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
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.
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
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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