The laws relating to insolvency and bankruptcy in the earlier centuries were framed for penalizing the defaulting debtors. Over the Years there has been improvising change in the global regulatory framework towards corporate insolvency. The principal focus of modern insolvency legislation is not liquidation and elimination of insolvent entities but on the renovation of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business. If the rehabilitation is not possible it enables effective winding up of companies in time bound manner through single regulator i.e. “National Company Law Tribunal”.
What is Insolvency and Bankruptcy?
Insolvency a terminology used for a state, when an Individual or business entity is unable to meet its outstanding debts to the Creditors, Investors or Lenders. However, it may also arise when the Liabilities or Debts of a Company supersede the Assets or Income of the Company. Hence in simple terms:
“Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due.”
However, Bankruptcy is not exactly the same as Insolvency. Bankruptcy occurs when a court has determined insolvency, and given legal orders for it to be resolved. It is subject to be a legal scheme under which the Insolvent Debtor seeks relief.
Thereby, “Bankruptcy is the legal process whereby financially distressed firms, individuals, and occasionally governments resolve their debts”.
Evolution of Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) is the law of India which seeks to consolidate the existing framework by creating a single law for Insolvency and Bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5th May 2016. The Code received the assent of the President of India on 28th May 2016.
The ecosystem of the Code is dependent on four pillars namely, the Insolvency and Bankruptcy Board of India (IBBI), Information Utilities (IUs), Insolvency Professional Agencies (IPAs) and Insolvency Professionals (IPs).
- The Insolvency and Bankruptcy Code, 2016 (IBC) replaces a fragmented legal framework and a broken institutional set-up that has been delivering poor outcomes for years for creditors and distressed businesses. Almost all of these are now eligible to be initiated as new cases under the Insolvency and Bankruptcy Code (IBC).
- The Insolvency and Bankruptcy Code (IBC) offers a time-bound resolution process aimed at maximizing the value of a distressed business. This will benefit not just the creditor and debtor companies, but also the overall economy because capital and productive resources will get redeployed relatively quickly.
- The main objective of the new law is to promote entrepreneurship, availability of credit and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, proprietorship firms, personal guarantors and individuals in a time-bound manner and for maximization the value of assets of such persons.
Salient Features of The Code
- Adjudicating authority– In relation to Insolvency Resolution and Liquidation for corporate persons including corporate debtors and personal guarantors, thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. The Matters relating to Insolvency and Bankruptcy of individuals and partnership firms the “Adjudicating Authority” means the Debt Recovery Tribunal constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
- Corporate Debtor means a corporate person who owes a debt to any person
- Financial and operational creditors- The code makes a distinction between creditors holding financial debt and creditors holding operational debt:
- Financial Creditors: A person to whom Financial Debt is owed and to whom such debt is legally assigned or transferred. (Financial debt means debt extended against consideration for the time value of money, and includes: Term Loans, working capital loans, non-fund based limits such as bank guarantees, Bonds, notes, debentures, loan stock or any similar instrument, Lease or hire purchase agreements, receivables sold or discounted and any other transaction, having commercial effect of a borrowing or certain type of derivative transactions or liabilities in respect of guarantees or indemnities).
- Operational Creditor: A person claiming in respect of the provision of goods or services including 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, and any person to whom such debt has been legally assigned or transferred.
- Resolution Professional (RP): For the purpose of Corporate Insolvency Resolution Process, RP means an insolvency professional appointed to conduct insolvency resolution process and includes an Interim Resolution Professional.
Qualifications and experience of Insolvency Professional
An individual shall be eligible for registration if he
(a) has passed the Limited Insolvency Examination within twelve months before the date of his application for enrolment with the insolvency professional agency;
(b) has completed a pre-registration educational course, as may be required by the Board, from an insolvency professional agency after his enrolment as a professional member; and
(i) Successfully completed the National Insolvency Programme, as may be approved by the Board;
(ii) successfully completed the Graduate Insolvency Programme, as may be approved by the Board;
(iii) fifteen years’ of experience in management, after receiving a Bachelor’s degree from a university established or recognized by law; or
(iv) ten years of experience as one the following–
- chartered accountant registered as a member of the Institute of Chartered Accountants of India,
- company secretary registered as a member of the Institute of Company Secretaries of India,
- cost accountant registered as a member of the Institute of Cost Accountants of India
- advocate enrolled with the Bar Council.
However, as per Regulation 3 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a person shall be eligible to act as a Resolution Professional if:
- He is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013 (18 of 2013), where the corporate debtor is a company;
- Is not a related party of the corporate debtor; or
- is not an employee or proprietor or a partner:
- of a firm of auditors or company secretaries in practice or cost auditors of the corporate debtor; or
- of a legal or a consulting firm, that has or had any transaction with the corporate debtor amounting to ten percent or more of the gross turnover of such firm, in the last three financial years.
Who Can Initiate Corporate Insolvency Resolution Process?
As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by
(a) Financial Creditor;
(b) Operational Creditor; and
(c) Corporate Debtor, itself
The Corporate Insolvency Resolution Process
- A financial creditor, an operational creditor or the corporate debtor, may initiate corporate insolvency resolution process in case a default is committed by the corporate debtor.
- An application can be made before the National Company Law Tribunal (NCLT) for initiating the resolution process. Operational creditor needs to give demand notice of ten days to the corporate debtor before approaching the NCLT. If the corporate debtor fails to repay dues to the operational creditor or fails to show any existing dispute or arbitration, then the operational creditor can approach NCLT.
- Within fourteen days of filing such application, the Adjudicating Authority shall accept or reject the application. In case of acceptance of the application, the corporate insolvency process shall commence w.e.f. the date of admission of application.
Corporate insolvency process shall be completed within 180 days from the admission of application to initiate the process by NCLT.
- Within fourteen days from the date of commencement of the insolvency procedure, the Adjudicating Authority is obligated to appoint an Interim Resolution Professional (IRP) whose term shall not exceed 30 days from the date of appointment. IRP takes control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities or from the Corporate Debtor.
- The Adjudicating Authority, after admission of the application declare a moratorium (a period under which the Corporate Debtor shall be prohibited the institution of any suits or continuation of pending suits or proceedings or transfer, encumber, alienate or dispose off any assets or any legal right or beneficial interest by the Corporate Debtor, or the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.
- The Interim Resolution Professional shall make Public Announcement in Form A in One English Newspaper, One Regional Newspaper, on the website of the Insolvency and Bankruptcy Board of India and on the website of the Corporate Debtor within a period not later than three days from the date of his appointment and call for submission of claims by creditors by giving them Fourteen days to submit the proof of claims.
- The interim resolution professional shall within seven days of his appointment, appoint two registered valuers to determine the liquidation value of the corporate debtor.
- After receiving claims pursuant to the public announcement, Interim Resolution Professional or the Resolution Professional shall verify every claim within seven days from the last date of receipt of the Claim and constitute the Creditors Committee. All financial creditors shall be part of Creditors Committee and if any Financial Creditor is a related party of the Corporate Debtor, then such financial creditor will not have any right of representation, participation or voting. Operational creditors shall constitute a committee in the absence of any Financial Debt.
- With the formation of the Committee of Creditor, the Interim Resolution Professional shall convene First Meeting of Committee of Creditors within seven days of filing the report certifying constitution of Committee by giving Seven days’ notice to every participant of the Meeting.
- At the First Meeting of Committee of Creditors, the members of the Committee along with the Interim Resolution Professional as the Chairperson take all necessary decisions regarding the smooth working of the Corporate Insolvency Process.
- The Corporate Insolvency Resolution Process in complex cases or situations extend the time beyond 180 days of maximum up to 90 days as provided in the Code.
- Resolution Professional shall prepare Information Memorandum containing the details of the Corporate Debtor and shall submit the Information Memorandum in electronic form to each member of the committee and any Potential Resolution Applicant.
- The Resolution Professional shall also issue an invitation, including evaluation matrix, to the Prospective Resolution Applicants in accordance with clause (h) of sub-section (2) of section 25, to submit Resolution Plans at least thirty days before the last date of submission of resolution plans.
- The Resolution Plan as approved by the Committee of Creditors shall be submitted to the Adjudicating Authority at least fifteen days before the expiry of the maximum period for the completion of the Corporate Insolvency Resolution Process.
- The members of the Committee of Creditors shall also on approval of the majority decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company.
Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
The Provisions of the Insolvency and Bankruptcy Code, 2016 shall also apply to Partnership Firms, Proprietorship Firm, and Individuals. An Individual or Partnership Firm can also initiate the Insolvency Resolution Process where the amount of the default is not less than one thousand rupees.
Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.
The Insolvency and Bankruptcy Code aims at repayment to Creditors without harming the Corporate Debtor, the Code serves to provide a secure and effective means to recover Debts and to remove or eradicate the Financial Distress of the Corporate Debtor. The Insolvency Professional serves to be an integral part of the Corporate Insolvency Resolution Process, the role of whom changes with the progress of the process. The IPs undertakes various roles such as an Interim Resolution Professional, resolution professional and eventually as a Liquidator depending on the stage of the Corporate Insolvency Resolution Process.