The Insolvency and Bankruptcy Code, 2016 – Procedure and Key Highlights

The Insolvency and Bankruptcy Code, 2016

“An act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

 In a country like India, where business entities not only brings revenue and jobs but also creates a sense of economic growth in the country, it is one of the most essential business supporting element to bring in a mechanism to settle struggling or bankrupt entities without causing damage to any contributor in the economy. Continuation of Non Performing assets in any economy leads to locking of funds and physical assets, which generally lead as a cause for big concern for the lender who have provided loan and financial assistance to the NPA business entity.

Over three lacs crore rupees of public money is stuck in NPA (non-performing Assets). The World Bank says that resolving insolvency takes over four years in India and the average recovery is 25 cents to the dollar. The sick industrial companies act SICA and the Board of Industrial Financial Reconstruction BIFR had both failed to speedily revive or liquidate companies and recover assets and so a committee appointed by the government has proposed a New Bankruptcy Code.

Recognizing that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially constituted ‘Bankruptcy Law Reforms Committee’ (BLRC) under the Ministry of Finance.

UNLOCKING “THE INSOLVENCY AND BANKRUPTCY CODE, 2016”

Lets start from the basic structure of the Code as to what it has in store for us.

There are 255 sections, 11 schedules, 5 parts and 21 chapters under IBC. The Code repeals the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920, as well as amends various laws, including:

  1. Indian Partnership Act, 1932
  2. The Companies Act, 2013
  3. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  4. Limited Liability Partnership Act, 2008
  5. Sick Industrial Companies (Special Provisions) Repeal Act, 2003

 FIVE PARTS OF THE CODE

  • Part I – Preliminary –Section 1 to 3
  • Part II – Insolvency resolution and liquidation for corporate bodies – Section 4 to 77 with 7 chapters
  • Part III – Insolvency resolution and bankruptcy for individuals and partnership firms – section 78 to 187 with 7 chapters
  • Part IV – Regulation of Insolvency Professionals, agencies and information utilities – section 188 to 223 with 7 chapters
  • Part V – Miscellaneous

 

AGENCIES AND INTERMEDIARIES INVOLVED UNDER AN INSOLVENCY AND BANKRUPTCY PROCESS:

  • The Insolvency Regulator (IBBI)
  • Insolvency Professionals (IP’s)
  • Insolvency Professional Agencies
  • Information Utilities (IU)
  • Adjudicatory authorities (NCLT)

Duties, powers and responsibilities of every intermediary has been precisely mentioned in the code.

SALIENT FEATURES OF THE CODE

Adjudicating authority

  • NCLT shall deal with the matters relating to corporate insolvency, LLP and enforcement of personal guarentees related to corporate debtors.
  • DRT shall deal with individual insolvency and partnership.
  • Adjucating authority would have exclusive jurisdiction to deal with insolvency related matters, no injuction shall be granted by any ocourt, tribunal or authority in respect of any action take, or to be taken, in pursuance of any power conferred on the NCLT/DRT.

Financial and operational creditors.

  • The code makes a disticition between creditors holding financial debt and criditors holding operational debt. Financial debt and operational debt are as as following:
    1. Financial Debt- means debt extended against consideration for the time value of money, and includes:
      1. Term Loans, working capital loans etc.
      2. Non fund based limites such as bank guarantees.
  • Bonds, notes, debentures, loan stock or any similar instrument;
  1. Lease or hire purchase agreements.
  2. Recievables sold or discounted (other than any recievvables to the extent they are sold on a non-recourse basis)
  3. Any other transaction, having commercial effect of a borrowing
  • Certain types of derivative transactions.
  • Liabilities in respect of guarantees or indemnities.

Operational debt—means debt incurred in exchange for the proviosions of goods or services (including emplyment) or debt inrespect of the payment of dues arising under any law for the time bein in force payable to the central government, any state govt or any other regulator.

PROCEDURE OF INSOLVENCY RESOLUTION PROCESS (IRP) UNDER THE CODE:

Instead of continuing the existing resolution regime the code seeks to shift the responsibility on the shoulders of the creditor to initiate the insolvency resolution process (IRP) against the corporate debtor. It empowers all class of the creditors (secured, unsecured lenders, employees and trade creditors, regulatory authorities) to trigger a resolution process in case of non-payment of valid claim. The code not only provides for immediate suspension of the board of directors and promoters powers in the company but also enables a stand still period which provides stakeholders time to facilitate discussion and arrive at a common resolution rather than running independent process.

For better clarity of the concept we may simplify it by following:

  • IRP cannot be initiated unless there is a default which is beyond the Minimum threshold.
  • IRP cannot be initiated against the financial service provider.
  • Persons not entitled to initiate IRP (Section 11):
  • a corporate debtor undergoing a corporate insolvency resolution process; or
  • a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application;
  • a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
  • a corporate debtor in respect of whom a liquidation order has been made
  • Who can initiate/apply for IRP:
  • Financial Creditor
  • Operational Creditor
  • Corporate Applicant
  1. INSOLVENCY RESOLUTION AND LIQUIDATION PROCESS FOR CORPORATES

If the default is above Rs.1 Lakh (may be increased up to Rs.1 Cr by the Government, by notification), the creditor may initiate insolvency resolution process.

 

Conclusively we can say that the Code proposes TWO independent stages:

 

 

INSOLVENCY RESOLUTION PROCESS UNDER THE CODE

  1. A financial creditor (himself or jointly with other financial creditors), an operational creditor or the corporate debtor (through Corporate applicant i.e. corporate debtor itself; or an authorized member, partner of corporate debtor; or a person who has control and supervision over the financial affairs of the corporate debtor) may initiate corporate insolvency resolution process in case a default is committed by corporate debtor. An application can be made before the National Company Law Tribunal (NCLT) for initiating the resolution process. Operational creditor needs to give demand notice of 10 days to corporate debtor before approaching the NCLT. If corporate debtor fails to repay dues to operational creditor or fails to show any existing dispute or arbitration, then the operational creditor can approach NCLT.
  1. Corporate insolvency process shall be completed within 180 days of admission of application by NCLT. Upon admission of application by NCLT, Creditors’ claims will be frozen for 180 days, during which time NCLT will hear proposals for revival and decide on the future course of action. And thereupon, no coercive proceedings can be launched against the corporate debtor in any other forum or under any other law, until approval of resolution plan or until initiation of liquidation process.
  1. NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the Insolvency and Bankruptcy Board (hereinafter, “the Board”) within 14 days of acceptance of application. Interim IP holds office for 30 days only. Interim IP takes control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities.
  1. NCLT causes public announcement to be made of the initiation of corporate insolvency process and calls for submission of claims by any other creditors.
  1. After receiving claims pursuant to public announcement, interim IP constitutes the creditors’ committee. All financial creditors shall be part of creditors’ committee and if any financial creditor is related party of corporate debtor, then such financial creditor will not have any right of representation, participation or voting. Operational creditors should be part of Creditors’ Committee (without voting right) if their aggregate dues are not less than 10% of the debt.
  1. Creditors’ committee shall meet first within seven days of its constitution and decide by 75% of votes either to replace or confirm interim IP as Resolution Professional. Thereupon, Resolution Professional is appointed by the NCLT upon confirmation by the Board. The creditors’ committee, with a majority of 75% votes, can change Resolution Professional any time.
  1. The creditors’ committee has to then take decisions regarding insolvency resolution by a 75% majority voting.
  1. If three-fourths of the financial creditors consider the case complex and require extension of time beyond 180 days, the NCLT can grant a one-time extension of up to 90 days.
  1. Resolution Professional to conduct entire corporate insolvency resolution process and manage the corporate debtor during the period.
  1. Resolution Professional shall prepare information memorandum for the purpose of enabling resolution applicant to prepare resolution plan. A resolution applicant means any person who submits resolution plan to the resolution professional. And upon receipt of resolution plans, Resolution Professional shall place it before the creditors’ committee for its approval.
  1. Once a resolution is passed, the creditors’ committee has to decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company. If no decision is made during the resolution process, the debtor’s assets will be liquidated to repay the debt.
  1. The resolution plan will be sent to NCLT for final approval, and implemented once approved.

 

LIQUIDATION PROCESS UNDER THE CODE

  1. The commencement of liquidation process takes place on account of:
    • failure to submit the resolution plan to the NCLT within the prescribed period, or
    • rejection of resolution plan for non-compliance with the requirements of the Code,
    • or decision of creditors’ committee based on vote of majority, or
    • Contravention of resolution plan by the debtor.
  1. During liquidation, no suit or other proceedings shall be instituted by or against the corporate debtor; except through the liquidator on behalf of corporate debtor with permission of the NCLT.
  1. The Resolution Professional shall act as liquidator unless replaced.
  1. The liquidator shall form an estate of all assets of corporate debtor called the liquidation estate.
  1. Liquidator shall receive, verify and admit or reject, as the case may be, the claims of creditors within the prescribed time. Creditor may appeal to the adjudicator within 14 days.
  1. A secured creditor may either relinquish its security interest to the liquidation estate and receive on first priority, the proceeds of the sale by the liquidator or realize its security interest by enforcing, realizing, settling, compromising or dealing with the secured asset in accordance with such law as applicable to the secured interest. Any surplus amount so realized shall be tendered to the liquidator. In case of any shortfall in recovery, the secured creditors will be paid by the liquidator out of the assets of the corporate debtor. However, his claim will be junior to the unsecured creditors to the extent of the shortfall.
  1. Assets will be distributed by the liquidator in the manner of priorities of debts laid in the Code (see below). Individual claimants or those claiming to have any special rights on assets of the debtor will form part of the liquidation process.
  1. All sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund will be considered as priority dues and is not to be included in the liquidation estate and estate of bankrupt.
  1. Upon the assets of corporate debtor completely liquidated and the liquidator making an application, the NCLT shall pass an order dissolving the corporate debtor.

 

Author: 

Nimesh Kumar, (CS, LL.B)

(Advocate at VNC Corporate & Legal)

Above write-up has been compiled by Mr. Nimesh Kumar, an Advocate in the field of Corporate Law and NCLT matters. He can be reached at nimesh.cs@gmail.com.

“The entire contents of above article have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.”

 

One comment

Leave a Reply

Your email address will not be published. Required fields are marked *