INSOLVENCY AND BANKRUPTCY CODE 2016
INSOLVENCY AND BANKRUPTCY CODE 2016
In India, there was no single law which could deal with Insolvency and Bankruptcy laws. Under the previous law i.e. Sick Industrial Companies (Special Provision) Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debts Due to Banks and Financial Institution Act, 1993, and Companies Act, 2013, provision relating to insolvency and bankruptcy for Companies were dealt with, though not effectively and efficaciously, hence were considered to be inadequate.
The Central Government proposed “The Insolvency and Bankruptcy Code 2015” which was introduced by the Finance Minister Shri. Arun Jaitely in Lok Sabha on 21st December, 2015 and the same was referred to a Joint Parliamentary Committee of both the Houses of Parliament for examination. The Committee presented its report to Lok Sabha on 28th April, 2016 and laid the same in Rajya Sabha on the same day.
After the recommdation by the Joint Parliamentary Committee, the Code was passed by the Lok Sabha on 5th May, 2016 and by Rajya Sabha on 11th May, 2016 and assented by the President on 28th May, 2016. Now, it is known as the “The Insolvency and Bankruptcy Code 2016”.
The Insolvency and Bankruptcy Code, 2016 extends to the whole of India except Part III (Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms) which shall not extend to the State of Jammu and Kashmir.
The provision provides the applicability of the code to:
- any Company incorporated under the Companies Act, 2013 or under any previous Company Law;
- any other Company governed by any Special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such Special Act;
- any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;
- 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
- Partnership firms and individuals.
The Provincial Insolvency Act, 1920
The objective of the Insolvency and Bankruptcy Code is to promote the ease of doing business and amending the laws relating to re-organisation 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 provide establishment of the Insolvency and Bankruptcy Board of India for regulation of insolvency professionals, insolvency professional agencies and information utilities.
The provisions of this Code shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of default is Rupees One (1) Lakh. However, the Central Government may specify the minimum amount of default of higher value which shall not be more than Rupee One (1) Crore by notification.
CONSTITUTION OF THE BOARD:
The Central Government has established the Board “The Insolvency and Bankruptcy Board of India” under the provision of section 188 of the Insolvency and Bankruptcy Code, 2016.
The Board shall consist of the following Members who shall be appointed by the Central Government
- a Chairman;
- three (3) Members from amongst the officers of the Central Government not below the rank of Joint Secretary or equivalent, one each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex officio;
- one (1) Member to be nominated by the Reserve Bank of India, ex officio;
- five (5) other Members to be nominated by the Central Government, of whom at least three (3) shall be the whole-time Members.
The Chairperson and the other Members shall be persons of ability, integrity and standing, who have shown capacity in dealing with problems relating to insolvency or bankruptcy and have special knowledge and experience in the field of law, finance, economics, accountancy or administration.
CORPORATE INSOLVENCY RESOLUTION PROCESS:
- Initiation of Corporate Insolvency Resolution Process:
A financial creditor, an operational creditor or the corporate debtor, as the case may be, file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred under the provisions of section 7, 9 and 10 respectively of the Insolvency and Bankruptcy Code, 2016.
- Adjudication Authority mean National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.
- Till such time the rules of procedure for conduct of proceedings under the Code are notified, the application made under sub-section (1) of section 7, sub-section (1) of section 9 or sub-section (1) of section 10 of the Code shall be filed before the Adjudicating Authority in accordance with rules 20, 21, 22, 23, 24 and 26 of Part III of the National Company Law Tribunal Rules, 2016.
Application for Initiation of Corporate Insolvency Resolution Process by Financial Creditors:
A Financial Creditor either by itself or jointly with other financial creditors may file an application in Form 1 for initiating corporate insolvency resolution process against corporate debtors before the Adjudicating Authority under the provision of section 7 of the Code.
Application for Initiation of Corporate Insolvency Resolution Process by Operational Creditors:
An Operational Creditor may deliver a Demand Notice in Form 3 of unpaid operational debtor copy of an invoice in Form 4 demanding payment of the amount involved in the default to the Corporate Debtors. The Corporate Debtor has a period of ten days from the receipt of demand notice to inform the operational creditors of the existence of a dispute regarding the debt claim or the repayment of debt. After the expiry of the period of ten (10) days from the date of delivery demand Notice, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application in Form 5 before the Adjudicating Authority for initiating a corporate insolvency resolution process under the provisions of section 9 of the Code.
- A Corporate Applicant (Corporate Debtor) may make an application in Form 6 to the Adjudicating Authority under the provisions of the section 10 of the Code.
- The Adjudicating Authority shall ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the Financial Creditor, Operational Creditor and Corporate Debtors within fourteen (14) days of the receipt of the application.
Accordingly, we can say that the Adjudicating Authority within 14 days of receipt of application by order accept or reject the application. However, before the rejecting the application, the Adjudicating Authority shall give notice to the applicant to rectify the defect within seven (7) days of receipt of such notice. The corporate insolvency resolution process shall commence from the date of admission of the application. The Adjudicating Authority shall communicate to the Financial Creditor/ Operational Creditors and the corporate debtor within seven (7) days of admission or rejection of such application, as the case may be.
Time-limit for Completion of Insolvency Resolution Process:
The corporate insolvency resolution process shall be completed within a period of one hundred and eighty (180) days from the date of admission of the application to initiate of process. The resolution professional can file an application to the Adjudicating Authority for extension the period of the corporate insolvency resolution process beyond one hundred and eighty days but not exceeding ninety (90) days.
The Adjudication Authority will declare moratorium period for prohibiting all of the following:
- the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
- transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
- any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- 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 supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. Further, the abovesaid provisions not apply to such transactions notified by the Central Government in consultation with any financial sector regulator.
According to above, we can say that the purpose of moratorium include keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring that the Company may continue as a going concern while the creditors take a view on resolution of default.
Public Announcement of Corporate Insolvency Resolution Process:
A Public announcement of corporate insolvency resolution process for the corporate debtor shall contain the information includes Name and address of the corporate debtor under the corporate insolvency resolution process, name of the authority with which corporate debtor is registered, the last date for submission of claims and date on which corporate insolvency resolution process will be closed etc.
Appointment and Tenure of Interim Resolution Professional:
The Adjudicating Authority shall appoint an interim resolution professional within fourteen (14) days from the insolvency commencement date under section 7, 9 and 10. Where the corporate insolvency resolution process has been initiated in respect of a corporate debtor in the application by a financial creditor or the corporate debtor itself, the insolvency professional whose name has been proposed in the application shall be appointed by the Adjudicating Authority.
Management of Affairs of Corporate Debtor by Interim Resolution Professional:
After appointment of the interim resolution professional, the management of the affairs of the corporate debtor shall vest in the interim resolution professional and the powers of the Board of Directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional. The officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional.
Committees of Creditors:
The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. The committee of creditors shall comprise all financial creditors of the corporate Debtor. All decisions of the committee of creditors shall be taken by a vote of not less than 75% of voting share of the financial creditors.
Appointment of Resolution Professional:
The first meeting of the committee of creditors shall be held within seven (7) days of the constitution of the committee of creditors. The committee of creditors either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.
Resolution Professional to Conduct Corporate Insolvency Resolution Process:
The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. In case of appointment of a new resolution professional in place of the interim resolution professional, the interim resolution professional shall provide all the information, documents and records pertaining to the corporate debtor in his possession and knowledge to the resolution professional.
Replacement of Resolution Professional by Committee of Creditors:
At any time during the corporate insolvency resolution process, the committee of creditors is of the opinion that a resolution professional appointed under the provision of the Code is required to be replaced. The Committee of creditors may replace him with another resolution professional.
Preparation of Information Memorandum:
The resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.
Submission of Resolution Plan:
A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum and the resolution professional shall examine such resolution plan. The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority (NCLT).
Approval of Resolution Plan:
If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors meets the requirements as referred under the provision of the Code, then the Adjudication Authority shall by order approve the resolution plan. If Adjudicating Authority is felt that the resolution plan does not meet the requirements of the Code, it may reject the resolution plan or order for Liquidation.
The approved plan shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
Any person aggrieved by the order of the Adjudicating Authority may appeal to the National Company Law Appellate Tribunal (NCLAT) within thirty (30) days. All appeals from the orders of the NCLT will be heard by NCLAT. Appeals from the NCLAT will be heard by the Supreme Court of India.
FAST TRACK CORPORATE INSOLVENCY RESOLUTION PROCESS
A new concept “Fast Track Corporate Insolvency Resolution Process” has been introduced. The Code provides that the Fast Track Corporate Insolvency Resolution Process shall be completed within a period of ninety days (90) from the insolvency commencement date. The resolution professional can file an application to the Adjudicating Authority for extension the period of the fast track corporate insolvency resolution process beyond ninety days but not exceeding forty-five days (45).
VOLUNTARY LIQUIDATION OF CORPORATE PERSONS
The Code provides provisions for initiation of Voluntary Liquidation proceedings by the corporate person which has not defaulted on any debt due to any person. The Code also repealed the provision of Part II of Chapter XX of Companies Act, 2013, which deals with Voluntary Winding Up. The section 304 to 323 (Voluntary Winding Up) of the Companies Act, 2013 has been omitted with effect to the applicability of this Code and section 59 of the Code provides provision for Voluntary Liquidation of Corporate Persons.
A Corporate person who intend to liquidate or wound up itself and has not committed any default may initiate voluntarily liquidation proceeding. Voluntary liquidation proceeding of a corporate person registered as Company shall meet the following conditions:
Declaration of Solvency by the majority of Directors:
A declaration of solvency from majority of the Directors of the Company in Form of an affidavit stating that they have made a full inquiry into the affairs of the Company and they have formed an opinion that either the Company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation and the Company is not being liquidated to defraud any person.
Documents to be filed with Declaration of Solvency:
The above declaration shall be accompanied with the audited financial statements and record of business operations of the Company for the previous two years or for the period since its incorporation, whichever is later. Further, a report of the valuation of the assets of the Company prepared by a registered valuer also needs to be submitted with declaration.
Within four weeks of a declaration, a Members special resolution in favour of the voluntary liquidation of the Company and appointment of an insolvency professional as the liquidator has to be passed. Further, if the Company owes any debt to any person, creditors representing two-thirds in value of the debt of the Company shall approve the resolution passed within seven days of such resolution.
Submission of resolution with ROC and IBBI:
The Company also has to notify the Resolution with Registrar of Companies and the Insolvency and Bankruptcy Board of India within seven days of such resolution or the subsequent approval by the creditors, as the case may be.
The voluntary liquidation proceedings in respect of a Company shall be deemed to have commenced from the date of passing of the resolution subject to approval of the creditors. The provisions of sections 35 to 53 of Chapter III and Chapter VII of the Code shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary.
Once the affairs of the corporate debtor have been wound up and its assets completely liquidated, the liquidator shall make an application to the adjudicating authority for the dissolution of the corporate debtor and the corporate debtor shall be dissolved by the order of the adjudicating authority.
Filing of Copy of Order with Authority:
A copy of an Order shall be forwarded to the Authority (Concerned Registrar of Companies in case of Company and Registrar of LLP in case of LLP) with which the corporate person is registered within fourteen days from the date of such order.
ADVANTAGES OF THE CODE:
The code seeks to provide an effective legal framework for timely resolution of insolvency and bankruptcy. It would also improve ease of doing business in India. Some of most important advantages are as under:
- Speedy Process: The code creates time-bound processes for insolvency resolution of Companies and Individuals. These processes will be completed within 180 days.
- Reduction of work of Court: The number of pending cases with Court is too high and now the matters in respect to insolvency and bankruptcy transferred to NCLT. Accordingly, The NCLT and the NCLAT will reduce the work of overburdened Courts.
- The speedy disposal of cases will save time, energy and money of the parties.
Hence, we do hope that not only the corporate would obtain its benefits but stakeholders would also be benefitted.
SCOPE OF COMPANY SECRETARY:
The Insolvency and Bankruptcy Code 2016 has given various opportunities to the professionals in the area of Corporate Insolvency Resolution Process, Liquidation Process and Individual insolvency resolution process. A Company Secretary who has been in practice for 15 year can immediately register as “Insolvency Professionals” for a period of 6 Months and a Company Secretary (employment/ in practice) having 10 year of experience as Member of the Institute can register to himself/ herself subject to passing of Limited Insolvency Examination.
The passing of the Insolvency and Bankruptcy Code was a step towards to improving the ease of doing business by bringing all aspects of Insolvency and Bankruptcy matters under one roof. It is aimed to provide a speedy and efficient disposal of the matters. Further, it will also reduce the work of overburdened Courts. It would take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes. This is considered as the biggest economic reform.
The contents of this Article have been prepared on the basis of provisions of the Insolvency and Bankruptcy Code. The information contained in this Article or document for the purpose of knowledge sharing among the professionals. It may also be legally privileged and shall not be used as a legal opinion and not to be used for rendering any professional advice. I assume no responsibility for the consequence of use of such information.