This article aims to clarify and explain the new Insolvency and Bankruptcy Code which received the assent of the President on 28 May 2016. This new Code replaces the century old archaic legislation i.e. the Presidency Towns and Insolvency act, 1909, which has been implemented thus far to resolve disputes of such nature. By way of this article we seek to apprise you with the key highlights of this Code which include but are not limited to: Insolvency resolution & liquidation for corporate entities, insolvency resolution & bankruptcy for individuals & partnership firms and the authorities & intermediaries under this code. We further seek to provide you an insight on insolvency resolution and liquidation processes with regard to corporate entities and the insolvency resolution process & bankruptcy procedures for individuals and partnership firms.
Currently, India has the fastest growth rate among the world’s major economies, expanding at 7.6% as on March 2016. Yet, as per the Central Bank of India, lending rates have grown at 9.2% in the past 12 months through 29 April 2016 (have a five-year average of 14%). In addition to this, India had a backlog of around 62,000 cases pending (as on December 2014) and has an impaired debt worth $131 billion at its disposal. It is currently ranked at 130 in the World Bank’s ease of doing business index while being 136 amongst 189 countries on the parameter of resolving Insolvency.
These alarming statistics necessitated the enactment of a brand new Law that not only helped clean up the backlog of pending cases, but also avert inevitable crisis that Indian banks were headed towards. India addressed the need of the hour by enacting the Insolvency and Bankruptcy Code (hereinafter referred to as “the Code”), which received the assent of the President on 28 May 2016.
Before the enactment of this Code, the country was governed by multiple laws with regard to insolvency resolution, which included:
The Companies Act, 2013 – for winding up of an insolvent/bankrupt entity;
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - dealing in claims of special creditors;
Recovery of Debts due to Banks and Financial Institutions Act, 1993 - in cases where the creditors are banks or any other financial institutions;
The Sick Industrial Companies Act, 1985 - to detect the sickness of any industrial unit and offer appropriate and relevant remedies for the same;
The Presidency Towns Insolvency Act, 1909 which caters to the provinces of Kolkata, Mumbai and Chennai and the Provincial Insolvency Act, 1920 which has jurisdiction over the rest of the provinces of India, deal with personal insolvency. These acts are applicable to sole proprietorships and partnership firms and have certain parallel provisions.
By way of this Code, India seeks to expedite the adjudication process, by creating an eco-system consisting of Insolvency Professionals, Information Utilities and a Bankruptcy regulator. The introduction to the Code itself states:
“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.”
The Code has a structured framework laying down laws for financial failure by any corporate entity, an individual or a partnership firm. Lets take a look at some of the key highlights of the code.
HIGHLIGHTS OF THE CODE
1. INSOLVENCY RESOLUTION AND LIQUIDATION FOR CORPORATE PERSONS
The Code expressly provides the procedure for Insolvency Resolution and Liquidation for Corporate Persons shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is Rs.1,00,000/- ($1,500) which can be extended by the Government upto Rs.1,00,00,000/- ($148,000). The processes for such resolution are as follows:
a) Insolvency Resolution Process (IRP)
The Code provides that any financial creditor or an operational creditor or a corporate debtor can initiate a corporate insolvency resolution in case of a default by the corporate entity. The Code brings about a change from an earlier approach whereby only a corporate debtor could initiate an Insolvency Resolution Process.
Both financial creditors either by itself or jointly with other financial creditors(for a defaulted financial debt), or an operational creditor (for an unpaid operational debt) can initiate IRP against a corporate debtor before the concerned Adjudicating Authority.
The Code makes the completion of IRP time bound to be completed within 180 days, from the date of admission of the application to initiate such process. Such period may be extended by the concerned Adjudicating Authority to a maximum period of 90 days on an appropriate application being moved by a resolution professional.
Once the application for insolvency resolution is accepted by the concerned adjudicating authority, it may declare Moratorium by a public announcement.
(ii) Appointment of an Interim Resolution Professional
The Adjudicating Authority shall appoint an Interim Resolution Professional within 14 days from the date of commencement of the insolvency. The Interim Resolution Professional shall from the date of appointment, manage the affairs of the corporate debtor and shall treat the debtor’s business as a going concern. The powers of the board of directors or the partners of the corporate debtor shall stand suspended and be exercised by the interim resolution professional until such time the interim resolution professional remains. The duties of the interim resolution professional shall include:
Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of such director;
Receive and collate all the claims submitted by creditors to him;
Constitute a committee of creditors;
Monitor the assets of the corporate debtor and manager its operations until a resolution professional is appointed;
File collected information with information utility;
Take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor;
Such other duties as may be specified by the Board.
(iii) Committee of Creditors
The committee constitutes all the financial creditors of the Corporate Debtor. The basic motive of organising such a committee is to give powers to the creditors to either liquidate the corporate entity or to decide a revival plan for such entity. All decisions by the Committee must be taken on the basis of at least 75% vote of the voting share of the financial creditors. When a default in repayment occurs, the creditors take control over the assets of the corporate debtors and are required to resolve insolvency within a 180-day period. The Committee shall conduct its first meeting within 07 days of its constitution, wherein, it shall by a majority vote of 75% of the voting share of the financial creditors, either:
Resolve to appoint the interim resolution professional as a resolution professional; or
Replace the interim resolution professional by another resolution professional.
Fast Track Insolvency Resolution Process
The Code provides for a Fast Track Corporate Insolvency Resolution Process whereby the entire process of Insolvency Resolution shall be completed within a period of 90 days as against the normal time period of 180 days provided in the Code.
The Adjudicating Authority in circumstances where it:
Does not receive a resolution plan before the expiration or maximum period permitted for completion of the corporate insolvency resolution process; or
Rejects the resolution plan for non-compliance of the requirements specified therein.
May pass an order requiring the corporate debtor to be liquidated, or issue a public announcement stating that the corporate debtor is in liquidation. Again till such time as the liquidation is complete, a moratorium is imposed.
Distribution of assets
The proceeds from the sale of the liquidation assets shall be paid in the following order:
Insolvency resolution process and liquidation costs;
Workmen’s dues for the period of 24 months preceding the liquidation commencement date;
Debts owed to a secured creditor in the event such secured creditor has relinquished security;
Wages and unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;
Financial debts owed to unsecured creditors;
Any amount due to the central and the state government, this shall include Consolidated Funds of India and State, if any, in whole or any part of the period of two years preceding the liquidation commencement date;
Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
Any remaining debts and dues;
Equity shareholder or partners.
2. VOLUNTARY LIQUIDATION OF CORPORATE PERSONS
A corporate person may initiate voluntary liquidation proceedings, provided that the following conditions are met, namely:
1. A declaration from majority of the directors of the company verified by an affidavit stating:
(i) Full inquiry into affairs of the company has been duly conducted and either the company has no debt or that it will be able to pay its debts in full from asset proceeds to be sold in the voluntary liquidation; and
(ii) The company is not being liquidated to defraud any person.
2. The said declaration is to be accompanied by following documents, namely:
(i) Audited financial statements and record of business operations (preceding two years); and
(ii) Report on valuation of assets of the company, by a registered valuer.
3. Within 4 weeks of such declaration, either a special resolution or a general resolution of the members of the company to appoint an insolvency professional to act as the liquidator. If such a company owes debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the said resolution within 07 days.
4. The Company shall notify the Registrar of Companies and the Board about the resolution within 07 days of such resolution or the subsequent approval by the creditors.
5. On complete winding up of the affairs of the corporate person, the liquidator shall make an application to the concerned Adjudicating Authority for the dissolution of such corporate person, who shall pass an order to dissolve the corporate debtor from the date of the order. A copy of such order shall be forwarded within 14 days from the date of such order, to the authority with which the corporate person is registered.
3. APPEALS AND APPELLATE AUTHORITY
Any person aggrieved by the order of the appropriate Adjudicating Authority may prefer an appeal to the National Company Law Appellate Tribunal within 30 days from the date of the order of the Adjudicating Authority (period may be extended to 15 days);
An appeal against an order approving a resolution plan may be on the following grounds:
Approved resolution plan is in contravention of any law for the time being in force;
Material irregularity in exercise of powers by the resolution professional during the corporate insolvency resolution period;
Debts owed to operational creditors have not been provided in the resolution plan in the manner specified by the Board;
Insolvency resolution process costs have not been provided for repayment in priority to all other debts; or
The Resolution plan does not comply with any other criteria specified by the Board