The Insolvency and Bankruptcy Code, 2016-An Overview

The Government has felt a need to have a consolidated law or code to govern and regulate the matters of recovery of money from debtors who have borrowed and failed to repay debts even after it becomes due more particularly when those debts are not secured. The existing insolvency laws and laws relating to recovery of loans enacted for the purpose of companies and banks namely the Sick Industrial Companies Act, The Recovery of Debt Due to Banks & Financial Institutions Act, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Companies Act 2013/Companies Act 1956 etc are not providing speedy remedy to recover the loans and debts due from debtors and in a way it has failed to improve the recovery position and possibility from debtor by the creditor.

Purpose of the Code:

(a)  To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals.

(b)  To fix time periods for execution of the law in a time bound manner.

(c)   To maximize the value of assets of interested persons.

(d)  To promote entrepreneurship

(e)  To increase availability of credit.

(f)   To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues.

(g)  To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.

Applicability

The Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of Companies, LLPs, Partnership Firms and Individuals.

Exception: The Code shall not apply to Financial Service Providers like Banks, Financial Institutions and Insurance companies.

What is considered as a Claim under the code?

As per Section 3(6) of the Code, Claim means a right to payment or right to remedy for breach of contract if such breach gives rise to a right to payment whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.

Applicable forms to file an application with NCLT.

The form in which the application is to be preferred is provided in the Application to Adjudicating Authority Rules as follows: Financial Creditor – Form 1, Operational Creditor – Form 5, Corporate Debtor – Form 6

Resolution Process (For Corporates)

Application on default: Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment

Appointment of IP: IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company. From date of appointment of IP, power of Board of directors to be suspended and vested in the IP. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith.

Moratorium period: Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the Company on going concern basis. A Resolution plan would have to be prepared and approved by the Committee of creditors.

Credit committee: A credit committee of creditors will be constituted. Related party to be excluded from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditor approve the resolution plan same needs to be implemented.

Liquidation Process

Initiation: Failure to approve resolution plan within specified days will cause initiation of Liquidation. Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.

Liquidator: The IP may act as the liquidator, and exercise all powers of the BoD. The liquidator shall form an estate of the assets, and consolidate, verify, admit and determine value of creditors’ claims.

Order of priority for distribution of assets: • Insolvency related costs • Secured creditors and workmen dues upto 24 months • Other employee’s salaries/dues up to 12 months • Financial debts (unsecured creditors) • Government dues (up to 2 years) • Any remaining debts and dues • Equity

Source: Wiki, EY, ICAI. Compiled and Presented by: Preetham Shetty & Co