By: Mugdha Singh
A historical economic reform in India took place when the Rajya Sabha on 11th of May, 2016 passed the Insolvency and Bankruptcy Code, 2016. Insolvency & Bankruptcy Code, 2016 (IBC) received the assent of the president on 28/05/2016.
The code has become an Act and provisions are going to be effective from a date to be notified, which isn’t yet been notified.
The government’s efforts to clip the wings of high-profile debtors suffered a setback in March when tycoon Vijay Mallya flew to London as bankers pressed him to pay Rs. 9,000 Crore owed by his defunct Kingfisher Airlines.
Insolvency is a situation where Individuals or Companies are unable to repay their outstanding debt. It may be resolved by changing the repayment plan of the loans or writing off a part of the debt.
If insolvency can’t be resolved, the assets of the debtor could also be sold to boost money and repay the outstanding debt.
How does bankruptcy amounts to India
Insolvency is that the situation where the debtor isn’t in a position to pay back the creditor. Bankruptcy is the legal declaration of Insolvency. So the former may be an economic condition and the latter may be a legal position. All insolvencies need not lead to bankruptcy.
The new code features a sequential procedure of Insolvency resolution, failing which, results in Bankruptcy.
Being bankrupt may be a state of inability to repay debts to creditors. Under the proposed law, a bankrupt entity may be 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.
Need of code
The Code offers consistent, comprehensive insolvency legislation encompassing all companies,
LLPs, partnership Firms, individuals and other bodies Corporate.
This is often something that should put company promoters on one’s guard, they’re going to consider before committing a default.
The objective of the new law is to market entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws concerning reorganization and insolvency resolution of corporate persons, partnership firms and individuals during a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.
- To attract Foreign Investment: This Code in specific will, when implemented in letter and spirit, provide a serious boost to the India economy, especially on account of timely resolution and certainty in recovery.
- Strict Timelines: The strict timelines for resolution of insolvency and liquidation proceedings would definitely be an incentive and provide the requisite impetus for economic growth.
- Closure of Business: Facilitate stress-free and time-bound closure of businesses.
- 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.
- According to the government data top 50 defaulters of public sector banks had exposure in excess of Rs 1.21lakh Crore as on December 2015. “Because this law ensures time bound recovery foreign lenders will be more open to lend to Indian Corporate.
Challenges before new Law IBC
The new bankruptcy law isn’t a “magic wand”. It sees the advantages flowing in after 3-5 years from now. the most challenge is going to be creating an outsized pool of insolvency professionals who will help with the fast implementation of the law. The new regulators also will get to draft procedural rules for insolvency professionals and knowledge utilities among others.
At present, there are only 897 registered insolvency professionals. to be an insolvency professional one must either be an accountant, or a corporation Secretary, or accountant or an Advocate with 10 years of experience or a graduate with 15 years of experience. One must also pass the insolvency examination conducted by the IBBI.
Therefore, a resolution professional might not have experience in handling or managing a corporation. thanks to the shortage of need for minimum experience in handling and managing a corporation, one might question the power of the resolution professional.
Role of a resolution professional -The applicant must submit a resolution plan on receipt of such plan, the resolution professional shall examine the plan following Section 30(2). After which consistent with Section 30(3) the plan is to be presented to CoC for its approval.
Once the resolution plan is approved by the CoC, the plan is then forwarded to the adjudicating authority by the resolution professional.
How This New Bankruptcy Law Will Help Banks
As per the new Bankruptcy Law, banks are now entitled to recover their loan from defaulters within 180 days.
In case the majority of creditors agree, then this period can be extended to 90 days and, in case recovery of loans doesn’t happen within this period, then the concerned company shall be liquidated by default.
- Companies under Companies Act
- Special Companies under special Act
- Limited Liability Partnerships
- Other body Corporate as notified by central government
- Partnership Firms
There were different laws for different entities—a company, limited liability partnership, an individual, etc. That makes the task of creditors cumbersome. But now there is one law for all.
For what Matters:
- (1) Insolvency,
- (2) liquidation,
- (3) voluntary liquidation and
- (4) Bankruptcy
Creditors Power enhanced under Insolvency and Bankruptcy Code 2016:
- The Insolvency and Bankruptcy Code 2016 empowers the operational creditors (workmen, suppliers etc.) also to initiate the insolvency resolution process upon non-payment of dues.
- In order to develop the credit market in India, in case of liquidation, financial debts owed to unsecured creditors have been kept above the Government’s dues in the list of priorities (waterfall).
How Much Time Will the Law Save
Currently, it takes an average of 4.3 years to resolve insolvency in India. The new law introduces a time limit on the bankruptcy process. In the case of a default, the time limit is 180 days, within which the resolution has to be completed. This can be extended by another 90 days by the adjudicator, depending on the process. Analysts say the new time frame will help India improve its World Bank insolvency ranking.
Time – Limit for completion of Insolvency Resolution Process:
180 Days + 90 Days (one time extension) = 270 Days
Insolvency Adjudicating Authority:
- DRT: The Debt Recovery Tribunal (“DRT”) shall be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (“DRAT”).
- NCLT: The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities and other entities with limited liabilities.
- The jurisdiction of the NCLT shall be based on the registered office of the debtor. Appeals from the order of NCLT shall lie to NCLAT.
- NCLAT: The National Company Law Appellate Tribunal (“NCLAT”) shall be the appellate authority to hear appeals arising out of the orders passed by the Board in respect of insolvency professionals or information utilities.
- Supreme Court: The Supreme Court will have appellate jurisdiction over the orders of the DRAT or the NCLAT.
Insolvency and Bankruptcy Code is an umbrella regulation this is essential for the improvement of insolvency legal guidelines in India. It guarantees time-sure and green mechanisms for debt recovery.
The Corporate Insolvency Resolution Process is a creditor managed version for the decision of insolvency. The lenders were given the energy to take essential selections regarding the decision process. There were amendments and landmark judicial pronouncements as a way to make the Insolvency and Bankruptcy Code greater green and effective.
The goal of the Code is to put off the antiquated present legal guidelines masking elements of insolvency and bankruptcy.
Though the Code units out positive provisions to amend and override the prevailing legal guidelines to keep away from destiny litigation, a clean provision desires to be delivered to explicitly country the prevailing legal guidelines being repealed through the creation of this regulation.
Thus it’s miles a complete and systemic reform, to be able to deliver a quantum bounce to the functioning of the credit score market.
It might take India from amongst exceptionally susceptible insolvency regimes to turning into one of the world’s fine insolvency regimes. It lays the principles for the improvement of the company bond market, which might finance the infrastructure tasks of destiny.
The passing of this Code and implementation of the equation will deliver a large increase to ease of doing commercial enterprise in India.
- Insolvency and Bankruptcy code,
- Part-II chapter VII of the IBC, 2016 Veena Mani, Financial creditors recover more under IBC, Business-standard,(July,05,2019,01:46IST)
- Indian Express, The Hindu, Iastoppers, supra, 10 Forumias, supra, 8