The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11th May 2016, received Presidential assent on 28th May 2016 and was notified in the official gazette on the same day. IBC is a welcome overhaul of the existing framework dealing with insolvency of corporates, individuals, partnerships and other entities. It paves the way for much needed reforms while focusing on creditor driven insolvency resolution.
The Insolvency and Bankruptcy code (Provisions of this Code to override other existing laws on matters pertaining to Insolvency and Bankruptcy):
“An act to consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
Indian Banking/credit system had a total bad debt of about $150 Billion in 2016. At present, there are multiple overlapping laws and adjudicating bodies dealing with financial failure and insolvency of companies and individuals in India. The current legal framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system.
IBC combines the following legislations into one for the purpose of insolvency recovery or debt restructuring of a company.
• Chapter XIX & Chapter XX of Companies Act, 2013
• Part VIA, Part VII & Section 391 of Companies Act, 1956
• RDDBFI Act, 1993
• SARFAESI Act, 2002
• SICA Act, 1985
• The Presidency Towns Insolvency Act, 1909
• The Provincial Insolvency Act, 1920
• Chapter XIII of the LLP Act, 20082
The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The Government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities.
A financial creditor (himself or jointly with other financial creditors), an operational creditor or the corporate debtor may initiate corporate insolvency resolution process in case a default is committed by corporate debtor. An application can be made before the National Company Law Tribunal (NCLT) for initiating the resolution process. Operational creditor needs to give demand notice of 10 days to corporate debtor before approaching the NCLT.
Corporate insolvency process shall be completed within 180 days of admission of application by NCLT. 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.
NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the Insolvency and Bankruptcy Board within 14 days of acceptance of application. Interim IP holds office for 30 days only. Interim IP takes control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities.
After receiving claims from creditors, interim IP constitutes 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.
The creditors’ committee has to then take decisions regarding insolvency resolution by a 75% majority voting which initiates the Moratorium period.
If three-fourths of the financial creditors consider the case complex and require extension of time beyond 180 days, the NCLT can grant a one-time extension of up to 90 days. Extending the Moratorium period to 270 Days.
Once a resolution is proposed and passed by 75% of the COC, 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.
The resolution plan will be sent to NCLT for final approval, and implemented once approved.
To initiate an insolvency process for corporate debtors, the default should be at least INR 1,00,000 which may be increased to 10,00,000 by the Government.
The Code proposes two independent stages:
Application on default – Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment.
Appointment of IP – IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company. From date of appointment of IP, power of Board of directors to be suspended and vested in the IP. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith.
Moratorium period – Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the Company on going concern basis. A Resolution plan would have to be prepared and approved by the Committee of creditors.
Credit committee – A credit committee of creditors will be constituted. Related party to be excluded from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditor approve the resolution plan same needs to be implemented.
Initiation – Failure to approve resolution plan within specified days will cause initiation of Liquidation. Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.
Liquidator – The IP may act as the liquidator, and exercise all powers of the BoD. The liquidator shall form an estate of the assets, and consolidate, verify, admit and determine value of creditors’ claims.
The Code significantly changes the priority waterfall for distribution of liquidation proceeds.
Insolvency related costs
Secured creditors and workmen dues up to 24 months
Other employee’s salaries/dues up to 12 months
Financial debts (unsecured creditors)
Government dues (up to 2 years)
Any remaining debts and dues
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.
KEY CHANGES/HIGHLIGHTS OF IBC:
IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the Companies Act.
The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.
The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days. Moratorium period of 180 days (extendable up to 270 days) for the Company.
Insolvency professional to take over the management of the Company clearly defined ‘order of priority’ or the waterfall mechanism.
Introduce a qualified insolvency professional (IP) as intermediaries to oversee the Process
Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information
Utilities as a depository of financial information.
The legislature has sent a clear signal and has cracked the whip on the defaulters and the laws have been shaped with more teeth.