Insolvency & Bankruptcy Code

INSOLVANCY & BANKRUPTCY CODE-2016- An effect will lies in its implementation:

The Upper House (Rajya Sabha) passed Insolvency & Bankruptcy Code on 11th May, 2016 that will ensure a time bound insolvency resolution and create a database of serious defaulters in India but the implementation of the code will remain the key issue as the present code envisage creation of multiple regulator/ authorities/ agencies like Insolvency & Bankruptcy Board, Insolvency professionals, Insolvency professional agencies, utilities agencies. Apart from all these agencies etc, there are NCLT, NCALT, DRT, DRAT etc. which are adjudicating authorities under the Code. Appeals & references in every step will make the task
cumbersome and defaulting debtors shall have escape routes for linger on the matter, thereby defeating the very purpose of the code.

At present there are a slew of legislations governing the insolvency & bankruptcy framework in India like:

• Companies Act, 1956/2013
• Sick Industrial Companies Act, 1985
• Recovery of debt due to the bank & financial institution act, 1993
• Securitization Act, 2002
• Presidency Town Insolvency Act, 1909
• Provisional Insolvency Act, 1920
• DRT, DRAT

The present Insolvency and Bankruptcy Code shall overwrite the provision of aforesaid Act as far as matter relating to Insolvency and Bankruptcy Code is concerned. The code is basically divided into two parts; one that dealt with corporate insolvency and bankruptcy and other one for individuals and partnership firms. Apart from this the code is set to establish Insolvency and Bankruptcy Board to register and regulate insolvency professionals, agencies, and information utilities.

The brief snapshot of the key feature of the code is given as under:

A: Company and LLP

Applicability:

1. Companies
2. LLP
3. Partnership firms
4. Individuals
5. Other corporate & bodies specified by the Government

Authorities :

1. Insolvency Board : to register & regulate insolvency professionals, insolvency professional agencies, information utilities.
2. Insolvency professional: to conduct insolvency resolution process.
3. Insolvency professional agencies: to be created by the board who shall further appoint the insolvency professionals for insolvency resolution process.
4. Information Utilities: To set up for creation & storage of financial information etc.
5. NCLT: adjudicating authority for insolvency issues for company & LLP.
6. NCLAT: appellant authority to appeal against the order of NCLT.
7. DRT:  to adjudicate insolvency issues of partnership firms and individuals.
8. DRAT: to prefer appeals against the order of DRT.

Establishment of NCLT and NCLAT is yet to be notified by the Government as per provisions of Companies Act, 2013

Insolvency Resolution process for company & LLP

• Any corporate debtor itself or a financial creditor or an operation creditor can initiate corporate insolvency resolution process by filing an application before   adjudicate authority (NCLT) when default is occurred.
• Adjudicating authority may either admit or reject such application
• On admission, Adjudicating Authority  shall appoint an interim insolvency resolution professional whose appointment is subsequently confirmed by committee of creditors. Insolvency resolution process must be completed within a period of 180 days of submission of application. However this period can be extended for further period of 90 days, if more than 75% of creditors are agreed to such extension of time.
• There is also a provision of fast track resolution process for small companies which should be completed within  a period of 90 days
• The resolution process shall start with a public announcement to this effect.
• The debtor must submit a detailed resolution plan to the insolvency resolution professional giving their plan that how it will make the payment of creditors.
• On submission, adjudicating authority shall either accept the plan or reject it.
• Adjudicating authority shall declare a moratorium period prohibiting certain action against the debtor like institution of suits, continuation of pending suits including execution of any judgment, decree or order recovery or enforce of any security interest etc.

Liquidation process  of company & LLP:

A liquidation process shall be initiated in following circumstances:

Adjudicating authority does not receive a resolution plan within a prescribed time period or plan so submitted is rejected.

Creditors with 75% majority decide to liquidate the debtor

Where there is violation of Resolution plan approved by adjudicating authority

Where a liquidation order is passed, no legal or other proceeding shall be initiated without the permission of adjudicating authority and all power of Board of director of debtor and managerial personal shall be vested with liquidator

The liquidator shall verify all claims, take into custody all assessed properties etc, evaluate the assets & properties, invite the claims of the creditors etc.

The liquidator shall consolidate the claims of all creditors, admit or reject them, determine the value of such claims. Creditor shall have right to file an appeal before adjudicating authority in case of rejection of claim by the liquidator.

The assets of the debtor in liquidation shall be disbursed in following order

1. Fees of insolvency professional
2. Workmen wages
3. Secured creditors
4. Employees wages
5. Unsecured creditors
6. Govt. dues
7. Remaining debts
8. shareholders

 B:  Insolvency and resolution process for Partnership firm and individual:

Application by individual, partnership firm who is debtor or the creditor can start the process of resolution process.

Such an application has to be made to the adjudicating authority ( DRT)

On admission, the adjudicating authority shall appoint the insolvency resolution process professional.

Debtor will prepare a resolution plan and shall submit to the adjudicating authority which may accept or reject it.

Like in case of insolvency of company and LLP, adjudicating authority shall have power to grant a moratorium against start or continuation of legal and other proceeding against the debtor.

A meeting of creditors shall be called by the insolvency professional chalking out the plan of repayment by debtor and in case same is approved shall be furnished to the adjudicating authority for its approval.

Discharge order shall be passed by the adjudicating authority based on the repayment plan approved by all concerned.

Fresh start option:

In case of debtors gross total income does not exceeds Rs. 65000/- and the aggregate value of qualifying debts of debtor does not exceeds Rs. 35000/- , an individual can apply for discharge of liability to pay the debts to the adjudicating authority.

In case application is accepted by the adjudicating authority, it will appoint a resolution professional who shall recommend for fresh start.

The Adjudicating authority shall pass an order on the basis of report of insolvency professional. In case adjudicating authority is of the opinion that debtors is worthy for fresh start, it will discharge the debtor the rom the all liability in respect of debt under consideration.]

Bankruptcy:

Where adjudicating authority does not accept the resolution process plan or fresh start plan or debtor and creditor so decides, adjudicating authority shall appoint bankruptcy nominee who may be insolvency resolution professional.

A public announcement shall be made for inviting the claims of creditors.

Such bankruptcy nominee shall prepare a list of all the estate of debtor

A bankruptcy order shall be passed by the adjudicating authority

Entire e state of the Bankrupt shall vest with the bankruptcy trustee which be used for paying off the debt of the creditor.

A discharge order shall be passed by the adjudicating authority.

Bankrupt shall not be, appointed as trustee or representative in respect of any trust or settlement, as public servant, elected to any public office, being sitting, electing or voting of any local authority. Apart from this a bankrupt shall be appointed as director of any company.

The content of this article is intended to provide a general overview of the Insolvency and Bankruptcy code and a specialist advice should be sought about your specific circumstances.

Sushil Aggarwal

S&A Associates

Advocates & Solicitors

Skaggarwal68@yahoo.com