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A historical economic reform in India took place when the Rajya Sabha on 11th of May, 2016 passed the Insolvency and Bankruptcy Code, 2016. This is considered as the biggest economic reform next only to GST. 

It’s a key reform that will make it much easier to do business in India and help the recovery of bad loans for banks. The Code seeks to overhaul the laws regulating insolvency amid a surge in bad loans.

This article deals with the major highlights of the Insolvency & bankruptcy code, 2016 and how the code is going to affect the Indian Economy.

So Technically, what exactly does bankruptcy amount to India?

Being bankrupt is a state of inability to repay debts to creditors. Under the new law, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority that has passed a bankruptcy order. The adjudicating authority would be the National Company Law Tribunal (NCLT) for companies and limited liability partnerships, and the Debt Recovery Tribunal (DRT) for individuals and partnership firms.

Why is a bankruptcy law such a big deal?

India’s banking industry is in the throes of a crisis. Bad debts are piling up at banks. The total stressed assets in the Indian banking industry is around Rs 8 lakh crore or 11.25 per cent of the total loans given by Indian banks. There are several reasons for the current buildup of NPAs on the book of banks.  Punjab National Bank (PNB) reported a loss of Rs 5,367 crore, the largest-ever loss reported by an Indian lender based on data since 1990. Here’s the list of the worst losses ever posted by Indian banks.  

Worst Quarterly Losses by Indian Banks:  Rs. in Crores.

PNB

MAR 16

  • (5,367.14)

BOB

DEC 15

  • (3,342.04)

BOB

MAR 16

  • (3,230.14)

IDBI

DEC 15

  • (2,183.68)

Syndicate Bank    

MAR 16

  • (2,158.17)

UCO Bank

MAR 16

  • (1715.16)

Central Bank

SEP 13

  • (1508.74)

Bank of India

DEC 15

  • (1505.58)

IOB

DEC 15

  • (1425.06)

 
So, there weren’t any laws dealing with this problem until now?

There are, in fact, several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple of laws dating from the time of the British Raj for dealing with individual debtors.

However, this multiplicity of laws has been a problem in the way of banks failing to recover their loans. For example, DRTs are dealing with a backlog of Rs 4 trillion worth of cases. For the last three financial years, less than 20% of cases taken up by various channels such as DRTs, Lok Adalats and SARFAESI courts have been successfully resolved.

Applicability of the Bankruptcy & Insolvency Code, 2016: 

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

Objective of this Code: 

Insolvency & Bankruptcy Code will consolidate the existing framework and create a new institutional structure.

The objective of the new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto. 

The Code proposes the setting up of a 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.

The Bankruptcy Code proposes two authorities to deal with insolvency: 

1. The National Company Law Tribunal will adjudicate cases for companies and limited liability partnerships
2. The Debt Recovery Tribunal will do the same for individual and partnership firms.

Both will have appellate tribunals.​

Pillars of Insolvency and Bankruptcy Code, 2016:

1. The Insolvency Professionals: They would play a key role in the efficient working of the bankruptcy process. They would be regulated by Insolvency Professional Agencies. 

The term Insolvency Professionals has been defined in the Code under Section 3 (19) as:  A person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207.

Section 207: Every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations. (2) The Board may specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field, as it deems fit.

2. Information Utilities: These would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place. 

3. Adjudication: The NCLT will be the forum where firm insolvency will be heard and DRTs will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate bodies, viz., NCLAT and DRATs will expedite the bankruptcy process. 

4. Regulator: The Insolvency and Bankruptcy Board of India. This body will have regulatory over-sight over the Insolvency Professional, Insolvency Professional agencies and information utilities. 

- The Board shall be a body corporate having perpetual succession and a common seal, with power, subject to the provisions of this Code, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.

- The head office of the Board shall be at such place in the National Capital Region with offices at other places in India.

Under the new law, what are the various stages through which the ‘resolution’ process must pass from the time a company files for bankruptcy?

There are five stages in all.

One, when a loan default occurs, and either the borrower or the lender approaches the NCLT or DRT for initiating the resolution process.

Two, the creditors appoint an interim Insolvency Professional (IP) to take control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities, and constitute the creditors’ committee.

Three, the committee has to then take decisions regarding insolvency resolution by a 75% majority.

Four, once a resolution is passed, the committee has to decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company. If no decision is made during the resolution process, the debtor’s assets will be liquidated to repay the debt.

Five, the resolution plan will be sent to the tribunal for final approval, and implemented once approved.

Benefits of the Code: 

1.  Code to help wind up sick businesses

On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.​

2. Cross-border insolvency

The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National Company Law Tribunals and courts.

3.  Protect workers of a bankrupt company

To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.

4. Fast Track Corporate Insolvency Resolution Process

The Code has provisions for fast track corporate insolvency resolution process shall be completed within a period of ninety days from the insolvency commencement date.

5. Voluntary Liquidation of Corporate Persons, Firms and Individuals

The Code also provides ways for a corporate person, Firms & Individuals who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings.

The Road Ahead:

Operational Issues:

a. Infrastructure Requirements: The Code proposes the establishment of the Board and NCLT, which the government has notified and is now operational, considering the manpower/ facilities these institutions will require to perform their respective functions and the expertise and training they will need to do justice to the aims of the Code.

b. Quality Professionals: Successful implementation of the Code will require a huge force of trained and skilled insolvency professionals. A strong focus and a well-defined plan will be needed to develop a large pool of insolvency professionals and an institutional structure which will produce, certify and regulate them. Such insolvency professionals will not only need to understand the nuances of restructuring/ liquidation but must also be capable of carrying out the affairs of the company during the process. This process will definitely take a substantial amount of time, resources and expertise. Moreover, effort will be needed to ensure that such professionals are available across the entire country and not just for high profile cases in financial hubs.

c. Information Systems: The underlying assumption for the success of the Code is to have access to quality information. For this to materialize, robust utilities with state of the art technologies will swiftly need to be put in operation.

d. Adjudication Infrastructure: By December 2015, almost 59,000 cases were pending before DRTs, which currently deal with recovery cases of only banks and certain financial institutions. This is despite a strict statutory prescription of 180 days for resolution of disputes in relation to recovery of debt. The major reason for clogging of pending cases is the multiplicity of proceedings and misuse of the remedy of appeal to DRAT and other forums. The Code does not take away this option and the order of the DRT and NCLT may be further challenged with DRAT and NCLAT, respectively. The appellate order may also be further challenged at the Supreme Court. Therefore, while the intent objective behind the Code is laudable, the sheer enormity of disputes/appeals in the country and the lack of infrastructure to support this legislative intent, will be a key challenge which will need to be overcome in order to achieve the intended speed.

In addition, the already over-burdened DRTs are now being assigned with the additional responsibility of adjudicating insolvency/ bankruptcy cases of individuals (which can be initiated by all creditors or the individuals themselves). A major overhaul of DRT infrastructure both in terms of physical facilities and manpower will be needed to achieve what the Code seeks.​

Conclusion: The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. The Code is a landmark piece of legislation providing a major facelift to the existing regime relating to restructuring and insolvency and bankruptcy in India. It promises to provide the one big missing piece in the existing jigsaw of laws in the form of establishing a framework for time–bound resolution for delinquent debts. India now has a bankruptcy and insolvency framework which is comparable with international standards and while this will go a long way in bringing an element of certainty and predictability to commercial transactions in the country and facilitating the ease of doing business, the litmus test for its success will be in how it is implemented. In particular, various practical, logistical and legal hurdles will need to be overcome and the coming months will be crucial with a lot resting on the nuts and bolts of the rules which are now expected to be notified under the Code.

The author is from Kolkata who is an associate member of the ICSI & can also be reached at csrahulharsh@gmail.com

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