The Insolvency And Bankruptcy Code 2016 passed unanimously by both Houses of Parliament in May 2016 is considered as the biggest economic reform next only to GST. Its need was highlighted due to absence of legal and institutional machinery for dealing with debt defaults in the country. Provisions of multiple laws dealing with recovery of debts such as the Contract Act, SARFAESI Act, 2002, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, Sick Industrial Companies (Special Provisions) Act, 1985 and winding up provisions of the Companies Act, 1956 have been inadequate to aid recovery for lenders and restructuring of firms. Also century old laws dealing with individual insolvency such as the Presidential Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 have hampered the confidence of lenders. As a result, the debt access to borrowers has diminished with secured credit becoming the largest component of the credit market in India.
The objective of the new law is to promote entrepreneurship though easy availability of credit. The law aims to consolidate laws relating to insolvency of companies, individuals, LLPs, partnership firms and other entities into a single legislation. It thereby aims to eliminate the fear of entrepreneurs’ especially young enthusiastic entrepreneurs, stakeholders and investors of dealing with multiple laws by bringing in place one legislation for easy exit, restructuring of debt or winding up when affected by business failure or inability to pay debt.
Under the Code, specialized adjudicating authorities like National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) are going to deal with special corporate issues under prescribed time limit to deal with procedures within 180 days, and provision of only one time extension of 90 days in certain circumstances. There is also provision of fast track option in time limit of 90 days with extension of 45 days to not just ensure repayment but timely repayment. Thus the jurisdiction of civil courts is taken away to ensure fast and effective process in timely manner.
There is a provision of establishment of new Board to deal with the matters in specialized manner. Another feature of the Code is that it gives right to operational creditor such as vendors, suppliers irrespective of their size to initiate proceedings of recovering their dues. Workmen and other employees have also got priority thus giving the message to defaulters to either re-structure, repay or windup!
A key innovation of the Insolvency and Bankruptcy Code is four pillars of institutional infrastructure.
1. The first pillar is creation of class of regulated professionals, ‘the Insolvency Professionals’ who would play a key role in the efficient working of the bankruptcy process. They would be regulated by the ‘Insolvency Professional Agencies’.
2. The second pillar is creation of institutional infrastructure of ‘Information Utilities’ that would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default takes place.
3. The third pillar is in adjudication. The NCLT will deal with firm insolvencies and DRT will deal with individual insolvencies. The institutions, along with their appellate bodies i.e. NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of bankruptcy process.
4. The fourth pillar is a regulator i.e. ‘The Insolvency and Bankruptcy Board of India’. This body will have regulatory control over the Insolvency Professional, Insolvency Professional Agencies and Information Utilities.
The Insolvency And Bankruptcy Code 2016 thus aims to take a systematic leap of economic reforms for smooth functioning of credit market, lays foundation of development of corporate bond market, support innovation and ease of doing business in India. It aims to take India from among the relatively weak insolvency regimes to global standards. Now that the Code is passed, it is important to see if the Code meets the expectation of the investors, financial institutions, stake holders and entrepreneurs who are at present struggling to handle issues of restructuring, bad debts and non repayments. It will also open plethora of opportunities for professionals to mediate the process!
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