Parliament Passes Insolvency and Bankruptcy Code
Following its passage in the Lok Sabha a week ago, the Rajya Sabha on 11 May 2016 passed the much discussed Insolvency and Bankruptcy Code 2016 (the Code). Once the Code receives the President’s assent it will become a law in India.
This initiative is part of the country’s focus to improve its bankruptcy law. The new law will ensure time bound settlements of insolvency, business revival and the creation of a vast database of insolvency resolution amongst other such goals. This is an effort by the central government to improve the country’s ranking in the ease of doing business in India.
Key highlights of the Code are as follows:
- The Code seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it amends 11 other laws including the Companies Act, 2013, Recovery of Debt Due to Banks and Financial Institutions Act, 1993, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- The Code specifies a framework for the resolution of insolvency for (i) companies and limited liability partnerships, and (ii) individuals and partnership firms.
- The Code provides a step by step time-bound process of insolvency settlements in respect of companies, firms and individuals. It sets a timeline of 180 days.
- If insolvency cannot be resolved, assets of borrowers may be sold to repay the creditors.
- The National Company Law Tribunal (NCLT) will adjudicate on insolvency resolution for companies and LLPs, whilst the Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals and partnership firms. The adjudicating order of NCLT and DRT will be heard by the National Company Law Appellate Tribunal and the Debt Recovery Appellate Tribunal respectively.
- The Code creates licensed insolvency professionals (IPs), who will conduct the insolvency process. These IPs will be members of insolvency professional agencies (IPAs). The IPAs will furnish performance bonds equal to the assets of a company under insolvency resolution.
- Information utilities (IU) will be established to collect, collate and disseminate financial information to facilitate the insolvency resolution.
- The Code envisages setting up an Insolvency and Bankruptcy Board to regulate IPs, IPAs and IUs.
- The bankruptcy code has enabling provisions to address cross-border insolvency through bilateral agreements with other countries.
- Under the Code, the creditors committee may choose to either revive a company or liquidate its assets for repayment of the debtor’s outstanding dues. In case of liquidation, the assets will be distributed based on an order of priority.
- The process involves1:
- Initiation of insolvency resolution may be the debtor or creditor in the event of default. The IP administers the process. The process lasts for 180 days and any legal action against the debtor is prohibited during this period.
- A committee consisting of the financial creditors who lent money to the debtor will be formed by the IP. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
- If the debtor goes into liquidation, IP administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to IP, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.
1. The Insolvency and Bankruptcy Code: All you need to know http://www.prsindia.org/theprsblog/?tag=bankruptcy