Bankruptcy code passed by Lok Sabha

The Insolvency and Bankruptcy Code Bill passed in the Lok Sabha . It is a ‘watershed’ reform that will facilitate ease of doing business by identifying and resolving cases of insolvencies in India
About Bankruptcy and Insolvency Code, 2015:

• This Code seeks to create a unified framework for resolving insolvency and bankruptcy in India. Insolvency is a situation where individuals or organisations are unable to meet their financial obligations.
• This Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it seeks to amend 11 laws, including the Companies Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Sick Industrial Companies (Special Provisions) Repeal Act, 2003, among others.
• The Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government.
• Insolvency Resolution: The insolvency resolution process (IRP) for individuals varies from that of companies. These processes may be initiated by either the debtor or the creditors.
• Resolution process for companies and limited liability partnerships: The resolution process will have to be completed within a maximum period of 180 days from the date of registration of the case. This period may be extended by 90 days if 75% of the financial creditors agree. The process will involve negotiations between the debtor and creditors to draft a resolution plan.
• The process will end under two circumstances, (i) when a resolution plan is agreed upon by a majority of the creditors and submitted to the adjudicating authority, or (ii) the time period for negotiation has come to an end. In case a plan cannot be negotiated upon, the company will go into liquidation.
• There will be provision for a fast track insolvency resolution process for companies with smaller operations. The process will have to be completed within 90 days, which may be extended if 75% of financial creditors agree.
• Resolution process for individuals and partnerships: Before going in for insolvency resolution, the debtor may apply for forgiveness of a specified amount of debt, provided that his assets are below a limit set by the central government. This process will have to be completed within six months.
• In case of insolvency resolution, negotiations between the debtor and creditors will be supervised by an insolvency professional. If negotiations succeed, a repayment plan, agreed upon by a majority of the creditors, will be submitted to the adjudicator. If they fail, the matter will proceed to bankruptcy resolution.
• Insolvency professionals and agencies: The IRP will be managed by a licensed professional. The professional will also control the assets of the debtor during the process. The Code also proposes to set up insolvency professional agencies. These agencies will admit insolvency professionals as members and develop a code of conduct and evolve performance standards for them.
• Insolvency regulator: The Code seeks to establish the Insolvency and Bankruptcy Board of India, to oversee insolvency resolution in the country. The Board will have 10 members, including representatives from the central government and Reserve Bank of India. It will register information utilities, insolvency professionals and insolvency professional agencies under it, and regulate their functioning.
• Insolvency and Bankruptcy Fund: The Code creates an Insolvency and Bankruptcy Fund. Deposits to the Fund will include: (i) grants made by the central government, (ii) amount deposited by persons, and (iii) interest earned on investments made from the Fund. Any person who has contributed to the Fund may apply for withdrawal, in case of proceedings against him.
• Bankruptcy and Insolvency Adjudicators: The Code proposes two separate tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law: (i) the National Company Law Tribunal will have jurisdiction over companies and limited liability partnerships, and (ii) the Debt Recovery Tribunal will have jurisdiction over individuals and partnership firms. Appeals against orders of these tribunals may be challenged before their respective Appellate Tribunals, and further before the Supreme Court.
• Offences and penalties: The Bill specifies that for most offences committed by a debtor under corporate insolvency (like concealing property, defrauding creditors, etc.), the penalty will be imprisonment of up to five years, with a fine of up to one crore rupees. For offences committed by an individual (like providing false information), the imprisonment will vary based on the offence. For most of these offences, the fine will not exceed five lakh rupees.

Analysis
Benefits:

• This law has consolidated the existing laws relating to insolvency of companies, limited liability entities, unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation.
• This law will provide greater clarity in the law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.
• The bill further seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns.
• As per the proposed legislation, the corporate insolvency would have to be resolved within a period 180 days, extend able by a further 90 days. It also provides for fast-track resolution of corporate insolvency within 90 days.
• An effective legal framework for timely resolution of insolvency and bankruptcy, it added, would support development of credit markets and encourage entrepreneurship. The Code would "improve ease of doing business, and facilitate more investments leading to higher economic growth and development".

Concerns

• Time-bound insolvency resolution will require establishment of several new entities. Also, given the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role.
• IPAs(insolvency professional agencies ), regulated by the Board, will be created for regulating the functioning of IPs. This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals. Further, requiring a high value of performance bond may deter the formation of IPAs.
• The Code provides an order of priority to distribute assets during liquidation. It is unclear why: (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.
• The Code provides for the creation of multiple IUs(Information utilities). However, it does not specify that full information about a company will be accessible through a single query from any IU. This may lead to financial information being scattered across these IUs.
• The Code creates an Insolvency and Bankruptcy Fund. However, it does not specify the manner in which the Fund will be used.

By: Vishal