Mar 16,2019 | 15 min read

Key Features of Insolvency and Bankruptcy Code, 2016

"Key Features of Insolvency and Bankruptcy Code, 2016."

Author – Advocate Khyati Dhuparr and Associate Rishimia Rawat

In neophyte’s terms, ‘Insolvency’ is a milieu where an individual or organization has more debts than available assets and is unable to meet its immediate obligations. ‘Bankruptcy’ on the other hand is a legal status accorded to an individual or an institution, who cannot pay back its debts.

An asynchronous system of resolving commercial insolvency existed before Insolvency and Bankruptcy Code, 2016 stemmed from the failures of existing laws to effectively deal with the insolvency procedures. A unified statute governing happenings of insolvency and bankruptcy of various organizations did not exist in India. The provisions relating to the insolvency of corporations were disintegrated amongst various laws, namely The Companies Act,1956, the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB Act), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). There were two statutes, namely, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 governing instances of individual bankruptcy which existed during the British reign.

The Companies Act of 1956 had a provision of winding up of a company if it was unable to meet its debt obligations in addition to the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) in an around the year 1980 for the rehabilitation of sick companies, precisely for companies whose net worth had become negative. However, the act did not prove to be highly efficient for recovering debt. The Provincial Insolvency Act, 1920 was applicable for non-corporate insolvencies but it was ineffective and had dwindled because of non usage. During the reign of the NDA government the SARFAESI Act came into picture which proved to be comparatively better than the earlier enactments.

In between 2008 to 2014, Banks had lent indiscriminately leading to a very high Non-Performing Asset (NPA) ratio. The NPA grew from approximately 2 % to 5% in 2015. This led to a prompt action by the government, the first step towards the birth o the Insolvency and Bankruptcy Code, 2016.

Timeline of the Insolvency and Bankruptcy Code, 2016

  • 2015

21st December-The Insolvency and Bankruptcy Code, 2015 was introduced by the Finance Minister, Mr. Arun Jaitley in the Lok Sabha.

23rd December- The Code was referred to a Joint Committee of Parliament.

  • 2016

28th April-The Joint Committee of Parliament submitted its recommendations and modified code based on its suggestions.

5th May-The modified code was passed by Lok Sabha.

11th May- The Code was passed by Rajya Sabha

28th May-The code received the assent of the then President Pranab Mukherjee.It was notified in The Gazette of India.

1st December-The Code became effective.

 

 

FEATURES OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

  1. The code repeals the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920.
  2. It amends eleven legislations including, Indian Partnership Act, 1932, The Companies Act, 2013, The SARFAESI Act, 2002 amongst a few.
  3. It is a compendious Code enacted as the Preamble states, to consolidate and amend the laws related to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound procedure.
  4. The code has an overriding effect on all other prevailing laws relating to Insolvency & Bankruptcy in the country.
  5. It sees a drift from the existing ‘Debtor controlled’ to a ‘Creditor in control’ regime.
  6. A separate insolvency resolution process is outlined for individuals, companies and partnership firms.
  7. There is a clear and unambiguous process to be followed.
  8. The code encompasses one chain of authority. It does not allow the Civil Courts to interfere with the application pending before the adjudicating authority, thereby reducing the mounting arrears of litigations.
  9. An Insolvency and Bankruptcy Board of India, is established on October 1, 2016 with the Head office being located at New Delhi. It aims to oversee the insolvency proceedings in the country and regulates the entities (Insolvency Professionals, Insolvency Professional Agencies and Information Utilities) registered under it. It also writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.
  10. The National Company Law Tribunal (NCLT) has been constituted to be the adjudicating authority for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs). Eleven benches of the National Company Law Tribunal (NCLT) have been set up in different states under Part II,Chapter VI of the Code. The DRT (Debt Recovery Tribunal) is the adjudicating authority for partnership firms and individual.
  11. The Bankruptcy process is to be resolved within a stipulated time period of 180 days, extendable for another 90 days (270 days in total) for the Company.
  12. A qualified Insolvency professional acts as an intermediary and takes over as the manager and oversees the process.
  13. It also provides for establishment of insolvency professionals agencies to enroll and regulate insolvency professionals as its members in accordance with the code and regulations.
  14. It also provides for the establishment of Information Utilities (IUs) which function as a databank to collect, collate and disseminate financial information and to facilitate insolvency resolution. This is considered to be an eccentric feature of the code.
  15. The priority for distribution of liquidation proceeds has been provided under a waterfall mechanism to aid for steady resolution process.
  16. The Code has not adopted the UNICITRAL model, however it provides for provisions enabling government to enter into agreements and treaties with governments of foreign countries.

The code is a federated legislation that dispenses a structured and time bound mechanism thereby promising a reform in the arena of Insolvency and Bankruptcy laws in the history of our country. It is the first huge step towards facilitating business practices in India. Quick resolution of business withers away the possibility of capital being squandered on weak business entities. It is a boon for our country as India is a developing as well as capital starved country and the Code aims as well as succeeds to ensure the upliftment of the economy of India.

 



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ABOUT THE AUTHOR



Khyati Dhuparr

Partner, V&K Law | Corporate & Competition Lawyer with specialization in dealing with Start-ups | A foreign-educated Indian lawyer skilled in utilizing strong legal knowledge focusing on Indian and International Comparative Competition/ Antitrust Laws , M&As and Corporate Laws including special focus on Start-ups. Highly motivated and results driven with a proven successful track record of running a legal practice in a boutique law firm in India.

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