INSOLVENCY AND BANKRUPTCY LAWS IN INDIA

Ketaki Das

INTRODUCTION

Whenever an organisation fails to honour its financial obligations towards its creditors, it files for bankruptcy. Every year, multiple companies, big or small, files a petition in the court for the purposes of measuring the outstanding debts and repayment of such debts from the company’s assets. The Insolvency and Bankruptcy Law of India seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy for all such organisations.

The Insolvency and Bankruptcy Code, 2016 (IBC) was proposed in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The Code received the assent of the President of India on 28 May 2016. IBC was introduced to replace SICA (Sick Industrial Companies Act), which was repealed with effect from 1 December 2016.

To combat an atmosphere of rampant industrial sickness, the Government of India came up with the Sick Industrial Companies Act in 1985.The Act was enacted in India to spot sick or potentially sick companies and to help with their revival or closure of such unit. In 2003, SICA was repealed and replaced by the Sick Industrial Companies (Special Provisions) Repeal Act of 2003. As SICA could not live up to the expected results, IBC was notified as on 28 May 2016.

The legislation describes IBC as an act to consolidate and amend the laws having reorganization and insolvency resolution issues. The provisions of the Code applies to the following in case of insolvency, liquidation, voluntary liquidation or bankruptcy:-

  • Company
  • Limited Liability Partnership
  • Partnership firms
  • Corporate persons
  • Individuals
  1. Facilities under the Code :-

Under the Code, various institutions have been created to facilitate resolution of insolvency, such as:-

  • Insolvency Professionals: Includes specialised licensed professionals who administer the resolution process, manage the assets of the debtors and provides information for creditors to assist them in decision making.
  • Insolvency professional agencies: These are professional agencies which conduct examination to certify the insolvency professionals and enforce a code conduct for their performance.
  • Information utility: The creditors report the information related to the debt owed to them by the debtors. Such information includes records of debts, liabilities and defaults.
  • Adjudicating authorities:-

Under the Code, two authorities adjudicate the resolution process. These two authorities are,

The National Company Law Tribunal (NCLT), constituted under Section 408 of The Companies Act 2013. It is a quasi-judicial board which hears insolvency resolution cases for corporate persons, and

The Debt Recovery Tribunal (DRT), constituted under Section 3(1) of the Recovery of Debts Due to Banks and Financial Institutions, with the purpose of adjudicating cases of insolvency resolutions and bankruptcy cases for partnership firms and individuals.

  • Procedures to resolve insolvency:-

The following step are proposed by the Code to resolve insolvency:-

  • Initiation:  When a default occurs, the resolution process may be initiated by the debtor or the creditor.
  • Decision to resolve insolvency: A committee is formed with the financial creditors who then take a decision regarding the future of the outstanding debt owed to them.
  • Liquidation: An insolvency professional will administer the liquidation process if a debtor goes into liquidation. Proceeds from the sale of the debtor’s assets is then distributed to cover the costs of the debt owed.

Recent Amendments

In 2019, the Legislature and the IBBI introduced certain amendments to the Code to ensure the IBC does not have to face the same fate as some of the similar Acts such as SICA. The Amended Act of 2019 further strengthened the objectives of the Code. These amendments include,

The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Services Providers and Application to Adjudicating Authority) Rules 2019, Notification of Application of Code to Personal Guarantors of Corporate Debtors and some further amendments made to the Code by the way of the Insolvency and Bankruptcy Amendment Ordinance, 2019 which was passed on 28 December 2019.

Conclusion

The Insolvency and Bankruptcy Code, 2016 is a comprehensive legislation providing speedy and specific remedies to issues of insolvency. The Code and the recent amendment has been effective in improving India’s ranking on the World Bank’s “Ease of Doing Business” 2020 reports. It has also been noticed that in the Resolving Insolvency Index, India’s rank has jumped 56 places and has also recorded an increase in its recovery rates and the time taken in recovery has also reduced from 4.3 years to 1.6 years.

References