Blog Details

Author - Advocate Pallavi Parmar 

The World Bank's Ease of Doing Business report states that it takes an insolvency case more than four years on an average to get resolved in India. A person, closer to the grass-root level, would confirm the period to be more than that. Keeping such a situation in view, the Government of India overtook a plan and replaced the then existing insolvency laws with a more consolidated and comprehensive legislation to facilitate easy and time-bound closure of a business. The Rajya Sabha passed the Major Economic Reform Bill moved by the government – Insolvency and Bankruptcy Code 2016 on 11th May 2016. The Lok Sabha passed the Bill on 5th May 2016. After receiving the assent of the President on 28th May 2016, the Insolvency and Bankruptcy Code 2016 came into effect from August 2016 onwards. The Code aims at amending and consolidating the laws relating to insolvency resolution of companies entities, partnership, and individuals, contained in various enactments, into a single legislation. The timely resurrection and resolution of value of debtors' assets is the primary motive of the Code. It has been embedded with several new, unique and highly relevant features.

INSOLVENCY RESOLUTION PROCESS:

The default by corporate debtors should meet the minimum criteria of INR 100,000 to initiate an insolvency process. The insolvency resolution process can be undertaken by the financial creditor, the operational creditor or corporate debtor himself. Under Section 7 of the Code, a financial creditor will file an application before the National Company Law Tribunal (NCLT) for starting insolvency proceedings against the corporate debtor. NCLT may reject the same on the grounds of no default on the part of the debtor. The Tribunal has 14 days to entertain the application from the day of its making. Under Section 8, an operational creditor will send the debtor a prior notice of 10 days to pay back the dues. In case of continuing default, the creditor can apply for the insolvency resolution process. The corporate debtor himself, as stated in Section 10 of the Code, can file an application to initiate the resolution process, producing the books of accounts and other financial documents of the business, at the same time. The complete procedure is supposed to be done within 180 days after the admission of the application, extendable to an additional period of 90 days, as decided by NCLT. The Tribunal has to either admit or decline the request within 14 days and also appoint an interim insolvency professional in consent with the Insolvency and Bankruptcy Board of India (IBBI).

MORATORIUM:

The Insolvency and Bankruptcy Code provides for an automatic moratorium of 180 days against any debt recovery actions by the creditors and also prohibits a few things. Transfer, encumberment, alienation or disposal of any property or right, any action to recover any security interest created by the debtor regarding the property concerned, recovery of any property under the possession of the corporate debtor and supply of goods and services to him are all prohibited under the purview of the moratorium.

APPOINTMENT OF A RESOLUTION PROFESSIONAL (RP):

Financial creditor, who has filed the petition, should propose the name of interim Resolution Professional in the application. The appointment of such a professional will be subsequently approved by 75% of the creditors in their first meeting. The creditors' committee shall decide upon the fees of the Resolution Professional. Such appointment is subject to prior approval by the Insolvency and Bankruptcy Board. The Resolution Professional will be invested with power to control over the assets and financial details of the debtor, accept or decline claims based on the verification of the same from the debtors' database, manage the latter's affairs and have access to their books of accounts. This professional shall have all the powers of the Board of Directors of the company in debt and will act as a supervisory authority for the managers and officers and the financial institutions of the corporate debtor. He shall be appointed for a term of 30 days only.

LIQUIDATION:

The Insolvency and Bankruptcy Code, 2016 defines liquidation as "the process of acquiring the assets of the corporate debtor and releasing them in the market and then distributing the sale proceeds to the creditors as per their priority list described under Insolvency and Bankruptcy Code, 2016".

The reasons for liquidation include the application not presented to NCLT within 180 days or as decided, the rejection of the same by NCLT, contravention of an application by the debtor, approval of the creditors' committee for liquidation with the resolution process on the part of the corporate debtor. NCLT has to make a public announcement, under Section 13 and 14 of the Code regarding such liquidation. If not replaced, the RP himself will act as a liquidator. He will form an estimate of the debtors' assets and conduct the process following the rules and regulations laid down in the Code. After verification of all the claims submitted by creditors, the liquidator will either approve or reject them. In case such an application is accepted, the liquidator will sell the assets of the debtor through private contract or a public auction. The claims of the creditors have to be satisfied under Section 53 of the Code.

DISTRIBUTION OF ASSETS:

The sale proceeds from the liquidation shall be distributed in the following manner on a priority basis –

• Costs of the insolvency resolution and liquidation processes.
• Workmen dues and claims of secured creditors.
• Salaries of employees other than workers.
• Any amount due to the State or Central Government.
• Financial debt owed to unsecured creditors. 
• Any other remaining dues.

The fees of the liquidator shall be deducted from the proceeds, proportionately. Then only the remaining proceeds are received by the relevant persons.

India's weak insolvency regime, systematic abuse and its significant inefficiencies have resulted in the distressing current state of credit markets. The Insolvency and Bankruptcy Code is a promising move by the Government which may bring about far-fetched reformations with a thrust on creditor-driven insolvency resolution.