INSOLVENCY CODE

The Insolvency and Bankruptcy Code, 2016 (‘Code’) was notified as an act to:

• Consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals;
• In a time bound manner
• For maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

As you will see in the above text, the objects of the Code are very clear and three main objects are of most importance viz. the Code consolidates various laws related to reorganisation and insolvency resolution, it operates in a time bound manner and that it strives to balance the interests of all stakeholders

So, who are the stakeholders:

• Financial Creditor means any person to whom a financial debt is owed or its assignee or transferee. Financial debt has been separately defined to mean right of payment (whether or not decided, secured or disputed) where an amount is due for payment, wherein the amount was disbursed in consideration for time value of money such as loan, debt securities, hire purchase, financial or capital lease etc.
• Operation Creditor means a person to whom an operational debt is owed or its assignee/transferee. Operational debt has been defined as a claim in respect of the provision of goods, services, employment; or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;
• Corporate Debtor means an incorporated entity (LLP, company etc.) who owes a debt to any person. As regards the persons who can file insolvency applications, a corporate debtor may file an application under Section 10 of the Code as a corporate applicant. A Corporate applicant inter alia has been defined to mean the debtor itself, its partners/shareholders, persons in charge of management or control and supervision of the financial affairs.

However, for the partners/shareholders to file an application, they should be authorised to do so as per the constitution documents viz. MOA/AOA, LLP agreement etc. Therefore, an investor, in order to secure the right to drag the company into insolvency in which it is investing, must secure such right under the shareholders agreement which inter alia will reflect in the articles of association of the company.

The Code is robust and comprehensive enough to include all types of stakeholders that a company may have although conditions for different creditors differ in order to avoid frivolous claims or claims which are subject matter of dispute. The Code with its strict timelines shall be faster and effective as compared to what was available to Banks and other relevant lending institutions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or under the Recovery Of Debts Due To Banks And Financial Institutions Act, 1993. Apart from being able to secure faster relief and predictability of the outcome since the creditors shall remain in control, the Code, unlike other laws, recognizes Non-Banking Financial Institutions as well as considers an unsecured loan as well. This is likely to be very efficient for loans advanced to early stage companies who mostly have intangible or negligible tangible assets.

Insofar as operational creditors are concerned, the Code shall to a certain extent alleviate the ubiquitous problem of time consuming and expensive litigations. While many may argue that the Code is not supposed to be used as a tool for recovery of money, however, if the true intent of Code is analyzed it seems more than appropriate to say that the Code indeed was enacted to strike a fear of insolvency process and pay undisputed amounts instead of engaging in frivolous litigations.

The Code has already started showing results and the genuine claim holders and creditors, and especially the financial creditors, have started taking action. This clearly establishes that such a law was much needed to give a breather to bleeding banks and financial institutions and also increase confidence amongst overseas investors and lenders who now have a time bound recourse.