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Insolvency & Bankruptcy Regime in India

A situation when a debtor is unable to be a creditor is referred to as insolvency. The legal process of resolution of insolvency is known as bankruptcy. Due to the rising rate of Non-Performing Assets in the banking sector, time-consuming insolvency resolution & law recovery rates, lending rates were usually higher and investor confidence was law, which affected the credit cycle & ease of doing business. There was an urgent need for a proper consolidated law on insolvency and bankruptcy.

Before 2016, Insolvency & Bankruptcy was governed by more than one Act. In the case of Corporate Insolvency, the Companies Act,1956, the Companies Act,2013 & Sick Industrial Companies Act, 1985, govern the insolvency & bankruptcy landscape. In the case of retail/individual borrowers, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 & Recovery of Debts [Due to Banks and Financial Institutions] Act, 1993 governed the insolvency & bankruptcy landscape. In 2016, Parliament passed the Insolvency and Bankruptcy Code, 2016, which is a consolidated law on insolvency & bankruptcy in India.

Insolvency & Bankruptcy Code, 2016, transitioned India from a regime of the debtor in possession to a regime of the creditor in control. Section 188(1) of Insolvency & Bankruptcy Code, 2016, established Insolvency & Bankruptcy Code, 2016. Insolvency Professionals were created in Chapter 4 of Insolvency & Bankruptcy Code, 2016 for the supervision of the insolvency resolution process, advising the creditors and custody and management of debtor’s assets. Under Section 210 of Insolvency & Bankruptcy Code, 2016, information utilities were registered, these information utilities are the central depository of credit-related information of the borrower. In the regime of the debtor in possession, the debtor remained in the possession of assets while insolvency proceedings were underway. In the new regime of the creditor in control, when an insolvency application is accepted by adjudicating authority, an insolvency professional is made in charge of the company to manage the assets of the debtor. Adjudicating Authority for the purpose of corporate & individual insolvency is separated under the Insolvency & Bankruptcy Code, 2016, adjudicating body for insolvency resolution cases of individual debtors & debts in a partnership firm, shall be Debt Recovery Tribunal & Adjudicating Authority for insolvency resolution cases of companies & LLP, shall be National Company Law Tribunal. Insolvency Resolution is to be passed within the Moratorium Period of 180 days. Within the moratorium period, no recovery proceedings are to be conducted against the company in question. At the discretion of Insolvency Professional, the moratorium period can be extended for 90 days.

By way of Insolvency Resolution, The company can be sold to the resolution applicant or can be liquidated. Financial Institutions/Firms are not covered under Insolvency & Bankruptcy of Code,2016.

Stake Holders in an Insolvency

The state of insolvency occurs when a debtor is unable to pay off its debt to the creditors. The creditors can be of two types, I.e Financial Creditor & Operational Creditor. For example XYZ Ltd., is a company in the business of manufacturing iron gates. XYZ Ltd., has secured a loan of Rs. 10 Crore from DEF Bank for setting up a manufacturing plant. GHI Iron Ore Ltd. Is a company is the business of mining & supplying raw iron ore to manufacturing companies? XYZ Ltd. procures the iron ore it uses to make gates from GHI Iron Ore Ltd. on credit, the payment for the iron ore is to be made collectively every 3 months. Demand for Iron Door lowered & XYZ Ltd. Started losing customers to competitors. Soon XYZ Ltd. Runs out of business and is unable to pay loan payments of DEF Bank & the payment of Iron Ore, which it procured from GHI Iron Ore Ltd. . XYZ Ltd. Defaults on both the payments and declares itself insolvent. In this case, DEF Bank is the financial creditor who gave a loan, while GHI Iron Ore Ltd. is an operational creditor which supplied iron ore for the operation of the business.

Application for initiation of Corporate Insolvency Resolution Process 

A corporate insolvency resolution process under Insolvency & Bankruptcy Code, 2016, can be initiated under Section 7 & Section 9 of Insolvency & Bankruptcy Code, 2016. Under Section 4 of Insolvency & Bankruptcy Code, 2016, a minimum default of One Lakh Rupees is the criteria for initiation of the Corporate Insolvency Resolution Process. Due to COVID-19 the minimum default amount is increased to One Crore Rupee.

As per Section 6 of Insolvency & Bankruptcy Code, 2016, initiation of the corporate insolvency resolution process can be done by a financial creditor, an operational creditor or the corporate debtor itself. Financial Creditors can initiate proceedings under Section 7 of the Insolvency & Bankruptcy Code, 2016. Financial Creditors can jointly or individually or any other person on behalf of financial creditors as may be notified by the central government can file an application for corporate insolvency resolution process against the corporate debtor, who has defaulted to the adjudicating body.

Financial Creditors under Section 21(6-A) (a) & Section 21(6-A) (b), are required to file applications jointly with not less than one hundred such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less.

Financial Creditor under who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less.

The financial creditor shall, along with the application furnish, a record of the default recorded and other documents, as may be specified; the name of the resolution professional proposed to act as an interim resolution professional; and any other information as may be specified by the Board. The application must be accompanied by a fee as prescribed.

If Adjudicating Authority is satisfied that, default has occurred and the application is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application. If Adjudicating Authority is satisfied that default has not occurred or the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application. Adjudicating Authority shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority. The corporate insolvency resolution process shall commence from the date of admission of the application. Adjudicating Authority shall communicate the order to the financial creditor and the corporate debtor.

Section 8 of Insolvency and Bankruptcy Code, 2016, requires an operational creditor, on the occurrence of a default, to deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice and bring it to the notice of the operational creditor. After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process. The application must be accompanied by a fee as prescribed.   Adjudicating office within 14 days of receipt of application pass or reject the application by order. The corporate insolvency resolution process shall commence from the date of admission of the application.

References

• Companies Act, 1956

• Companies Act, 2013

• Sick Industrial Companies Act, 1985

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

• Recovery of Debts [Due to Banks and Financial Institutions] Act, 1993

• Insolvency and Bankruptcy Code, 2016

Co-author - Rudraksh Mathur