INTRODUCTION

The Bankruptcy and Insolvency Code 2016, India’s new bankruptcy law, aims to consolidate existing laws by framing a single law for insolvency and bankruptcy of legal persons, partnerships and individuals. With the promulgation of the code, the Insolvency Law of the Peoples of the Presidency of 1909 and the Provincial Insolvency Law of 1920 are repealed. In addition, 11 laws are modified. These include the DRT Act of 1993, the SARFAESI Act of 2002, the SICA Repeal Act of 2003, the LLP Act of 2008 and the Companies Act of 2013. Multiple overlapping laws and adjudication authorities currently operating in India that are dealing with financial defaults and insolvency of corporate companies, partnerships and individuals give rise to a number of conflict situations. Therefore, the existing framework does not provide creditors, debtors and other stakeholders with certainty about the outcome and time frame regarding the resolution process. In this context, the code legislation, which is part of the second generation economic reforms in India, has been designed with a view to resolving the existing difficulties with the timely resolution of the insolvency resolution process. The current legal and institutional framework does not assist in the effective and timely recovery or restructuring of non-performing assets causing undue stress on the Indian credit system. Recognizing these difficulties, the Code, in its legal framework, aims to complete the entire resolution process within a given period. The Code, if used correctly, can improve the business environment and ease distressed credit markets.

PURPOSE OF THE CODE:

In the preamble to the Code, the objective has been very clear. “An Act to consolidate and amend the laws relating to the organization and resolution of insolvency of legal persons, partnerships and individuals on a limited time basis to maximize the value of the assets of such persons, to promote entrepreneurship, the availability of credit and balancing the interests of all these parties, including altering the order of priority of payment of government debts and the establishment of a Bankruptcy and Insolvency Board of India, and for matters related or incidental thereto” .

KEY POINTS:

• The code has five parts. While Part I and Part V have no chapters, the other Parts each contain seven chapters. Part III, which deals with insolvency resolution and bankruptcy of sole proprietorships and partnerships, contains a maximum number of sections (110), followed by Part II, which deals with insolvency resolution and liquidation of legal persons, contains seventy-four (74) sections. Part IV, which deals with the regulation of insolvency practitioners, agencies and information services, contains six thirty (36) sections. Part V, dealing with various, contains thirty-two (32). Part I, which deals primarily with definitions, contains three (3) sections.

• The code does not address the legal framework for the resolution of bankruptcies of financial institutions and financial service providers.

• The code has introduced the concept of a few entities for the first time in Indian insolvency and bankruptcy law. These entities are Professional Bankruptcy Agencies (IPA), Bankruptcy Professionals (IP), Interim Resolution Professionals (IRP), Resolution Professionals (RP), Resolution Applicants (RA), Information Services (IU), Creditors Committee (CC ), Financial Creditor (FCs), Operational Creditors (OCs), Corporate Debtors (CDs).

• Creditors have been classified as financial, operational, guaranteed, unsecured and holders of decrees.

• The Awarding Authority (AA) for legal entities is NCLT, while the same for corporate firms and individuals is DRT.

• The term to complete the contest resolution process is 180 days with an extension of another 90 days – total 270 days.

• The AA would decree by order a moratorium for the entire term of the bankruptcy resolution process by virtue of which no coercive action may be exercised by anyone who causes damage to the operation of the debtor company as a going concern.

• The first track corporate insolvency resolution process has been introduced for certain categories of corporate debtors.

• Anyone involved in the resolution process of the company aggrieved by the AA order may prefer an appeal to the National Company Law Appeals Tribunal (NCLAT). The interested person aggrieved by the NCLAT order may prefer an appeal to the Honorable Supreme Court.

• The same for individuals and partnerships are the Debt Recovery Court of Appeals and then the honorable Supreme Court.

• STEPS TO FOLLOW FOR THE RESOLUTION PROCESS OF CORPORATE BANKRUPTCY BY FINANCIAL CREDITOR

1. The Financial Creditors (FC), individually or jointly with the other FCs, submit an application to AA with all the required details.

2. AA receives defect request/rectification.

3. AA sends notice for defect rectification within 7 days.

4. AA admits the application within 14 days subject to compliance with all requirements under the Code and notifies the secured creditor and corporate debtor.

5. The Bankruptcy Resolution process (ICD) begins.

6. AA completes an IRP within 14 days of the ICD.

7. IRP handles the management of CD matters.

8. IRP collects all necessary information/data/claims and determines CD’s financial position.

9. IRP constitutes a CC.

10. CC accepts IRP as RP or appoints a new RP through AA.

11. RA presents a resolution plan.

12. RP reviews the plan and submits it to CC for approval.

After this two situations may arise.

State 1:

1. CC approves the plan with a vote of not less than 75% of the voting shares of FC.

2. PR presents the approved plan to AA.

3. AA approves the plan that will be binding on the CD and other interested parties, including guarantors.

Prayed

3. AA rejects the plan and orders its liquidation.

4. The liquidation process begins, RP carries out all the procedures for the liquidation of the company in accordance with the provisions of the code.

Situation 2:

1. CC rejects the plan by majority vote.

2.AA Settlement orders.

3. The liquidation process begins, RP carries out all the procedures for the liquidation of the company in accordance with the provisions of the code.

In the case of the operating creditor, the steps are almost the same except that the documents that must be presented to AA are different. In the case of a corporate client, the steps are almost the same as those of financial creditors.

REORIENTATION OF CENTRAL GOVERNMENT POLICY TO ADDRESS OCCUPATIONAL DISEASE AND THE CONSEQUENT INCREASE IN DOUBTFUL ASSETS

In any economy, the favorable industrial climate should provide a favorable environment for doing business and a quick exit route in case an industrial unit fails. In the early 1980s, as the government caught on, it began to relax control over industries. The incompetent industries, which were receiving government protection, came for a serious discussion. It was agreed that nationalization as a solution would be ineffective. At the same time, in the absence of adequate bankruptcy laws and an exit policy, restructuring through market-driven forces also proved ineffective in the country. Due to pressure from various political sectors, the government finally opted for a middle path. The enactment of SICA, 1985 was the result of such a policy resolution at the central government level. However, the BIFR, which was formed to operationalize the SICA provisions, did not work as expected by policymakers. SICA was heavily abused by corporate debtors to the extent that it was used as a protective shield to not meet commitments with creditors. This was mainly due to the provisions contained in Section 22 of the SICA of 1985. Meanwhile, other laws, namely the DRT Law of 1993, the SARFAESI Law of 2002, were enacted mainly not with a view to restructuring and rehabilitating the companies sick but with the main objective of recovering what is owed by secured creditors. Even then, there were no tangible results either with respect to reactivation or recovery of delinquent debts. The result was a sharp increase in NPA growth. In such an economic environment, investors did not show much interest in investing in India. The government was also under pressure from international agencies, namely the IMF and the World Bank to carry out second generation economic reforms. The result was the enactment of the 2016 Bankruptcy and Insolvency Code.

conclusion

India’s ranking with respect to insolvency resolution is 136 out of 189 countries. It takes about 4.3 years to resolve insolvency in India compared to the world average of 2.6 years. World Bank data shows that there is a positive correlation between the rate of creditor recovery and the strength of the legal framework for insolvency. In this perspective, the code promises to carry out far-reaching reforms with a focus on the creditor-driven insolvency resolution process. Notwithstanding the code, which is a unified law, which provides for a structured and time-bound process for the resolution and liquidation of insolvency, it will be seen over a period of time whether the various provisions and steps incorporated in the Code will make any difference to address the growing problem of industrial disease. When a specialized body of experts, namely the BIFR, fails, it must be seen how the NCLT with combined and composite functions will be effective enough to address the range of problems related to the country’s underperforming industrial activities. On the other hand, a review of the literature on the prevailing insolvency system in the different countries suggests that a well-designed insolvency law does not necessarily guarantee the recovery of debts to the extent foreseen. Again, there are economies that have well-designed laws but face challenges in implementing them effectively. However, the enactment of the Code, which establishes a collective, linear and time-bound process for the resolution and liquidation of insolvency, is a good step in the right direction.