INSOLVENCY & BANKRUPTCY CODE- BRIEF BACKGROUND
INSOLVENCY & BANKRUPTCY CODE-
BRIEF BACKGROUND
BACKGROUND:
Article 19 (1)(g) of the Constitution of
India gives freedom to practice any profession or to carry on any occupation,
trade or business to the citizens of India, there are restrictions on closure
of any industrial undertaking. Such restriction is justified on the ground that
it is in public interest to prevent unemployment. As a result of such policy
there is a freedom to undertake any industrial activity, but there is no
freedom to exit.
Jurisdiction:
It extends
to the whole of India. Provided that Part III (INSOLVENCY RESOLUTION AND
BANKRUPTCY FOR INDIVIDUALS AND PARTNERSHIP FIRMS) of this Code shall not
extend to the State of Jammu and Kashmir.
Effectiveness of the Code:
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.
Even those
different dates may be appointed for different provisions of this Code and any
reference in any such provision to the commencement of this Code shall be
construed as a reference to the commencement of that provision.
Applicability: The
provisions of this Code shall applying relation to their insolvency, liquidation,
voluntary liquidation or bankruptcy, as the case may be.
§ Companies
under Companies Act
§ Special
Companies under special Act
§ Limited
Liability Partnerships
§ Other body
Corporate as notified by CG
§ Individuals
§ Partnership
Firms
Purpose of I & B Code:
The incidence of corporate
failure has adverse implications for various stakeholders including the
shareholders, creditors, employees, suppliers and customers. Corporate failure
can also have a ripple effect on the economy, affecting the solvency of many
other businesses. Therefore, it is necessary that there be a highly efficient
corporate insolvency regime to improving the Corporate Insolvency in India.
One of the
main purposes of this Code is to suggest certain immediate reforms for
improving the Corporate Insolvency regime in India.
General Reasons Behind
Insolvency:
The main reasons behind insolvency are primarily poor
management and financial constraints. This is much more prevalent in smaller
companies. Specifically, the reasons are:
• Market – Company did not recognize the
need for change
• Bad debts – obviously money owed by
customers
• Management – failure to acquire
adequate skills, imprudent accounting, lack of
information systems
• Finance – loss of long term finance,
over gearing or lack of cash flow
• Knock on effect – i.e. from other
insolvencies
• Other – for example excessive overheads
etc
THE LEGAL LANDSCAPE
‘Bankruptcy and Insolvency’ falls in List
III i.e. concurrent list. Therefore both the state as well as the centre has
the power to make law on the subject. In case of conflict between laws made by
the Parliament and State Legislature the parliamentary law will prevail. The
stream of insolvency laws in India can be segregated under following heads:
Companies
There are three
laws (Companies Acts of 1956 and 2013; and Sick industrial Companies Act 1985)
which handle the corporate insolvency procedures in India.
REVIVAL AND
REHABILITATION OF SICK COMPANIES:-
The Sick
Industrial Companies (Special Provisions) Act, 1985 (“SICA”) remains to date
the only Central rescue law in force (although, it applies to industrial
Companies only). This is because other legislative attempts to overhaul the corporate rescue regime in India have not been made operational yet.
Companies only). This is because other legislative attempts to overhaul the corporate rescue regime in India have not been made operational yet.
*THE SICK
STORY*. _*Sick Companies provisions were themselves sick.*_
Following enactments were brought in:-
1. SICA -1985 read
with 1991 &1993 Amendment
2.
Companies
(Amendment ) Act, 2002_ - Chapter
VIA of the CA 1956, inserted by the Companies (Second Amendment) Act, 2002,
which provided for the National Company Law Tribunal (“NCLT”) to exercise
powers in relation to sick industrial companies could not be notified for
commencement because the operationalization of the NCLT remained entangled in
litigation
3. SICA (Special
Provision) Repeal, Act - Not yet effective & now amended by IBC
4. Companies Act,
2013- Never made effective & now omitted by IBC
5. IBC - provisions
to be notified
Therefore,
as of today, all aspects of rehabilitation of sick/potentially sick industrial
companies continue to be governed by SICA and there is no similar statutory
rescue mechanism for other categories of companies (other than mechanisms under
certain statutes applicable to banking companies and some State Relief
Undertaking Acts.
LIQUIDATION/WINDING-UP OF COMPANIES:-
The current
legal framework governing the winding-up of companies is contained in the CA
1956. The provisions contained in Chapter XX of the CA 2013 relating to winding
up of companies have not been notified yet. The winding up proceedings under
the CA 1956 are carried out voluntarily (members’ voluntary liquidation, which
is a liquidation procedure for solvent companies, and creditors’ voluntary
liquidation), or compulsorily by the High Court. It may be noted that
insolvency of a company is only one of the grounds for compulsory winding up a
company. I & B code, 2016 delete all the section of Voluntary winding up
from the Companies Act, 2013.
S. No.
|
Section
|
Particulars
|
|
Complete process of Voluntary
Winding up
|
|
1.
|
304
|
Circumstances in
which company may be wound up voluntarily
|
2.
|
305
|
Declaration of
Solvency in case of proposal to wind up voluntarily
|
3.
|
306
|
Meeting of
creditors
|
4.
|
307
|
Publication of
Resolution to wind up voluntarily
|
5.
|
308
|
Commencement of
voluntary Winding up
|
6.
|
309
|
Effect of
Voluntary Winding up
|
7.
|
310
|
Appointment of
Company Liquidator
|
8.
|
311
|
Power to remove
and fill the vacancy of company liquidator
|
9.
|
312
|
Notice of appointment
of company Liquidator to be given to the Registrar
|
10.
|
313
|
Cesser of
Board’s Power on appointment of company liquidator
|
11.
|
314
|
Power and duties
of Company Liquidator in Voluntary Winding up
|
12.
|
315
|
Appointment of
Commitees
|
13.
|
316
|
Company
Liquidator to submit the report on progress of winding up
|
14.
|
317
|
Report of
Company Liquidator to Tribunal for the Examination of persons
|
15.
|
318
|
Final meeting
and dissolution of the company
|
16.
|
319
|
Power of company
liquidator to accept the shares etc. as the consideration for the sale of
property of the company
|
17.
|
320
|
Distribution of
the property of the company
|
18.
|
321
|
Arrangement when
binding on Company and liquidator
|
19.
|
322
|
Power to apply
to Tribunal to have questions determined Cost of Voluntary Winding Up
|
20.
|
323
|
Cost of Volunary
winding Up
|
21.
|
325
|
Application of
insolvency rules in winding up of insolvent Companies.
|
22.
|
The heading
"Part II.—Voluntary winding up" shall be omitted
|
|
23.
|
342(2)(3)(4)
|
Prosecution
of delinquent officers and members of Company.
|
Individual and Partnership
Personal insolvency is preliminary governed under
two acts in Indi:
i.
The Presidency Towns Insolvency Act, 1909 (for the erstwhile
presidency towns, i.e. Kolkata, Mumbai and Chennai) and
ii.
The Provincial Insolvency Act, 1920 (for the rest of India).
Though above
are the Central Law, it should be noted that both these Acts have a number of
state specific amendments. The substantive provisions under the two Acts are
largely similar. There have not been any substantial changes to this regime
over the years and it has proved to be largely ineffective in practice
Limited Liability Partnership: The Limited
Liability Partnership Act, 2008 includes provisions not only related to winding
up and dissolution of a LLP but also compromise, arrangement or reconstruction
of LLP. In addition, the LLP Rules, 2012
contain detailed provision regarding the procedure of winding up and
dissolution of LLP in various circumstance, including insolvency.
Co-operative Society
Co-operative
societies fall under the State List in the Constitution and there are State
specific legislations for co-operative societies which often include provisions
relating to winding up. In addition,
§ The
Co-operative Societies Act, 1912 and
§ The
Multi-State Co-operative Societies Act, 200212,
which are
both central acts, also include provisions for the dissolution and winding up
of co-operative societies registered under them. However, these Acts do not
provide for the rehabilitation or revival of sick co-operative societies.
ASSET RECONSTRUCTION UNDER THE SARFAESI ACT:-
The SARFAESI
Act envisages specialized resolution agencies in the form of Asset
Reconstruction Companies to resolve Non-performing Assets and other specified bank loan under distress. This mechanism is largely seen as a debt recovery tool and not an insolvency resolution tool (i.e. it does not facilitate rescue in practice).
Reconstruction Companies to resolve Non-performing Assets and other specified bank loan under distress. This mechanism is largely seen as a debt recovery tool and not an insolvency resolution tool (i.e. it does not facilitate rescue in practice).
DEBT ENFORCEMENT/
RECOVERY:-
The RDDBI Act set up the
framework for the establishment of Debt Recovery Tribunals (“DRTs”) and the
Debt Recovery Appellate Tribunals (“DRATs”) in India. The primary objective of
RDDBFI Act was to ensure speedy adjudication of cases concerning recovery of
debts due to banks and notified financial institutions. Cases pending before
the civil courts where the debt amount exceeded Rs 10,00,000 were automatically
transferred to DRT. There are some key
differences between DRTs and ordinary civil courts.
STATE RELIEF UNDERTAKING ACTS:-
Several State governments have
their own Relief Undertaking legislations that seek to provide for
rehabilitation of sick undertakings established or funded by the government.
Many such legislations were specifically enacted for the purpose of preventing
unemployment (and thus allowed many unviable businesses to continue operating
even at the cost of creditors).
THE INDUSTRIES DEVELOPMENT AND REGULATION ACT, 1951
It may be noted that the
Central Government is authorised to take-over the management of a scheduled
industrial company under the Industries Development and Regulation Act, 1951
several grounds and provide relief similar to those available under insolvency
laws (suspension of claims etc.)
Present nature of Insolvency Process in India
Conclusion:-
Though there are no prefect
laws and bankruptcy code anywhere in the world, the presence of a strong
framework is essential to deal with corporate insolvency and creditor and
debtor protection in a hassle-free manner. The Insolvency and Bankruptcy Code
would provide such environment to ensure easy exit for sick companies and help
the country to improve its position in easy of doing business.
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