The Insolvency and Bankruptcy Code, 2016

In 1999, the Justice Eradi Committee, in its report, had identified 473 winding-up cases that were pending for more than 25 years. The analysis of companies under liquidation as on October 31, 2015, furnished by the Department of Financial Services indicates that there were 1,479 pending winding-up cases for more than 20 years, indicating relative triple-time increase in data of winding-up cases still pending.

According to central bank data, stressed assets (which include gross bad loans, advances whose terms have been restructured and written-off accounts) rose to 14.5% of banking sector loans at the end of December 2015. That’s almost Rs 10 trillion of loans that are stuck.

India's ranking on ease of doing business India, as per World bank, is 130th among 189 nations. And on the vexed parameter of closing down of business, even further down--136th.

In his Union Budget speech of 2014-15, the finance minister had announced the development of an effective bankruptcy code for easy exit. Following this announcement, the Viswanathan Committee was set up on August 22, 2014, to study the corporate bankruptcy legal framework in India.

Commendably, within a short span of time, a comprehensive Insolvency and Bankruptcy Code, 2015, was introduced in Lok Sabha on December 21, 2015, after public consultation; it consolidates individual insolvency, insolvency of LLPs (limited liability partnerships), unlimited liability partnerships and corporate insolvency.

The code was referred to a Joint Parliamentary Committee of both the Houses for scrutiny. The report was presented to the Lok Sabha and Rajya Sabha on April 28, 2016. The Committee has taken care of certain unaddressed issues in the code that was introduced in Parliament. These include participation of operational creditor in insolvency proceedings, inclusion of public financial institution under the definition of financial institution, rationalisation of time-lines with respect to various steps in the insolvency resolution process, rectification of drafting errors, removal of a clause relating to registration bond and performance security by an insolvency professional.

On May 05, 2016, Lok Sabha passed the Insolvency and Bankruptcy Code, 2016 and the Rajya Sabha approved it on May 11, 2016. It is now awaiting assent of the President of India.

There are high expectations from the implementation of the Code. It is expected that there would be time-bound settlement of insolvency, faster turnaround of businesses and creation of a database of serial defaulters—all critical in resolving India’s bad debt problem. This will make it easier for financial institutions and banks to deal with non-performing assets (NPAs).

The Insolvency and Bankruptcy Code, 2016 seeks to consolidate all existing laws. The code repeals the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920, as well as amend 11 legislations, including the Companies Act, 2013; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; Limited Liability Partnership Act, 2008, SICA, etc.

Chapter XIX of the Companies Act, on rescue and rehabilitation of sick companies, is replaced by the Code.

To avoid any further litigation in insolvency proceedings, the Code would have an overriding effect over all other laws.

Policy-related aspects are being addressed in the code and procedural aspects will be dealt under delegated legislations for flexibility.

Bankruptcy laws accept that business ventures (individuals /proprietorship and unlimited partnership firms) can fail and allow entrepreneurs to make a new start. While facilitating failed Corporate person to wind up painlessly, the code can pave the way to resurrection also.

Politicians and bureaucrats would be debarred from holding public office once they are declared insolvent.

The Adjudicating authorities:

Currently, four different forums—High Courts, Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and Debt Recovery Tribunal (DRT)—have overlapping jurisdiction, which gives rise to systemic delays and complexities in the process. The code intends to overcome these challenges and aims to reduce the burden on the courts as all litigation will be filed under the code as under:

Under Part II, Chapter VI of the Code, National Company Law Tribunal (NCLT) would be adjudicating authority for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs), any entity with limited liability under any law (except financial service provider) and personal guarantors thereof. An appeal can be preferred from orders of NCLT to National Company Law Appellate Tribunal (NCLAT). Jurisdiction would be based on place of registered office of corporate person.

Both NCLT and NCLAT are proposed to be setup under the Companies Act 2013. However, the same is pending due to certain amendments to be brought in the Act (pursuant to Judgement of the Supreme Court), which is brought to Parliament by way of the Companies (Amendment) Bill 2016 and the same is currently with the Standing Committee of the Parliament.

Under Part III, Chapter VI of the Code, Debt Recovery Tribunals (DRTs) would be adjudicating authority for insolvency resolution and bankruptcy of individuals and unlimited partnerships. Jurisdiction would be based on place of residence or works for gain or carries on business. Appeal can be made to Debt Recovery Appellate Tribunal (DRAT). Further appeal from DRAT would be before the Supreme Court only on question of law. It is specifically provided that Civil courts or authority not to have jurisdiction and also cannot grant any injunction.

For individual insolvency there is a fresh start process under Part III, Chapter II, which is not available for corporates.

For individuals and partnerships, there is no specific mandatory period within which the resolution decision has to be taken. This is because individual businesses are varied and vastly different, with no standardised information about their activities. More, a corporate person can be liquidated but an individual cannot. He has to be declared bankrupt.

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. This poses challenge to implementation of faster insolvency resolution for individuals and unlimited partnerships.

It is specifically provided that Civil courts or authority not to have jurisdiction and also cannot grant any injunction.

Order of priority of settlement of claims:

It puts cap of 24 months wages due to workers prior to commencement of liquidation which would rank pari passu with secured creditors (where secured creditors relinquish its security interest to the liquidation estate). Whereas cap for the employees dues are kept at 12 months prior to commencement of liquidation and would rank after dues of workers and secured creditors. And thereafter, dues of unsecured creditors to be paid. And thereafter claims of Central Government and State Government to be paid pari passu with debts of secured creditors, if remained unpaid after enforcement of security (i.e. those secured creditors who remained outside liquidation process). And then remaining debts and dues and then preference shareholders and lastly equity shareholders or partners (in case of LLP).

It must be noted that tax and other dues would defer to the dues of secured creditors and 24 month salary of workers. Earlier, taxes jostled with secured creditors’ and workers’ dues.

There is an anomaly insofar as secured creditors are concerned. A creditor is secured only to the extent the mortgage assets are sufficient to clear his dues. However, the Code provides for paying secured creditors fully. This needs to be corrected so that the unsecured portion is relegated down in the order of priority.

New Institutions:

It proposes to create a host of new institutions. These would include:

* Insolvency Professionals, who will conduct the insolvency resolution process (broadly in five stages), take over the management of a company, assist creditors in the collection of relevant information, and manage the liquidation process,
* Insolvency Professional Agencies, who will examine and certify these professionals,
* Information Utilities, which will collect, collate and disseminate financial information related to debtors, and
* Insolvency and Bankruptcy Board of India, a regulator that will oversee these new entities.

Transitional provision: Until Insolvency and Bankruptcy Board of India is constituted, it provides that Central Government to exercise powers of Board. It also provides that the Central Government to issue regulations for recognition of persons as insolvency professionals, insolvency professional agencies and information utilities under the Code.

It is reported in media that the exercise to fill the posts in the NCLT and its appellate tribunal is on and receiving top priority. And the finance ministry has started the process for establishment of the Insolvency and Bankruptcy Board as envisaged under the Code. Once that is done, the momentum will pick up.

Stages of Corporate Insolvency Process:

1) when a financial default occurs, either the borrower (debtor u/s.10 r/w s.11) or the lender (creditors - financial creditor u/s.7 or operational creditor u/s.9) can approach the NCLT for initiating the resolution process. Operational creditor need to give notice of 10 days to Corproate debtor before approaching the NCLT. If Corporate Debtor fails to repay dues to operational creditor or fails to show any existing dispute or arbitration, then the operational creditor can approach NCLT.

2) Corporate insolvency process shall be completed within 180 days of admission of application by NCLT.

The creditors’ committee has to then take decisions regarding insolvency resolution by a 75% majority. If three-fourths of the financial creditors consider the case complex and feel it cannot be addressed within 180 days, the adjudicator could grant a one-time extension of up to 90 days on the process.

3) Upon admission of application by NCLT, Creditors’ claims will be frozen for 180 days, during which time NCLT will hear proposals for revival and decide on the future course of action. And thereupon, no coercive proceedings can be launched against the corporate debtor in any other forum or under any other law, until approval of resolution plan or until initiation of liquidation process.

4) NCLT to appoint an interim Insolvency Professional (IP) within 14 days of acceptance of application. Interim IP to hold office for 30 days only. Interim IP to take control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities. NCLT to also cause public announcement of the initiation of corporate insolvency process and call for submission of claims.

After receiving claims pursuant to public announcement, interim IP shall constitute the creditors’ committee. All financial creditors shall be part of creditors' committee and if any financial creditor is related party of corporate debtor, then such financial creditor will not have any right of representation, participation or voting. Operational creditors should be part of Creditors' Committee (without voting right) if their aggregate dues is not less than 10% of the debt [u/s.24(3)(c)]. Creditors' Committee can meet even by electronic means.

5) creditors' committee shall meet first within seven days of its constitution and at such first meeting decide by 75% of votes either to replace interim IP or confirm interim IP as resolution professional. Similarly, creditors' committee can change resolution professional any time.

6) Resolution professional to conduct entire corporate insolvency resolution process and manage the corporate debtor during the period.

Resolution Professional shall prepare information memorandum for the purpose of enabling resolution applicant to prepare resolution plan. And upon receipt of resolution plans, Resolution Professional  shall place it before the creditors' committee for its approval.

Once a resolution is passed, the creditors’ 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.

5) the resolution plan will be sent to NCLT / DRT for final approval, and implemented once approved.