The Insolvency & Bankruptcy Code 2016: The Journey So Far

Manoj Kumar | June 2017

Insolvency proceedings were earlier governed by the SARFESI Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, Sick Industrial Companies (Special Provisions) Act, 1985, Corporate and Strategic Debt Restructuring under RBI Guidelines.

In India, the process of resolving insolvency has been very time–consuming as compared to any other progressive economy around the world. The erstwhile laws were mainly designed for enforcement and were not effective in revival of the sick companies. Also, the prescribed revival of sick companies under the same management was often ineffective in nature and there was no time bound process due to which moratorium often continued for the indefinite period. There are always a multitude of litigations pending for debt recovery. India seems to be lacking an appropriate legal framework to deal with Insolvency as per global standard. As per the World Bank data, the average time taken to resolve insolvency in India is 4.3 years, which is way higher when compared to United Kingdom (1 year), United States of America (1.5 years) and South Africa (2 years).

The aim to overcome the shortcomings of Indian insolvency laws has led to the enactment of the Insolvency Bankruptcy Code, 2016 (The Code).

ECOSYSTEM OF THE CODE

The Code has introduced the adjudicating authorities having an exclusive jurisdiction to deal with insolvency matters i.e. NCLT/ NCLAT, DRT/ DRAT etc.

The Code offers uniform and comprehensive insolvency legislation encompassing all companies, partnership firms, limited liability partnership firms, individuals and any other body specified by the Central Government other than financial firms.

The Code seeks to consolidate the existing framework by repealing Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920, as well as amending 11 other legislations

To meet the objectives of timeliness and value maximization, the Code proposes a new institutional set-up comprising four critical pillars:

A robust and efficient Adjudicating Authority to hear the cases.
Regulating the appointment of Insolvency Professionals (IPs) to take up the role of Resolution Professional.
Regulating the Information Utilities (IUs) and their functioning to overcome information asymmetries amongst the creditors and to reduce time taken to determine actual financial health of the corporate debtor.
A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform legislative, executive and quasi-judicial functions with respect to the IPs, and IUs and draft regulations for the resolution procedures under the Code.

PROMINENT FEATURES OF THE CODE:

The code specifies a framework for time bound (180 days that can be further extended by maximum 90 days to 270 days) insolvency resolution under a properly structured process.
The resolution processes will be conducted by licensed IPs. IPs will be members of Insolvency Professional Agency (IPA).
The Code does not make any distinction between creditors and empowers all secured, unsecured, domestic, international, financial, corporate and operational creditors to initiate the insolvency resolution process.
The Code proposes two tribunals to adjudicate insolvency resolution cases:

The National Company Law Tribunal (NCLT) will adjudicate cases for companies and limited liability partnerships, and
The Debt Recovery Tribunal (DRT) will adjudicate cases for individuals and partnership firms.

The Code balances the interest of all the stakeholders including modification in the order of priority of payment of Government dues.
The Code enables to start the insolvency resolution process at the earliest sign of financial crisis. The triggering point for the financial creditor to initiate insolvency proceedings is upon the default of more than INR 1 lac and for the operational creditor upon default of more than INR 1 lac and non-payment by corporate debtor for a period of 10 days after issue of demand notice.
The Code offers a predetermined time limit within which the insolvent’s viability can be assessed. If still, resolution is not found, liquidation will be initiated automatically.
The Code addresses cross-border insolvency through bilateral agreements with other countries.

IRP will end under the following circumstances:

When the creditors decide to evolve a resolution plan or sell the assets of the debtor.
On completion of time limit of 180- days for negotiations. In case a revival plan cannot be created in this time limit, the assets of the debtor will be sold to repay his outstanding dues to its creditors.

THE JOURNEY SO FAR

The Code’s journey so far has been no different from other similar legislations and is still looking for consistency and clarity.

For example, in relation to the term ‘dispute’ as defined under Section 5 of the Code, NCLT has held that use of the term “includes” as used in the definition clause of ‘dispute’ has to be read as “means”. Thus an inclusive non-exhaustive definition has turned turtle, thereby saying that there should be an existing suit or arbitration only.

Contradicting views in separate proceedings, even by different benches is also not helping the cause of consistency. NCLT has taken different views in two separate cases by merely citing the reason that the view in the earlier case was taken during the “formative days”.

Recently the NCLT allowed Insolvency resolution proceedings despite pendency (Vasan’s case) of a winding up petition taking a view that the same could not be bar under the Code for initiating the corporate insolvency resolution process, as the High Court had not passed any order for winding up and no official liquidator had been appointed.

In another recent development, the NCLAT refused to entertain India’s largest private Lender on a default application against Starlog Enterprises. While the lenders cannot take the due process for granted, the confusion and lack of consistency is likely to raise questions on the very objective and rationale behind the Code in time to come. An effective ‘ease to do business’ regime requires a robust Insolvency ecosystem to address challenges of an emerging economy like India. For this, all eyes remain on NCLT.