The Insolvency and Bankruptcy Code, 2016 is a comprehensive piece of legislation that touches all insolvency and bankruptcy issues of companies, limited liability partnerships (LLPs), limited liability entities, individual and partnership firms.
The Insolvency and Bankruptcy Code, 2016 (the Code) applies to both domestic and foreign creditors in dealing with issues related to cross-border transactions of companies incorporated under the Companies Act, 2013. Enactment of the Code is an attempt to match the international corporate standards followed across the globe.
The significant feature of the Code is that it is a comprehensive legal regime that brings insolvency and bankruptcy proceedings under a single legislation. The Code introduces a separate institutional structure, comprising regulators and insolvency professionals, information utilities and adjudicatory mechanisms to promote a concise and time-bound insolvency resolution process, failing which liquidation will be resorted to.
Several legislations covered in one
The Code purports to repeal certain legislations which made insolvency a complex and time-consuming process. As the Code brings a plethora of laws under its ambit, its introduction has repealed laws, such as the Provincial Insolvency Act, 1920 which governed insolvency across India except for presidency towns, and Presidency Towns Insolvency Act, 1909 which was meant to amend insolvency laws for the presidency towns that existed then.
Moreover, the Code has brought about amendments to several existing legislations, such as the Indian Partnership Act, 1932; Central Excise Act, 1944; Income Tax Act, 1961; Customs Act, 1962; Recovery of Debts Due to Banks and Financial Institutions Act, 1993; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; Sick Industries Companies (Special Provisions) Repeal Act, 2003; Payment and Settlement Systems Act, 2007; Limited Liability Partnership Act, 2008 and Companies Act, 2013.
The Code specifically looks at 'time-bound' matters covered under the aforementioned legislations, so as to increase the liquidation amount realised from the assets. Earlier, on account of the tedious process involved in the liquidation process, the assets lost value over time. The primary objective for recovery under the Code is to pass a resolution.
The Code expressly provides a time period of 180 days for the debt recovery process conducted by the creditors. An extension of a maximum of 90 days is offered, if the adjudicating authority is convinced that the case needs an extension. Setting of time limit is the highlight of the Code, since it encourages a speedy resolution mechanism.
Dedicated adjudicating authorities
The Code assigns National Company Law Tribunal (NCLT) matters pertaining to insolvency and liquidation of corporate debtors when the minimum amount of default is Rs 1 lakh, and the Debt Recovery Tribunal (DRT) matters pertaining to insolvency and bankruptcy of individuals and partnership firms where the minimum amount of default is Rs 1,000.
Corporate insolvency resolution process
The Code aims to establish a Corporate Insolvency Resolution Process (CIRP) for companies and LLPs. The purpose of the CIRP is to consolidate the operations of proceedings from the filing for insolvency to the recovery of dues. It enables creditors to plan the revival or liquidation of a debtor and assess it as a business decision.
In case of individuals and unlimited liability partnership firms, the Code is applicable when the minimum default amount is Rs 1,000 and upwards. There are two separate processes introduced under the Code for insolvency in these cases: fresh start process and insolvency resolution. A creditor may initiate insolvency process by filing an application before the relevant adjudicating authority, that is, the Debt Recovery Tribunal.
Individual debtors may initiate the fresh start process and apply to the DRT for discharge of certain debts not exceeding the specified threshold of gross annual income, value of assets and qualifying debts. A resolution professional is appointed by the DRT, who examines the application, receives claims of the creditors and may either accept or reject the application. The professional then prepares a report and submits it to the DRT. The DRT accepts or rejects the application.
Inclusion of financial and operational creditors
The Code segregates creditors into financial creditors and operational creditors. A financial creditor is defined as 'a person to whom financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to'. The definition of who would qualify as an operational creditor is similar to that of a financial creditor, except that it applies when an operational debt has occurred.
Pursuant to the case of IDBI Bank vs. Jaypee Infratech Ltd., the Insolvency and Bankruptcy Board of India (IBBI) has stated that a creditor who falls under the category of neither a financial creditor nor an operational creditor can submit his claim on Form F under the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. The IBBI has amended the said regulation and widened its ambit by providing relief to creditors belonging to the third category.
Insolvency resolution professional
The Code has introduced a resolution professional or insolvency professional appointed by the creditors' committee to manage the affairs of the corporate debtor by taking custody of the assets and monitoring them.
The resolution professional provides assistance to the adjudicating authorities to reach a consensus before passing necessary orders.
Change in the procedure of distribution of assets
The Code has substantially altered the distribution process of liquidated assets by creditors. The proceeds from the assets realised by the creditor will be distributed in the following manner:
One of the main provisions of the scope of applicability of the Code is the inclusion of cross-border insolvency. The Code provides that the Central Government may enter into bilateral agreements with other jurisdictions to be able to enforce provisions. The alternative course is authorising the adjudicating authorities to request courts and authorities of other countries in writing for information or to take relevant action if the assets of the debtor lie outside India.
Various Indian companies have assets and creditors located in different parts of the world and many foreign companies have subsidiaries in India. Issues relating to insolvency or liquidation of Indian companies with assets lying in several jurisdictions outside India and vice versa cannot be achieved without having a concrete mechanism such as the UNCITRAL Model Law on cross-border insolvency. The introduction of bilateral agreements widens the scope and applicability of the Code.
However, its implementation is likely to take place gradually, as cross-country negotiations are complex and have to be handled keeping in view the existing laws of the jurisdictions concerned, the sensibilities of the jurisdictions and the circumstances of each case.
One of the notable developments of the implementation of the Code is effected by the Mumbai Bench of NCLT, which proposed an amicable resolution for the parties as alternate mechanism in the insolvency of Gammon India Ltd. vs. Housing Development Infrastructure Ltd. (HDIL). In this matter, the Tribunal suggested to the parties under dispute to opt for settlement without exercising the resolution process under the Code. Gammon India, the operational creditor, filed for insolvency petition for an outstanding operational debt amounting to Rs 5.86 crore plus interest, which was the claim for goods supplied or services rendered. Thereby, the decision was rendered to enable timely resolution of dispute. This aided the Tribunal in lessening the burden of pending cases as well as paving the way for involving third parties in the insolvency process, similar to that of an arbitrator in the ADR mechanism.
The way forward
The Insolvency and Bankruptcy Code, 2016 has been long overdue. The Code promises to enact a timely procedure for bankruptcy or liquidation process. The Code has introduced new and fresh provisions to enable India to be on par with its worldly counterparts. It is also part of the government's ease of doing business in India initiative. Hence, it has also been structured in such a way that companies from around the world would look forward to opportunities of doing +-business in India.
Alternatively, the Code promises too many changes at one time, which could be difficult to enforce at one go. A step-by-step enforcement of the new provisions would ensure an enhanced enactment of the Code in the long run.
The Code aims for detection of financial shortcomings at the early stage itself in maximising the value of the assets of an insolvent in a specified time frame. The Code also covers in its ambit cross-border insolvencies through bilateral agreements and arrangements between countries.
Overall, the introduction and enactment of this legislation is a huge step towards improving and regulating India's debt recovery regime.
Authored by Krrishan Singhania, Managing Partner and Nikita Shankar, Associate, Singhania and Co.