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Introduction to the code

As the name suggests the insolvency and bankruptcy code aims at establishing a single, unified, uniform law to solve issues related to the insolvency and bankruptcy of firms. The code was introduced into the parliament in 2016 and the provisions of the code came into force on 19th August 2016. The code is an amendment in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act’ 2002,(SARFAESI) Recovery of Debts Due to Banks and Financial Institutions’1993,(RDDBFI). It also repealed various acts including the Sick Industrial Companies (Special Provisions) Repeal Act’2003,(SICA).

One of the keywords of the code is insolvency which can be understood as being in a state where a person/firm is unable to pay back the debts owed. Another keyword is bankruptcy which is often used inter- changeably with the word insolvency. However, there is a hairline difference between the two, bankruptcy refers to a legal status imposed by the courts which highlights their obligations towards the creditors they have taken loans from and their inability to repay the same.

Here is more information about where we are moving ahead with the insolvency and bankruptcy code.

Importance of the code

According to the Financial Times, in 2015 India overtook China and the US as the top destination for the Foreign Direct Investment. In first half of the 2015, India attracted investment of $31 billion compared to $28 billion and $27 billion of China and the US respectively.

With increasing investment in India, the ease of doing business has to be increased so that not only the investment in the country increases but also the disputes can be easily resolved. The duration for which the disputes and cases go on in India is a major concern for the investors. According to the World Bank’s Ease of Doing Business report, it takes more than four years on an average to resolve disputes related to insolvency in India. Hence, the insolvency and bankruptcy code was introduced for timely resolution.

Moreover, the code gives a sense of security to the creditors that they will be able to recover the money they have given to the debtors as credit. With Sick Industrial Companies (Special Provisions) Repeal Act’2003,(SICA) being repealed the companies who tried to cheat the law by changing the numbers in their balance sheets to escape the clutches of the creditors will no longer be able to do that.

A lot of individuals and companies deliberately default on the repayments. We all have heard about Mr. Vijay Mallya, a business tycoon and how he wilfully defaulted on a bank loan amount of more than Rs. 9000 crores and took shelter in another country. The Indian government has failed to get their hands on Mr. Vijay Mallya and here is why.

However, with the introduction of the insolvency and bankruptcy code the certainty in recovery, overcoming of loopholes and speedy resolution of disputes will hopefully take place.

Key features of the code

Here are the key features of the insolvency and bankruptcy code

• According to the World Bank’s Ease of Doing Business report, it takes more than four years on an average to resolve insolvency in India. Prior to the code there was no time limit on the duration of the disputes related to insolvency. The code not only gives a definite time frame within which the disputes need to be resolved but also separation in the resolution processes for individuals and firms. For the companies, the process will have to be completed within 180 days, however, it may be extended by 90 days, if a majority of the creditors agree to it.
• With a new code in place repealing certain previous acts there is also a need for a body to ensure that the provisions of the new code are being effectively implemented and the perpetrators accordingly punished. Hence on 1st October 2016, the Insolvency and Bankruptcy Board of India (IBBI) was established for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) etc. The board led by the chairperson Dr. M. S. Sahoo, is said to consist of 10 members representing the various ministries of the government. Members from the ministries of finance, law and the Reserve Bank Of India (RBI) is said to be a part of the 10 member board. The board will issue guidelines, ethics etc. and play an important role in disciplining the firms.
• The code proposes the establishment of two separate tribunals to deal with matters of bankruptcy and insolvency for firms and different types of companies in India. (Here is a detailed breakdown of the types of companies in India) The National Company Law Tribunal for Companies and Limited Liability Partnership firms.

Read more about the advantages of limited liability partnerships.

Similarly, The Debt Recovery Tribunal will be set up for individuals and partnership firms. Partnership firms in the today’s world have become indispensable. Partners are important risk bearers, decision makers and mutual agents. Here is why partnership firms have gained a lot of importance in the recent years.

There is also a provision of setting up of tribunals for hearing appeals. The appeals from the National Company Law Tribunal will be heard by the National Company Law Appellate Tribunal and appeals from the Debt Recovery Tribunal will be heard by the Debt Recovery Appellate Tribunal.

• An essential provision of the insolvency and bankruptcy code is granting of moratorium by the court. A moratorium which in simpler terms means prohibition, on the actions of the creditor.
• The debts that have become due will be paid in the manner given below-
  
  Insolvency Resolution cost and liquidation cost
  Debts to secured creditor
  Wages and unpaid dues to employees
  Financial debts to unsecured creditors and workmen’s dues for earlier period
  Crown debts and debts to secured creditor following enforcement of security interest
  Remaining debts
  Preference shareholders
  Equity Shareholders or partners.
  
  
• The code also proposes setting up of agencies which would collect, assess and disseminate data and information about the registered firms. An individual insolvency database is also proposed to be set up for the purpose of providing information on the insolvency status of individuals.

Step by step timeline of dispute resolution

Step 1: The insolvency application needs to be filled by the individual and/or firm.

Step 2: The respective authority will either reject or accept the application within a period of 14 days from the filing of the insolvency application.

Step 3: A notice to the applicant to rectify the defect in the application within 7 days shall also be given by the adjudicator.

Step 4: A professional will be appointed and within the next 180 days the dispute will need to be resolved.
The resolution process can be extended for another 90 days if a majority of creditors agree to it.

Step 5: The resolution plan so proposed will either be accepted or rejected. If it is accepted the moratorium imposed by the adjudicating authority ceases to have effect. However, if it is rejected, the process of liquidation will be initiated. Liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. The company's operations are brought to an end, and its assets are divided up among creditors and shareholders, according to the priority of their claims as mentioned above in the key features of the code.

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