Quick Estimates of Index of Industrial Production and Use-Based Index for the Month of May, 2017 (Base 2011-12=100), Ministry of Statistics and Programme Implementation Click here

Insolvency and Bankruptcy Code, 2016

From Arthapedia
Jump to: navigation, search

Insolvency and Bankruptcy Code represents the legal and institutional mechanisms in India for dealing with debt defaultof companies and limited liability entities, partnership firms and individuals.However, this does not automatically cover default by financial service providers, unless notified by the Government.

 

Background

A Bankruptcy Law Reforms Committee (BLRC) was set up on 22.8.2014 for providing an entrepreneur friendly legal bankruptcy framework for India as announced in the Budget Speech (2014-15), Para 106 - “Entrepreneur friendly legal bankruptcy framework will also be developed for SMEs to enable easy exit…”   Further, the Government identified Bankruptcy Law Reform as a key priority for improving the ease of doing business and had announced in the Budget Speech 2015-16that a comprehensive Bankruptcy Code, meeting global standards and providing necessary judicial capacity, will be brought in fiscal 2015-16.

The BLRCsubmitted its Report and draft Bill on 4.11.2015. Based on this, as well as public/stakeholder consultation, the Insolvency and Bankruptcy Code, 2015 was finalized. The Bill was introduced in the Lok Sabha on 21.12.2015and referred to a Joint Committee of Parliament. The Joint Committee of Parliamentsubmitted its report on 28.4.2016.The Insolvency and Bankruptcy Code, 2016 was passed by Parliament on 11.5.2016 and published in the Official Gazette on 28.5.2016.

 

Objective of the Code

The new law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, contained in a number of legislations [1], into a single legislation and provide for their reorganisation and resolution in a time bound manner for maximisation of value of their assets. Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.

 

Benefits of the Code

The law will thus promote entrepreneurship, availability of credit and balance the interest of all stakeholders. The vision of the new law is to encourage entrepreneurship and innovation. It is true that some business ventures will fail, but such failures will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past. The Code 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).

Facilitating early resolution and exit is as important as facilitating investment. The essential idea of the new law is that when a corporate entity defaults on its debt, control shifts from the shareholders / promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the corporate entity can be saved as a going concern, and the productive resources of the economy (labour and capital) can be put to the best use. This is in complete departure from regime under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) where there were delays leading to destruction of the value of the firm. 

The Insolvency and Bankruptcy Code is thus 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.

 

Salient Features of the Code

The Code separates commercial aspects of the insolvency proceedings from judicial aspects. While Insolvency Professionals (IPs) [2] will deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organising their meetings, examination of the resolution plan, etc., judicial issues will be handled by proposed Adjudicating Authorities (National Company Law Tribunal / Debt Recovery Tribunal) [3]. One more important institution created under the Code is the ‘Information Utility’ [4] which would store financial information and data and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.

The Code also provides a fast track insolvency resolution process for corporates and LLPs. This will be an enabler for start-ups and small and medium enterprises (SMEs) to complete the resolution process in 90 days (extendable to 45 days in deserving cases).

The Code also addresses the important issue relating to cross border insolvency by providing the enabling mechanism on the subject. The Government, at an appropriate time, may come out with a detailed framework for cross border insolvency.

The code proposes setting up a regulator to register and regulate the functioning of insolvency professional agencies, insolvency professionals and information utilities.

 

Present Status of Implementation

The Insolvency and Bankruptcy code was spearheaded by Ministry of Finance. However, the administration of the Insolvency and Bankruptcy Code, 2016 has been transferred to the Ministry of Corporate Affairs w.e.f. 29th July,2016 by amending the GoI (Allocation of Business) Rules, 1961. The Ministry of Corporate Affairs has been taking necessary steps for implementation of the Code in terms of creating the required institutional architecture.The Insolvency and Bankruptcy Board of Indiawhich regulates the IPs Insolvency professional agencies and information utilities was established on 1.10.2016 and has started issuing relevant Regulations. The institutional architecture of IPsand National Company Law Tribunaland National Company Law Appellate Tribunalhas been created for starting the insolvency and bankruptcy process. The regulations for corporate insolvency process have been notified and came into force with effect from 1.12.2016. SICA has been repealed and therefore the adjudicating authorities of Board for Industrial and Financial Reconstruction and Appellate Authority for Industrial and Financial Reconstruction have been abolished with effect from 1.12.2016 paving the way for starting the resolution process under the Insolvency and Bankruptcy Code, 2016, starting with corporate insolvency process. 


1. The recovery proceedings by creditors, either through the Contract Act or through special laws such as the Recovery of Debts due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes. Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor restructuring of firms. Laws dealing with individual insolvency, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, were almost a century old. This has hampered the confidence of the lender and development of the credit markets in India. Resultantly, credit by banks is the largest component of the credit market in India and corporate bond market has not yet developed to the desired level.

2. Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and will be the first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals.

3. The Debt Recovery Tribunal (DRT) is 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). The National Company Law Tribunal (NCLT) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (NCLAT).NCLAT shall be the appellate authority to hear appeals arising out of the orders passed by the Regulator in respect of insolvency professionals or information utilities.(The National Company Law Tribunal has been constituted w.e.f. 1 June,2016 and by virtue of Section 466(1) of Companies Act,2013, the Company Law Board stands dissolved.)

4. The Act proposes for insolvency information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.


References


Also See

Contributed by

Dr. Shashank Saksena (IES 1987)

Personal tools
Variants
Actions
Navigation
Concepts
Share Tools
Toolbox
Translate