The Insolvency and Bankruptcy Code, 2016 (“Code”) has been introduced to revamp the existing framework which deals with insolvency. Prior to the introduction of the Code, there was no single statutory framework dealing with liquidations or insolvencies of body corporate, individuals, partnership firms etc. The main objective of the Code is to consolidate and amend the laws relating to insolvency and bankruptcy, and to achieve the same the Code repeals the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and amends other legislations including The Companies Act and The Sick Industrial Companies Act. Operative portions of the Code pertaining to Corporate Insolvency Resolution Process (“CIRP”) have come into force on 1st December, 2016 and aims to change the traditional way of litigating insolvency and liquidation cases {relevant provisions – Section 2(a) to (d) excepting voluntary liquidation procedure, Section 4 to Section 32 and Section 60 to Section 77}. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 have also been notified simultaneously to aid in implementation of the CIRP provisions of the Code.

India did not have any specific regime for corporate insolvency until introduction of the Code. Post independence, the Companies Act, 1956 traditionally has been the comprehensive code governing the functioning of an incorporated company, which also provides for winding up of a company under Sections 433 and 434 i.e. how a company ceases to exist as a juristic person. Apart from this, there has been no other specific statute in Indian Law which provides for death of a company, to put it philosophically. This is of course not taking into account special circumstances like amalgamation or any other arrangement by which a company becomes a part of another company and loses its individual existence.

There are many statutes which provide for recovery of debts from body corporate but what happens when a company is unable to pay its debts? Before introduction of the Code, a company unable to pay its debts would be wound up by a Court under the Companies Act, 1956. With the notification of the provisions of the Code pertaining to CIRP, the Legislature has intended that when a company is so stressed that it is unable to pay the dues to its creditors, it should be afforded another opportunity to revive itself before its fate is sealed. Under the Code, a debt-ridden company will be given a fresh lease of life through handholding by interim resolution professionals who will steer the company until the company is able to tide over its dire financial circumstances. Ultimately, if there is no option for revival, then the company will be liquidated under the provisions of the Code. The provisions for liquidation of a company are yet to be notified and should necessarily be notified within next 180 days so that the already notified provisions can be properly effected.

The Code aims at consolidating the entire procedure of resolution of corporate insolvency in a time bound manner {Sections 12 to 15 of the Code}. For CIRP, the Code categorizes creditors into two parts, i.e. Financial Creditors and Operational Creditors {Section 6 of the Code read with Sections 7 to 9}. A Corporate Debtor itself can also initiate CIRP under the Code with a few restrictions imposed. {Section 6 of the Code read with Sections 10 and 11}

One unique feature of the Code is the involvement of Insolvency Professional (“IP”) in CIRP {Sections 16 to 31}. This gives leverage to the creditors as the existing management is to be replaced by the IP during CIRP. Under Companies Act, the corporate debtors, even during adjudication of a winding up petition, were in control of their management and there was a possibility of alienation of the assets of the company or creation of third party interest to thwart the creditors, unless estopped by an order of a court.

The qualification of an IP is prescribed in the Code and they also have to obtain registration as an IP under the said Code. This minimizes possibility of challenges by the corporate debtors to the credibility/qualifications of an IP.

The Code has minimal judicial interference in the CIRP at the initial stage and has tried to address the issue of insolvency with the help of experienced professionals, which may effectively lower the time for the entire procedure. The Code also prescribes a period a moratorium {Sections 13 and 14} in which actions against the corporate debtor like execution proceedings, alienation of asset or legal rights, foreclosure or recovery or enforcement of security interest, suits for eviction etc. is restricted. Apart from this, the Code also provides for public announcement of CIRP {Section 15} and formation of a committee of creditors {Section 21, 24, 27, 28} of a debtor company so as to give an opportunity to all categories of creditors, financial as well as operational, to have a say in the CIRP.

With the CIRP provisions of the Code being made effective, the provisions of Sections 433 and 434 of the Companies Act, 1956 will eventually be redundant, even though the provisions have not yet been repealed as there are vast numbers of litigation pertaining across all the High Courts of India. The Companies (Transfer of Pending Proceedings) Rules, 2016 effective from 15th December, 2016 provide that all matters under Section 433(e) pending before a High Court but which have not yet been served on the debtor companies under the prevailing rules will be transferred to an appropriate bench of the National Company Law Tribunal for adjudication under the CIRP provisions.

Like all laws, there is always a possibility that the Code may be misused by otherwise motivated persons, especially since there is minimal judicial intervention. Further, since success of the CIRP depends on the ability of an impartial IP to ably guide and run the management of the debtor and because the IPs are practicing professionals, adhering to the strict timeline under the Code might become a practical difficulty. Even then and even if it is untested, the Code does usher in new insolvency regime for the benefit of the creditors and also the debtors as it is unlikely that corporate insolvency will now be mired under multiple legislations having overlapping jurisdictions as it was before the introduction of the Code.