The Insolvency and Bankruptcy Code, 2016 was passed by the upper house on 11th of May, 2016 and then subsequently it received the presidential assent on 28th of May, 2016. The Act has come at a very critical stage where the banking industry has been facing the problems of dealing with “bad loans” and has been looking for an efficient solution which could solve the matters in a time bound manner. This Code is inclined towards both, the domestic and foreign creditors, keeping in mind the cross-border transactions which were improved upon by the Companies Act, 2013. It is being seen as an attempt to match the international corporate standards which are followed in advanced jurisdictions of the world.
This Code aims to cover both, the corporate bodies as well as a common individual. It has the primary objective of compiling laws relating to insolvency, re-organization, liquidation and bankruptcy with relation to companies and an individual.
Part III of the Code sets out the legal regime dealing with the insolvency mechanism for individuals and partnership firms and includes within its ambit, 3 processes, namely, the 'fresh start process', 'the insolvency resolution process' and 'bankruptcy'. The threshold for applicability of Part III of the Code to individuals and partnership firms have been set at a minimum of INR 1,000. However, the Central Government may by notification increase the threshold to a minimum of INR 1,00,000
It would repeal plethora of acts and code which made it a complex and time consuming process with respect to all spheres related to insolvency and its procedures. It has specifically looked at making such matters “time-bound” so as to increase the liquidation amount which is received from the assets. Earlier, due to passing of time because of the long process of liquidation, the assets used to lose value over time. It has the primary objective of making resolutions as a first preference remedy for recovery. The Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authority and deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liability entities respectively.
It talks specifically about creating new branches, so as to facilitate the process. It introduces new branches such as Insolvency Resolution Professional Agencies (IPAs), Insolvency Professionals(IP) and Information Utilities(IU). These branches will supplement the procedures stipulated under the code.
As this Code aims to bring plethora of laws under its ambit, its advent has repealed many other laws, i.e- Provincial Insolvency Act, 1920, Presidency Towns Insolvency Act, 1909, Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA), Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Limited Liability Partnership Act, 2008 (LLP Act), (SARFAESI) and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI).
The summary of the procedure followed by the code is as follows: -
- Initiation of Proceedings: The power to initiate the matters enumerated under the code has been given to the creditor or the debtor. The Insolvency professional (IP) provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. The process has been given a time period of 180 days to be sought out. Under these 180 days any legal action against him is prohibited.
- Advice from the Insolvency Professionals: The financial creditors who lent money to the debtors will be informed and advised about the debt and its repayment. They together will take a decision, which may range from reviving the debt to going under liquidation process. Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors.
- Liquidation: Due to this code, to solve the complex process of liquidation faced by the debtor an insolvency professional will be granted to him, so that he can act as a catalyst to the whole process and thereby saving the assets from being depreciated due to passing of time.
The preferential payments with the proceeds of the sale has been stipulated under the code as: - i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.
Some of the issues that might be faced by this code are:-
- Multiple Insolvency Professionals and Insolvency Professional Agencies without clear stipulation of their powers could lead to conflict with regard to procedures that may be handled by each of them.
- The Code is silent as to why such preferential payments are being made. There being no such precedent on the code, it could be debatable as to who receives preference over whom.
- The smooth functioning of the Code depends on the functioning of new entities such as insolvency professionals, insolvency professional agencies and information utilities. These entities will have to evolve over time for the proper functioning of the system. In addition, the NCLT, which will adjudicate corporate insolvency has not been constituted as yet, and the DRTs are overloaded with pending cases.
