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Overview on Insolvency and Bankruptcy Code, 2016

CS Bhavesh Agal 
on 15 January 2017

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Introduction

The Insolvency and Bankruptcy Code, 2016 was passed by Lok Sabha on May 05, 2016 and Rajya Sabha on May 11, 2016. It is now awaiting assent of the President of India. Once The President Signs the legislation, India will have a new Bankruptcy Law.

The average time to resolve insolvency in India is 4.5 years, as compared to 0.8 years for Singapore and 1 year in London; India has the lowest recovery rate in the world at about 20% of debt value as per World Bank Report (2014). 

Features of the Code

1. Insolvency and Bankruptcy Code, 2016 (Code) provides a specialized forum to oversee all insolvency and liquidation proceedings for individuals, small and medium enterprise (SMEs), Limited Liability Partnerships and corporates.

2. It empowers all classes of creditors (secured and unsecured lenders, employees, trade creditors, regulatory authorities) to trigger a resolution process in case of non- payment of a valid claim.

3. Provides for immediate suspension of the Board of Directors and promoters' powers.

4. Provides for an insolvency professional to take control of the Corporate debtor.

5. Enables a 'stand-still period' which provides stakeholders time to facilitate discussions and arrive at a common resolution rather than running independent processes.

6. Provides for a balanced approach between rehabilitation and recovery and provides for compulsory liquidation of corporate debtors in the event the resolution has not been agreed within 180 days of the resolution process.

Institutional Infrastructure

1. Adjudicating Authority:

The adjudicating authority for corporate insolvency and liquidation is the NCLT. Appeals from NCLT orders lie to the National Company Law Appellate Tribunal and thereafter to the Supreme Court of India. For individuals and other persons, the adjudicating authority is the DRT, appeals lie to the Debt Recovery Appellate Tribunal and thereafter to the Supreme Court.

2. Insolvency and Bankruptcy Board of India (IB Board)

It would consist of members including representatives from MCA, MoF, Reserve Bank of India and would regulate the appointment of insolvency professionals, information Utilities and promote transparency in governance. The board will also make model bye laws for regulating insolvency professionals.

3. Information Utilities

A notable feature of the Code is the creation of information utilities to collect, collate, authenticate and disseminate financial information of debtors in centralised electronic databases. The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing basis.

4. Insolvency Resolution professionals

The Code provides for insolvency professionals as intermediaries who would play a key role in the efficient working of the bankruptcy process. The Code contemplates insolvency professionals as a class of regulated but private professionals having minimum standards of professional and ethical conduct.

Who can file for corporate insolvency resolution?

  1. Financial Creditor
  2. Operational Creditor
  3. Corporate Debtor

Corporate Debtors: Two-Stage Process

To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 (which limit may be increased up to INR 10,000,000 by the Government)

  1. Insolvency Resolution Process,                       
  2. Liquidation

Insolvency Resolution Process for Individuals/Unlimited Partnerships

For individuals and unlimited partnerships, the Code applies in all cases where the minimum default amount is INR 1000 and above (the Government may later revise the minimum amount of default to a higher threshold). The Code envisages two distinct processes in case of insolvencies.

Under the automatic fresh start process, eligible debtors (basis gross income) can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh.

Opportunities for Professional Members

The notification of the Insolvency and Bankruptcy Code, 2016 (the ‘Code’) and the Regulations/Rules made there under have opened up a plethora of opportunities for the professionals in the areas of Corporate Insolvency Resolution Process, Corporate Liquidation Process and Individual Insolvency Resolution process.

ICSI Insolvency Professionals Agency has started enrolling professionals having 15 or more years of practice as Company Secretary, Chartered Accountant, Advocate, Cost Accountant, as Insolvency Professionals for a period of 6 months

Conclusion

Overall this legislation is a huge step towards the ease of doing business in India and has the potential to bring business practices in India closer to more developed markets over the long term.

India currently ranks 136 out of 189 countries in the World Bank's index on the ease of resolving insolvencies. India's weak insolvency regime, its significant inefficiencies and systematic abuse are some of the reasons for the distressed state of credit markets in India today. The Code promises to bring about far-reaching reforms with a thrust on creditor driven insolvency resolution. It aims at early identification of financial failure and maximizing the asset value of insolvent firms. The Code also has provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries.


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