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Author - Associate Aliza Abdin

Bankruptcy is a legal term which is used to describe a person or an entity which is no longer sufficient enough to pay off its creditors. The process of bankruptcy usually starts with a petition, which is filed by the debtor that he can no longer pay off his debts. After that all of the debtor’s properties, assets and bank balance are evaluated and sealed which are then used to repay the unresolved debt.

Bankruptcy filing differs from country to country but in most cases it is levied by a court order after the petition is filed by the debtor.

 Although the process of bankruptcy is a relief for the insolvent debtors to free themselves from unsettled debts but in India it is hard to start fresh once you declare yourself bankrupt; getting loans becomes difficult because of a bad credit rating. And since the whole concept of bankruptcy is to forgive the part of debt not paid to the creditors and help the bankrupt person/entity to have a new start from rock bottom it becomes tough for the person to decide whether to file the petition or not.

BANKRUPTCY CODE 2016

The Insolvency and Bankruptcy Code, 2016 commonly known as (IBC) is a bankruptcy law prevalent in India that aims at eliminating all other smaller bankruptcy laws in order to create a single unified law. It was introduced in the Lok Sabha in 2015 by the then Finance Minister of India, Arun Jaitley and it was passed in 2016 and received the assent from the then President, Pranab Mukherjee on 28th May 2016.

The main objective of the bankruptcy code, 2016 is to find an easy solution for helping bankrupt citizens and companies and give them another chance to start afresh. Since the time it came into force, it has helped hundreds of small firms’ set-up and have a new start after helping them payoff a part of their debts.

 STRUCTURE of the BANKRUPTCY CODE, 2016

• Bankruptcy Resolution: It summarizes the process of declaring an individual, a joint business and a company bankrupt distinctly. The process of bankruptcy may be started by debtor (in most cases) or the creditors (in some cases). A different time limit has been set for different corporations, such as the process for companies has to be completed in a time frame of 180 days with maximum extension up to 90 more days, in the case of smaller firms and individuals having assets less that 1 crore can take up to 90 days with maximum extension of 45 days.

•   Bankruptcy regulator: The code also launched the Insolvency and Bankruptcy Board of India whose main function is to supervise all bankruptcy cases taking place in the country. The board constitutes of 10 members having representatives from the Finance and Law department of India.

• Bankruptcy professionals: The code carries out all bankruptcy proceeding by hired licensed trained professionals. The professionals assigned to a specific case also regulate all assets of the debtor and handles the entire case.

• Bankruptcy and Insolvency Arbitrator: The code offers two different tribunals to regulate the process of bankruptcy for individuals and companies, they are as follows:

1. The National Company Law Tribunal for Companies and Limited Liability Partnership firms

2. The Debt Recovery Tribunal for individuals and partnerships.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018

 This bill is an amendment to the preexisting law - Insolvency and Bankruptcy Code, 2016. It was promulgated on 6th June 2018.  It puts forward the new key features of the bill; that are as follows:

•  The bill states that in a real estate project all allotters (a buyer of an under-construction property) are to be treated as financial creditors.

• A committee will be constituted consisting of financial creditors for taking decisions on the procedure of the resolution. “In certain cases, such as when the debt is owed to a class of creditors, the financial creditors will be represented on the committee of creditors by an authorized representative.  These representatives will vote on behalf of the financial creditors as per the prior instructions received from them.”

• The voting edge for decisions taken by the committee of creditors has been reduced from 75% to 51%.  And for key decisions (such as-the appointment of professionals, increasing the time-limit for the cases, etc) the edge has been reduced from 75% to 66%.

• The new amendment also gives individuals the permit to withdraw their petition for bankruptcy if they have the approval of 90% of the committee of creditors.

• The amendment also prohibits certain persons from filing a petition if his or her account has been identified as a non-performing asset (NPA) for more than 365 days.  “The Ordinance provides that this criterion will not apply if such applicant is a financial entity, and is not a related party to the debtor (with certain exceptions).  Secondly, the Code also bars a guarantor of a defaulter from being an applicant. The Ordinance specifies that such a bar will apply if such guarantee has been invoked by the creditor and remains unpaid.”

• Lastly, it states that the NPAs would not be valid for people who are applying for resolution of MSMEs.