This Bankruptcy Code has been enacted at a very crucial time when most of the domestic banks are struggling with bad loans, and the current legal and institutional framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets. The lenders were eagerly looking for a legal framework to manage stress account in a time bound and effective manner.
It is true that some business ventures will fail, and the vision of the new law is to handle such failures rapidly and swiftly, so as to enable the promoters and creditors to move on in a timely manner.
As you are aware that soon after the Insolvency and Bankruptcy Code was passed by the Lower House on 5 May, 2016 and Upper House on 11 May 2016, the President provided its assent to the Code on May 28th. However the Code will come into effect only when the central government notifies the same in official gazette. Considering the past experience we had when Companies Act, 2013 was notified, I believe that the various provisions of the Code will be notified in phased manner and it may take more than a year before all the provisions of the Code comes into effect.
At present, there are multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. It consolidates the laws relating to insolvency, reorganization, liquidation/bankruptcy of companies, individuals, partnership firms and limited liability partnership firms under one statute. In order to achieve the same, the Bankruptcy Code will repeal Presidency Towns Insolvency Act and Provincial Insolvency Act. Further, this Code also amends 11 Statutes including, Companies Act, LLP Act, and SARFAESI Act, Recovery of Debts Due to Banks and Financial Institution Act, SICA Repeal Act.
However, this does not include financial firms within its purview. The Government is proposing a separate framework for bankruptcy resolution for banks and other financial sector entities.
Strict timelines for Insolvency Resolution Process
According to a report published by World Bank, under the existing bankruptcy regime, on the parameter of resolving insolvency, India is ranked 136 out of 189 countries. As per the report of the World Bank, at present, it takes more than four years to resolve a case of bankruptcy in India.
Keeping the current delay in mind, the Code provides for strict timelines of 180 days for completion of Insolvency Resolution Process. The period of 180 days starts from the date on which application for IRP has been accepted by NCLT. A single extension of 90 days is allowed under the Code provided (i) the Adjudicating Authority is satisfied that IRP cannot be completed within the stipulated period of 180 days; and (ii) 75% of creditor forming part of Committee of Creditors approves such extension.
It also provides for fast-track insolvency resolution process for corporate debtor that need to be completed within a time frame of 90 days.
This change is being welcomed by the creditors and reduction in time will surely help the creditors in maximizing the value of the assets of the debtor.
Unlike the existing bankruptcy regime, where the decision on the question whether the debtor should be wound up or not vested on the wisdom of the High Courts, under the new regime, the decision making power has been vested with the financial creditor.
This is expected to support the creditors in rapid and swift restructuring or recovery of loan.
The waterfall for distribution of liquidation proceeds have been changed significantly under the Code. Under the Code, Government dues including taxes matters which would in turn result into speedy completion of bankruptcy process
The Code for the first time attempts to address the issues concerning cross border insolvency as large corporates may have assets located in other jurisdictions as well. The Code provides for two solutions in order to deal with cross border insolvency, firstly, the Code lays down the legal basis for entering into reciprocal agreement with other countries for enforcement of the provisions of this code in other country.
Secondly, it empowers the Adjudicating Authority to write a letter to the courts/adjudicating authorities of another country, with whom India is having a reciprocal agreement, for seeking information or taking action in relation to the assets of the corporate debtor located in that jurisdiction.
While this move by the Government is a step in the right direction as it will help the lender in liquidating the assets located in foreign jurisdictions, it is yet to be seen how will the same be implemented as it would require a more comprehensive framework by the Government to deal with such cross border insolvency more effectively.
The Insolvency Professionals/ Regulators Insolvency & Bankruptcy Board of India:
The Bankruptcy Code seeks to establish Insolvency and Bankruptcy Board of India, which will act as regulator for all matters pertaining to insolvency and bankruptcy. Some of the primary functions of the regulator will be (i) regulating entry, registration and exit of Insolvency Resolution Professional Agencies, Insolvency Resolution Professionals and Information Utilities; (ii) Setting out eligibility requirement of such entities; and (iii) providing model bye laws for Insolvency Resolution Professional Agencies;
Insolvency Adjudication Authority: The Bankruptcy Code provides for 2 different set of adjudicating authorities for exercising control over the Insolvency Resolution Process and Bankruptcy process. In case of Companies and LLPs, the adjudicating authority shall be NCLT and all appeals against the order of NCLT shall lie before NCLAT. In case of Individuals and Partnership Firms, the adjudicating authority shall be DRT and all appeals against the order of DRT shall lie before DRAT. The Supreme Court of India shall have the appellate jurisdiction over NCLAT and DRAT.
Insolvency Resolution Professionals: Under the Code, the Insolvency Resolution Professionals will act as quasi administrator. Their primary role will include (i) supervision of insolvency resolution process; (ii) management of affairs & assets of the debtor during insolvency resolution process; (iii) Constituting committee of creditors; (iv) receive and finalize resolution plans with committee of creditors; (v) verifying the claims of creditors and; (vi) carrying out liquidation/bankruptcy of the debtor
Insolvency Resolution Professional Agencies: The primary role of Insolvency Resolution Professional Agencies will be (i) admitting Insolvency Resolution Professionals; (ii) preparing model code of conduct and establishing performance standards for Insolvency Resolution Professionals; (iii) Redressing grievances, if any, filed against Insolvency Resolution Professionals; (iv) Acting as disciplinary body for Insolvency Resolution Professionals.
Information Utilities: One of major road blocks in timely completion of bankruptcy proceedings under existing bankruptcy regime is non-availability of data pertaining to the debtor. The Bankruptcy Code seeks to establish a robust infrastructure of Information Utilities which will act as depository of various data pertaining to debtor which are required for timely completion of bankruptcy proceedings. The specific nature of the data that these Information Utilities are required to maintain will be only clear when Rules under Code are notified.
Moratorium: The Code provides for imposing moratorium on the corporate debtor during the Insolvency Resolution Process. During moratorium, no suit or proceedings can be initiated against the Corporate Debtor. However, in order to protect the interest of the creditors, during this period the Insolvency Professional will take over the management of the Corporate Debtor as well as exercise the powers of board of directors of Corporate Debtor. Further, all employees and managers of the Corporate Debtor are required to act upon the instruction of Insolvency Professional during the period of Moratorium.
Committee of Creditors: It includes Financial Creditors only. Operation Creditors having more than 10% of exposure can attend the meeting of COC only as an observer. All decisions of COC are required to be approved by 75% of the voting shares/value of the Financial Creditors.
Liquidation: In the event, (i) the COC does not agree to a resolution plan; (ii) COC decides to liquidate the Corporate Debtor; (iii) NCLT rejects the resolution proposal; (iv) Corporate Debtor contravenes the resolution plan, NCLT can pass an order for liquidation of the Corporate Debtor.
Second Moratorium: Soon after the liquidation order is passed a second moratorium is imposed, mainly in order to pervert institution of suits against the Corporate Debtor so that liquidation process can be completed without any further complication. However, the liquidator may file suits after seeking prior permission of NCLT.
The Code significantly changes the priority waterfall for distribution of liquidation proceeds as envisaged under the old bankruptcy regime. The brief particulars of the distribution waterfall set out in the Code are as follow:
The next issue will focus on various challenges that India Inc. will face keeping in mind the new code.
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