Key Highlights of the Bankruptcy and Insolvency Code, 2016

The bankruptcy proceedings in India are governed by various laws – Sarfaesi Act, Sick Industrial Companies Act, Companies act, Presidency Towns Insolvency Act, Payment and Settlement Systems Act, Limited Liability Partnership Act, Indian Partnership Act, Central Excise Act, Customs Act, Income Tax Act, Provincial Insolvency Act, and Recovery of Debts Due to Banks and Financial Institutions Act, but unfortunately these Acts haven’t been successful in restricting the increasing number of defaulters.

The process of winding-up is protracted and on an average it takes 4 years owing to obscurity in the current bankruptcy legal framework, while the insolvency regulation in countries such as United States of America and United Kingdom takes 1 and 1.5 years, respectively. In India, only 25% of the asset value is recovered by the creditors even after the completion of the liquidation process. The Bankruptcy and Insolvency Code, 2016 proposes to consolidate a comprehensive insolvency legislation and would encircle all companies, partnerships and individuals. The code was passed by both the houses and it received President’s assent on 28th May, 2016.

“Default” under the code means “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor”. The code provides that the insolvency process has to be completed within 180 days. The limit can be extended to 270 days and in a case where insolvency cannot be resolved, the assets of the borrowers may be sold to repay the creditors. The insolvency process shall be conducted by licensed insolvency professionals who would be members of insolvency professional agencies. Information utilities will collect, maintain and disseminate information relating to the debt of companies.

The code proposes two tribunals to adjudicate cases i.e Debt Recovery Tribunals in case of individuals, and National Company Law Tribunal in case of companies. Insolvency and bankruptcy Board of India shall be established to regulate insolvency professionals and information companies and would comprise of 10 members including representatives from ministries of finance and law and the Reserve Bank of India (RBI).  Any financial default can trigger an insolvency resolution process, the applicant may be a financial creditor, operational creditor or corporate debtor. On acceptance of the application by the National Company Law Tribunal, an interim resolution professional shall be appointed and it must resolve the case within 180 days or a maximum 270 days or else the company goes into liquidation. The Code provides for an automatic moratorium of 180 days which will stay on all creditors claims, no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor.

The power of the board will be suspended and the company would have to report to the resolution professional and supply information relating to financial information. The resolution professional would constitute the creditors committee. Insolvency resolution plan has to be approved by 75% majority vote. The decision of the committee is binding on the creditors and debtors. In case no resolution is reached within the resolution period or the creditors have resolved to liquidate the debtor during the resolution period, the adjudicating authority will pass an order for liquidation of the debtor. The insolvency resolution professional will act as liquidator for liquidation of the debtor. In case of liquidation, the assets of the corporate debtor will be distributed in accordance with the provisions of the code. The liquidation process cannot be appealed after the expiry of the prescribed time after passing of order of liquidation. However, an appeal can be considered by adjudicating authority on limited grounds. The directors of the company can initiate voluntary liquidation by filing a petition which needs to be approved by a special resolution in a general meeting for the voluntary winding-up alongside the affidavit of solvency of company.

The Code has not adopted the UNCITRAL model of cross-border insolvency, but the Central Government may enter into an agreement with the government of any other country  to enforce the provisions of the Code. The proceeds from sale of the liquidation shall be distributed in the following order of priority – The insolvency resolution and liquidation costs to be paid in full, salaries of the employees/ workers upto 24 months, wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date, financial debts owed to unsecured creditors any amount due to the relevant state government or government of India. The Code also provides for punishment in terms of imprisonment as well as fine for defrauding creditor, misconduct in course of corporate insolvency process, falsification of books of corporate debtor, making wilful and material omissions from statements relating to affairs of corporate debtor, false representation to creditors, contravention of moratorium or resolution plan, providing false information.

The Code envisages a uniform and a structured time bound process which will certainly expedite the recovery process and improve India’s position in the World Bank’s ranking on the ease of resolving insolvencies and doing business in India. The Code also contains provisions for addressing cross-border insolvencies in India which is a massive step to hold and prosecute the defaulters who take shelter abroad. However, the main challenge would be the appointment of insolvency professionals and the drafting of procedural rules for information utilities and insolvency professionals.