THE INSOLVENCY AND BANKRUPTCY BILL, 2015
Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Other laws which deal with the issue include SICA (Sick Industrial Companies Act), 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993, SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 and Companies Act, 2013. As a result, four different agencies, the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs), have overlapping jurisdiction, giving rise to the potential of systemic delays and complexities in the process
The bill provides for setting up of an ‘Insolvency and Bankruptcy Board of India (the Board) to regulate professionals, agencies and information utilities engaged in resolution of insolvencies of companies, partnership firms and individuals.
As per the proposed legislation, the corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days. It also provides for fast-track resolution of corporate insolvency within 90 days.
The Code also seeks to balance the interest of all the stakeholders including alteration in the priority of payment of government dues.
The Code seeks to provide for designating National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) as the adjudicating authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy.
Till the Insolvency and Bankruptcy Board of India is set up, the central government will exercise the powers of the Board or designate any financial sector regulator the powers and functions.
The bill also provides for priority with regard to distribution of proceeds following liquidation of the company. In the order of priority,
- the first charge will be insolvency resolution process cost and liquidation costs to be paid in full.
- Liquidation proceeds will then be used to clear debts owed to secured creditors, and
- then to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors, in that order.
- Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment
It also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.
The Code also provides for fast track corporate insolvency resolution process to be completed in 90 days.
The Indian Code provides for quick identification of financial distress and a 180-day plan, extendable by 90 days, to revive a company, following which the company becomes insolvent.
The Indian code provides for management control to pass over to resolution professionals with significant powers, once an insolvency resolution is underway.
The Draft Bill: Summary for Corporates only
1. “debt” means a liability in respect of a claim including any financial debt and operational debt;
2. “operational debt” means a debt incurred in exchange for the provision of goods or services (including employment) or a debt in respect of the payment of a due arising under any law for the time being in force payable to the Central Government, any State Government or any regulator;
3. “personal guarantor” means an individual who is the surety in a contract of guarantee to a corporate debtor;
4. “Adjudicating Authority” for the purpose of Corporate Insolvency Resolution Process National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013.
5. “personal guarantor” means an individual who is the surety in a contract of guarantee to a corporate debtor;
Persons who may initiate corporate insolvency resolution process:
A financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process.
How does Initiation of corporate insolvency resolution process by financial creditor happens?
A financial creditor either by itself or jointly with other financial creditors may file an application before the Adjudicating Authority when a default has occurred (default may be in respect of a financial debt owed to any financial creditor of the corporate debtor and not only the applicant financial creditor)
How does Initiation of corporate insolvency resolution process by an operational creditor happens?
An operational creditor shall, on the occurrence of a default, deliver a demand notice or copy of an invoice demanding payment of the amount involved in the default to the corporate debtor. If, after the expiry of 10 days from the notice, the financial debtor’s default is continuing, the operational creditor may file an application with the Adjudicating Authority in the prescribed form for initiating a corporate insolvency resolution process.
How does Initiation of corporate insolvency resolution process by a financial debtor (company) happens?
Where a default has occurred, a corporate applicant may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
Persons who cannot initiate Corporate Insolvency Process
The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely:-
(a) a corporate debtor who is undergoing a corporate insolvency resolution process; or
(b) a corporate debtor who has completed corporate insolvency resolution process twelve months preceding the date of making of the application under this Chapter; and
(c) a corporate debtor or a financial creditor whose resolution plan was approved twelve months before the date of making an application under this Chapter and who has violated any of the terms of such plan.
What happens if the application is accepted by the Adjudicating Authority?
The Adjudicating Authority, after admission of the, shall, by an order –
(a) Declare a moratorium;
(b) Cause a public announcement of the initiation of Insolvency resolution process.
What is meaning of moratorium
Moratorium prohibits all of the following –
- the institution or continuation of suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
- the corporate debtor from transferring, encumbering, alienating or disposing off any of its assets or any legal right or beneficial interest therein other than in the ordinary course of business;
- any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor; and
- the termination, suspension or interruption of the supply of such essential goods or services to the corporate debtor as may be specified
- The moratorium shall cease to have effect if the Adjudicating Authority approves a duly submitted resolution plan or committee of creditors resolves to liquidate the Company
What is management of affairs of corporate debtor by interim resolution professional?
The Adjudicating Authority shall appoint “interim resolution professional”. From the date of appointment of the interim resolution professional -
(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;
(b) the powers of the board of directors or the partners or of the corporate debtor (as the case may be) shall be suspended and be exercised by the interim resolution professional;
(c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents. Etc.
What is Committee of Creditors?
The interim resolution professional, after consolidation of all claims received against the corporate debtor shall review the financial position of the corporate debtor and constitute a committee of creditors.
The committee of creditors shall comprise all financial creditors of the corporate debtor ( or, the operational creditors, as the case may be), to whom the corporate debtor owes financial debts,
All decisions of the committee of creditors shall be taken by a vote of not less than seventy five per cent of voting share:
The Committee of Creditors shall appoint Insolvency Resolution professional.
What is role of Resolution Professional?
The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process.
What happens after that?
A resolution applicant, through the resolution professional, may submit a resolution plan which is necessarily a plan towards running of the Company as a going concern. In case if the Resolution Plan is not accepted by Adjudicating Authority or Committee of Creditors, then the Company goes into liquidation. The liquidation proceeds are then disbursed in the manner as stated above.