02 Feb

Decoding India’s new Insolvency and Bankruptcy Legislation

Premise of enacting the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 came into force in August 2016. It is believed that the acid test for the Insolvency and Bankruptcy Code 2016 would come when the case involving Kolkata based Nico Industries is adjudicated. The adjudication process signals whether a sick company can be shut down within 180 days of the case being registered. While more than 1000 applications have been filed, 100 of them have been admitted by the arbitrator in the National Company Law Tribunal or NCLT that is expected to decide the fate of these non-financial firms within 180 days. That aside, one begs to examine the nitty-gritties of the code itself.

What is Bankruptcy?

Firstly, we must define as to what bankruptcy is? Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. Before the passing of the Bankruptcy Code, the legal framework in India with regard to this sphere suffered from a lack of clarity and certainty in jurisdictions. Decisions were often appealed, overstayed or overturned by judicial forums with concurrent jurisdictions. This has led to unnecessary delays often leading to misuse of this shortcoming by debtors. Therefore in this regard, the need for a new legislation was recognised. There were many reasons for this;

  1. Firstly, that Indian banks are ridden with debt. There is also a significant rise in Non-Performing Assets as well as restructured loans while the bad debts amount to 11% of the lending.

  2. There was a growth in loans from 3.49% in 2013 to 8.3% in 2015.

  3. Corporate bad loans constituted 56% of the total bad loans of state-run banks.

  4. The number of companies pending litigation was increasing.

All this combined began to have an adverse effect on the ease of doing business in India.

Features of the Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code was enacted in 2016 to consolidate and amend laws with regard to reorganization and insolvency resolution of individuals, corporations in a time bound manner. It replaced existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms. Bankruptcy legislations from USA and UK were taken as reference for this legislation. The new code is based on a number of principles. Firstly, the assessment of viability at the very early stage. Secondly, the creditors will enable symmetry of information between debtors and creditors. Thirdly, that the Code will ensure time bound process with regard to settling proceedings. The Code also ensures that the rights of all creditors will be protected equally. The Insolvency and Bankruptcy Code has the following features:

  1. The Insolvency and Bankruptcy Board of India will be set up by the Regulator in the Code.

  2. The Code aims at regulating insolvent professionals and agencies that look towards developing professional standards, a code of ethics and exercise a disciplinary role. Three sets of Resolution Professionals are sought to be appointed. The Interim Resolution Professional, Final Resolution Professional and the Liquidator.

  3. The Insolvency and Bankruptcy Code attempts to collect, collate and authenticate and disseminate financial information from listed companies and the financial and operational creditors of these companies.

  4. The Code empowers the Insolvency authority to exercise jurisdiction over cases by or against the debtor.

  5. The Debt Recovery Tribunal will be the adjudicating body exercising jurisdiction over individuals and partnerships other than Limited Liability Partnerships (LLPs) appeals from which will be going to the Debt Recovery Appellate Tribunal.

  6. The National Company Law Tribunal (NCLT) shall have jurisdiction over companies, other than Limited Liability Partnerships (LLPs).Appeals from the National Company Law Tribunal shall be heard at the National Company Law Appellate Tribunal.

Criticisms against the Insolvency Code

Despite its positives, there a number of criticisms that are levied against the Insolvency Code, 2016.

  • It is speculated that the inducement of time bound machinery will require the establishment of various additional Institutional Mechanisms. However, this transition is likely to take time and not immediate.

  • The second concern is that, although the Insolvency Code creates a banking and Insolvency Fund. However, it does not specify the manner of usage.

  • Another issue is with regard to the distribution of assets during liquidation. For eg; secured creditors receive their entire outstanding amount rather than up to their collateral value. Also, those unsecured creditors are given priority over secured creditors.

However, the Banking and Insolvency Code, 2016 is a step in the right direction as far as building investor confidence is concerned.

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