In 2016, India embarked on a landmark reform of providing a sturdy platform for resolution of troubled corporate entities. In principle, insolvency and bankruptcy are covered in the Seventh Schedule under the Concurrent List in the Constitution of India, permitting both states and the Centre to develop the legislative framework. However, in India, there is no state legislative history regarding either insolvency or bankruptcy in the post-Independence period, a key departure from the US. All such Indian post-Independence laws have their genesis from UK laws.
Till the year 1985, the legal framework dealing with corporate insolvency and bankruptcy in India consisted of only one law — the Companies Act, 1956. In 1985, the Sick Industrial Companies Act, 1985 (SICA) and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) under which debt recovery tribunals (DRTs) were established and finally, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) were enacted in 2002. Around the same time when the SARFAESI Act was introduced, the Reserve Bank of India introduced a corporate debt restructuring scheme that established broad guidelines for banks. It was thus clear by the year 2010 that a single, comprehensive framework was required to effectively tackle delay in insolvency and bankruptcy proceedings.
The Insolvency and Bankruptcy Code, 2016 was enacted by the Parliament to provide and revamp the framework for insolvency resolution in India in a time-bound manner and the promotion of entrepreneurship, credit availability and balancing of different interests of every stakeholder of a Company.
About Insolvency & Bankruptcy Code
Insolvency and Bankruptcy Board of India (IBBI) has been assigned as a regulator and it can oversee the procedure done under IBC. IBC applies to companies, partnerships and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must make decisions to settle insolvency. Under IBC debtor and creditor both can initiate ‘recovery’ proceedings against each other.
Companies have to complete the entire insolvency procedure within 180 days under IBC. The extension may be given on the deadline if the creditors do not raise any objections. For small companies including startups with an annual turnover of Rs 1 crore, the whole procedure of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn’t happen the company goes for liquidation.
The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies and the Debt Recovery Tribunal (DRT) for individuals. The courts approve initiating the resolution process, appointing the insolvency professional and giving nod to the final decision of creditors. The Insolvency and Bankruptcy Board regulates insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
Objectives of the Code
A strong legal framework of bankruptcy law is required for achieving the following objectives: –
·Improved handling of conflicts between creditors and the debtor: It can provide procedural certainty about the process of negotiation, in such a way as to reduce the issue of common property and reduce information asymmetry for all economic players.
Set a limit between malfeasance and business failure: It can also provide flexibility for parties to arrive at the most efficient solution to maximize the amount during negotiations. The bankruptcy law will build a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.
Macroeconomic downturns losses to be allocated: An ill insolvency regime leads to the stereotype of “rich promoters of defaulting entities” generating theories such as:
- Misconduct is the reason for all the defaults caused.
- Lastly, it is the promoters who should personally and financially be held responsible for defaults of the firms which are under their control.
Macroeconomic downturns losses to be allocated: Clear allocation of these losses is an outcome of a well-defined bankruptcy framework. Taxes, inflation, currency depreciation, expropriation, or wage or consumption suppression are the usual practices of loss allocation. These could disturb foreign creditors, small business owners, savers, workers, owners of financial and non-financial assets, importers, exporters.
What is the procedure to resolve insolvency under the Code?
When a default arises, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional furnishes financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is disallowed during this period.
What does the committee of creditors do?
A committee consisting of the financial creditors who lent money to the debtor is formed by the insolvency professional. The creditors’ committee decides 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 selling the assets of the debtor to get their dues back. If a decision is not taken in 180 days, the debtor’s assets go into the process of liquidation.
What happens under liquidation?
If the debtor goes into liquidation, an insolvency professional conducts the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of order: First insolvency resolution costs, including the remuneration to the insolvency professional, the second secured creditors, whose loans are backed by collateral and third dues to workers, other employees, forth unsecured creditors.
This Article Written by Sparsh Goyal, Student of Vivekananda Institute of Professional Studies.
Also Read – Insolvency and Bankruptcy Code: Journey from “Debtor Having Remote” to “Creditor in Control”.
