulate insolvency professionals
and insolvency professional agencies.
|
3.
|
Insolvency Information Utilities
|
The Code proposes for information utilities,
which would collect, collate, authenticate and
disseminate financial information from listed companies as well as financial
and operational creditors of companies.
An individual insolvency database is also
proposed to be set up for the purpose of providing information on the
insolvency status of individuals.
|
4.
|
Insolvency Adjudicating Authority
|
The adjudicating authority will exercise
jurisdiction over cases by or against the debtor.
|
5.
|
Moratorium
|
One of the most significant features of the
Code is the grant of moratorium during which creditor action will be stayed.
This is not automatic and has to be granted by the Adjudicating Authority on
the recommendation of the Resolution Professional
|
6.
|
Corporate Liquidation
|
The commencement of liquidation process takes place
on:
a) recommendation of the resolution plan;
b) on account of failure to submit the
resolution plan within the prescribed period or contravention of the
resolution plan; and
c) Based on vote of majority of the creditors
|
7.
|
Liquidation Estate
|
To the extent assets held by the debtor belong
to it, then will form part of the liquidation estate. Assets will be
distributed by
the liquidator in the manner of priorities laid
in the law
|
8.
|
Cross border insolvency
|
The Code provides that the Central Government
can enter into agreements with any country outside India for enforcing
provisions of the Code and notify applicability of the same from time to
time. Further, assets of the debtor located outside India (in countries with
whom India has reciprocal arrangements) may also be included for the purpose
of the insolvency resolution process and/or liquidation before the
Adjudicating Authority.
|
9.
|
Timelines
|
Shortening time required in the insolvency process from
filing a bankruptcy application to the time available for filing claims and
appeals.
The entire process of resolution to be completed within 180
days, extended by 90 days with the consent of 75% of the creditors if
required. Failure to resolve insolvency within this time frame may result in
selling of debtors assets to recover the dues.
|
v
Insolvency Professionals: A pool of licensed ‘Insolvency
Professionals’ (IPs) will be responsible to carry out the resolution process on
behalf of affected entities. Under the oversight of the Board, these agencies
will develop professional standards, codes of ethics and exercise a disciplinary
role.
Three sets of Resolution;
i.
Professionals
are sought to be appointed – Interim Resolution Professional,
ii.
Final Resolution Professional
iii.
Liquidator
v Insolvency
Adjudicating Authority:
DRT: The Debt Recovery
Tribunal (“DRT”) shall be the Adjudicating Authority with jurisdiction over
individuals and unlimited liability partnership firms. Appeals from the order
of DRT shall lie to the Debt Recovery Appellate Tribunal (“DRAT”). .
NCLT: The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities and other entities with limited liabilities. The jurisdiction of the NCLT shall be based on the registered office of the debtor. Appeals from the order of NCLT shall lie to NCLAT. .
NCLAT: The National Company Law Appellate Tribunal (“NCLAT”) shall be the appellate authority to hear appeals arising out of the orders passed by the Board in respect of insolvency professionals or information utilities.
NCLT: The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities and other entities with limited liabilities. The jurisdiction of the NCLT shall be based on the registered office of the debtor. Appeals from the order of NCLT shall lie to NCLAT. .
NCLAT: The National Company Law Appellate Tribunal (“NCLAT”) shall be the appellate authority to hear appeals arising out of the orders passed by the Board in respect of insolvency professionals or information utilities.
Supreme Court: The Supreme Court will have appellate jurisdiction over the orders of the DRAT or the NCLAT.
Benefits
of the Code:
i.
Code to help wind
up sick businesses: On the parameter of resolving
insolvency, India is ranked 136 among 189 countries. At present, it takes more
than four years to resolve a case of bankruptcy in India, according to the
World Bank. The code seeks to reduce this time to less than a year.
ii.
Crossborder: insolvency The bankruptcy code has provisions to address
crossborder insolvency through bilateral agreements with other countries. It
also proposes shorter, aggressive time frames for every step in the insolvency
process—right from filing a bankruptcy application to the time available for
filing claims and appeals in the debt recovery tribunals, National Company Law
Tribunals and courts.
iii.
Protect workers of
a bankrupt Company: To protect workers’ interests, the
code has provisions to ensure that the
money due to workers and employees from the provident fund, the
iv.
pension fund and gratuity fund
shouldn’t be included in the estate of the bankrupt company or individual.
Further, workers’ salaries for up to 24 months will get first priority in case
of liquidation of assets of a company, ahead of secured creditors.
v.
Fast Track
Corporate Insolvency Resolution Process: The Code has
provisions for fast track corporate insolvency resolution process shall be
completed within a period of ninety days from the insolvency commencement date.
vi.
Voluntary
Liquidation of Corporate Persons, Firms and Individuals: The Code also provides ways for a corporate person, Firms &
Individuals who intends to liquidate itself voluntarily and has not committed
any default may initiate voluntary liquidation proceedings.
Conclusion:
The intention of the Code is to do away with the antiquated
existing laws covering aspects of insolvency and bankruptcy. Though the Code
sets out certain provisions to amend and override the existing laws to avoid
future litigation, a clear provision needs to be introduced to explicitly state
the existing laws being repealed by the introduction of this legislation.
Thus it is a comprehensive and systemic reform, which will give a
quantum leap to the functioning of the credit market. It would take India from
among relatively weak insolvency regimes to becoming one of the world’s best
insolvency regimes. It lays the foundations for the development of the
corporate bond market, which would finance the infrastructure projects of the
future. The passing of this Code and implementation of the same will give a big
boost to ease of doing business in India.
_________________________________________________________________________________
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.
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