India - Insolvency and Bankruptcy Code 2016 – A dawn in the era of Credit Market Law

A transformation has taken in the Indian Economic reform with the passing of the Insolvency and Bankruptcy Code 2016 (hereinafter referred as ‘Code’) with regard to the functioning of the credit market in India. This shall provide a big boost to Ease of doing business in India. The law has been enacted with a vision to encourage entrepreneurship and innovation which will further boost the startups in India. This is an another government initiative to enhance the startups in India.

The code is a comprehensive and systematic reform which shall give a significant increase in the functioning of the credit market in India and would take the country from among relatively weak insolvency regimes to becoming one of the world's best insolvency regimes.

Background

The Insolvency and Bankruptcy Code 2015 was introduced by the Finance Minister in Lok Sabha in December 2015 and was subsequently referred to Joint Committee of Parliament. Thereafter the committee submitted its recommendations and the modified code was accordingly passed in the Lok Sabha on May 5, 2016 and the bill received the President assent on 28th May, 2016 and became an Act. The code creates a framework for resolving insolvency in India. Insolvency is a situation where an individual or a company is unable to repay the outstanding debt.

The Code repeals the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it amends 11 laws, including the Companies Act, 2013, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, among others.

"The Insolvency and Bankruptcy Code, 2016 – a law enacted for insolvency resolution of various corporate entities, 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."

Insolvency and Bankruptcy Code 2016 – A brief Overview

The Insolvency and Bankruptcy Code 2016 has been enacted 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.

"The Code is applicable on the Companies, Partnership firms and any other entity incorporated under any Statute as may be in force. The law strives to consolidate the laws relating to insolvency of companies and limited liability entities unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation."

Applicability:

• Any company incorporated under the Companies Act, 2013 or under any previous company law.
• Any other company governed by any special Act for the time being in force.
• Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008.
• Any other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf.
• Partnership firms and individuals.

Objective

The law strives 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, presently contained in a number of legislations, into a single legislation. 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.

Setting up of the Authority

The code proposes the setting up of new entity, the Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals and information companies – those which will store all the credit information of corporates.

Further, the code proposes two authorities to deal with insolvency – The National Company Law Tribunal will adjudicate cases for companies and Limited Liability Partnerships and the Debt Recovery Tribunal will do the same for individual and partnership firms.

Salient features of the Code

Insolvency Resolution Process – the code specifies similar insolvency resolution processes for companies and individuals, which will have to be completed within 180 days. This limit may extend to 270 days in certain circumstances. The resolution process will involve negotiations between the debtor and creditors to draft a resolution plan.

Fresh Start process – the code provides a fresh start process for individuals under which they will be eligible for a debt waiver of up to Rs. 35,000/-. The individual will be eligible for the waiver subject to certain limits prescribed under the code.

Insolvency professionals and agencies – the resolution process will be conducted by a licensed insolvency professional (IP). The IP will control the assets of the debtor during the process. Insolvency professional agencies will be created to regulate these IPs. The agencies will conduct examinations to enroll IPs and enforce a code of conduct for their functioning.

Information utilities – the code establishes multiple information utilities to collect, collate and disseminate financial information related to a debtor. This will include a record of debt and liabilities of the debtor.

Insolvency and Bankruptcy Fund – the code creates an Insolvency and Bankruptcy Fund. The Fund will receive voluntary contributions from any person. In case of insolvency proceedings being initiated against the contributor, he will be allowed to withdraw his contribution for making payments to workmen, protecting his assets, etc.

Cross border insolvency – cross border insolvency relates to an insolvent debtor who has assets abroad. The Central Government may enter into agreements with other countries to enforce provisions of the code.

Offences – the code specifies penalties for offences committed under corporate insolvency (such as concealing property). This penalty will be imprisonment of up to five years, or a fine of up to one crore rupees or both. For offences committed under individual insolvency (such as providing false information), the imprisonment will vary based on the offence. For most of the offences, the penalty will be imprisonment of up to six months, or a fine up to five lakh rupees or both.

"the law provides for the setting up of Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals and information companies also two authorities to deal with insolvency – The National Company Law Tribunal and the Debt Recovery Tribunal."

Implication of the Code

The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholders/promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about reviving the Company or taking into liquidation. When decisions are taken in a time – bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is complete departure with the experience under SICA regime where there were delays leading to destruction of the value of the firm. Thus giving more power in the hands of Creditors.

Further, the law strives towards the entrepreneurship and innovation. It is seen that some business ventures will fail, but with the new law in force they will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being carried 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. The Code lays down the foundations for the development of the Corporate bond market, which would finance the infrastructure projects of the future.

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Sunaina Jhingan working with Acquisory Consulting LLP as Knowledge Manager, having post qualification experience in field of Legal & Finance of 6 years.