Brief Analysis of Insolvency and Bankruptcy Code, 2016

Brief Analysis of Insolvency and Bankruptcy Code, 2016

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Brief Analysis of Insolvency and Bankruptcy Code, 2016
Brief Analysis of Insolvency and Bankruptcy Code, 2016

Introduction

The Insolvency and Bankruptcy Code, 2016 (the Code) is a uniform and complete legislation relating to insolvency and bankruptcy of all persons. The best feature of the Code is that it prefers resolution of stressed assets against liquidation as provided in previous scattered and multi-disciplinary laws and judicial framework. The Code is passed by the Parliament in May 2016 and became effective in December 2016.The legislative change has completely flicked the game by handling over the torch of insolvency resolution from Debtors in Position to Creditors in Control where by allowing creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation.

Preamble of the Code:

An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization 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.

Why the Code Promulgated:

Before the enactment of the Code the earlier legislative framework was quite complex and time consuming because of multiple governing laws and that too mostly for secured financial creditors such as the Companies Act, 2013; The Sick industrial Companies Act, 1985; The recovery of Debts Due to Banks and Financial Institutions Act 1993; the Presidency Towns Insolvency Act 1909 and Provincial Insolvency Act 1920 and various other Debt Restructuring Schemes brought by the Reserve bank Of India from time to time.

Therefore to curb the huge problem Non Performing Assets (NPA) in India and for free flow of credit in the country to strengthen and boost the economy, a speedy yet easy Exit Mechanism was required for benefit of all the stakeholders, hence a one stop solution for all debt related problems of all persons (Corporate, Individual, Partnership firms and LLP) was enacted in the name of the Insolvency and Bankruptcy Code, 2016.The X factor of the Code which was newer looked before is that the timeliness (180 days period for resolution) provided in the Code to resolving insolvency on a going concern basis before the commencement of liquidation so that the assets continues to serve the economy and in case of liquidation the value of the assets would not be depleted as in the earlier pro longed recovery process. Also the Code has given power to decide the fate of the defaulting corporate debtor by handling the steering of debt resolution to the committee of creditors the fund providers. As and when the insolvency resolution process triggered the Board of Directors of defaulting corporate debtor have to step down and all of their powers got suspended.

Applicability of the Code:

The Provisions of the Codein relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be shall apply to:

  1. any company incorporated under the Companies Act, 2013 or under any previous company law;
  2. any other company governed by any special Act for the time being in force;
  3. any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;
  4. such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and
  5. partnership firms and individuals.

Institutional Framework under the Code- The FivePillars of the Code-

  1. Insolvency and Bankruptcy Board of India (IBBI) – The Regulatoroverseeing insolvency proceedingsand entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India. It was established on 1 October 2016 and given statutory powers through the Insolvency and Bankruptcy Code, which was passed by Lok Sabha on 5 May 2016.
  • Insolvency Professionals (IP)- The Driving force of the Corporate Insolvency Resolution Process and Liquidation Process. IP’s are the professionals who chair the committee of creditors and conduct the insolvency resolution process for both corporates and individuals. To become an IP one needs to pass the Limited Insolvency Examination conducted by IBBI and must have ten years of experience as a Chartered Accountant/ Company Secretary/ Cost Accountant/Advocate or a management graduate with fifteen years of experience.
  • Insolvency Professional Agencies (IPA)- IPA’s are entities that have been incorporated under section 8 of the Companies Act 2013 as not for profit Companies and are registered with the IBBI to enroll, monitor, train, regulate the insolvency professionals.Currently all the three professional institutes that are Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Institute of Cost and management accounts of India have their respective IPA’s.
  • Adjudicating Authority-The Adjudicating Authority under the Code are National Company Law Tribunal (NCLT) for Companies and Limited Liability Partnership Firms and Debt Recovery Tribunals (DRT) for Individuals and Partnership Firms. A person can file application in the respective authority for initiation of insolvency resolution process. Any person aggrieved by the decision of NCLT may appeal to National Company Law Appellate Tribunal within a period of 30 days with a maximum extension of further 15 days provided that there is sufficient cause for delayed filing.
  • Information Utility– A distinguished feature of the Code is the formation of information utilities to collect, collates, authenticate and disseminate financial information of debtors in integratedcentralized electronic databases. The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing basis. Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings.

Conclusion

With various amendments and judicial pronouncements the Code has now taken shape and steadily it has come out from its embryonic stage. So far the Code has proven as a game changer in the Indian economy by constructively regularizing the insolvency process in the country. While the banks are sitting on the pile of NPA the code has become the need of the hour to resolve the debt crisis on one hand and building lender’s confidence on the other. Being one of the major reforms of the Country in the recent past the Code has aided India to notch the 77th Rank in World Bank Ranking on ease of doing business from 136th position in last two years.

This article has been written by CS Mayank Jain

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