Insolvency and Bankruptcy Code
Background
The Insolvency & Bankruptcy Code, 2016 (the “Code”) consolidated the archaic insolvency laws, provided a consolidated legislation and revolutionised the insolvency regime in India. Undoubtedly, the Code hashad a significant impact on the way corporate India functions.
It has been almost two years since the Code came into effect and in the year 2017 some significant amendments have been made to the Code based on inputs received from various market participants.
The President of India while exercising his power under Article 123 of the Constitution of India on November 23, 2017 promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”) which amended the existing Code.
The purpose of this Ordinance was to strengthen the Corporate Insolvency Resolution Process (“CIRP”).
The Insolvency and Bankruptcy Code (Amendment) Bill, 2017 was introduced to replace the Ordinance. The bill was passed by both houses of the Parliament and received President’s assent on January 18, 2018 to become the Insolvency and Bankruptcy (Amendment) Act, 2018(the“Amendment Act”).
The Amendment Act has a retrospective effect as it is deemed to be in force from November 23, 2017. This also means that it nullifies the Ordinance which came into force on same day and any action which was governed by the Ordinance will be governed by the Code as amended by the Amendment Act
The Code
The Insolvency and Bankruptcy Code, 2016 aims to consolidate and amend the laws relating to insolvency resolution of companies and limited liability entities, partnerships and individuals, which are contained in various enactments, into a single legislation. The main focus of this legislation is at providing resurrection and resolution in a time bound manner for maximization of value of debtor’s assets. The Code has put forth an overarching framework to aid sick companies to either wind up their business or engineer a revival plan, and for investors to exit. Notably, the Code has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency resolution process if default occurs.
Another important feature of the Code is that it does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. The Code has sought to balance the interest of all the stakeholders including alteration in the order of priority of payment of Government dues. The legislators have sought to bring in a law analogous to international standards which is guided by the broad philosophy that insolvency resolution must be commercially and professionally driven (rather than court driven). As such, the role of adjudicating authorities is limited to ensuring due process rather than adjudicating on the merits of the insolvency resolution
The Code repeals the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920, as well as amends 11 legislations, including:
- Indian Partnership Act, 1932
- The Companies Act, 2013
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- Limited Liability Partnership Act, 2008,
- Sick Industrial Companies (Special Provisions) Repeal Act, 2003
To avoid any further litigation in insolvency proceedings, the Code will have an overriding effect over all other laws. It is specifically provided that civil courts or authority not to have jurisdiction and also cannot grant any injunction. The Code as a new law, replacing over a dozen laws, when implemented post the infrastructure being put in place, will prove to be the most important step in evolving the regime of recovery of bad debts. Moreover, there will be a definite surge in economic growth in view of the rigid timeframe prescribed in the Code for resolution of insolvency and liquidation proceedings.
How can the Code help?
The Code makes a clear distinction between insolvency and bankruptcy — the former is a short-term inability to meet liabilities during the normal course of business, while the latter is a longer term view on the business. As all businesses cannot succeed, it is perfectly normal for some businesses to fail, making it important to emphasize on corrective action.
The code amply clarifies that Insolvency or Bankruptcy is a commercial issue, backed by law to enforce transparency and objectivity. It is not another law behind which the inevitable can be delayed.
As per the BLRC, the Code set out the following objectives to resolve insolvency and bankruptcy:
- Low time to resolution
- Higher recovery
- High Level dept financing across a wide variety of debt instruments
The Code ensures certainty in the process, including what constitutes insolvency, the processes to be followed to resolve the insolvency, and the process to resolve bankruptcy once it has been determined.
Such a framework can incentivize all stakeholders to behave rationally in negotiations toward the determination of viability, or in bankruptcy resolution. In turn, this will result in shorter recovery timeframes and better recovery, and greater certainty on lenders’ rights, leading to the development of a robust corporate debt market and unlocking the flow of capital.
Why is the code imperative today?
Why was the Code needed?
- Reduce the time taken to resolve insolvency
- Develop the investor confidence level
- Eliminate confusion caused by a complex judicial framework
- Address the NPA situation decisively
- Develop the credit and bond market
What does the code intend to change?
- Create a single insolvency and bankruptcy framework Set up a clear and unambiguous process to be followed by all stakeholders in a time-bound manner.
- Provide a commercial solution to a commercial issue
- Allow genuine business failures a second chance
- Clear and unambiguous process to be followed by all stakeholders in a time-bound manner
- Provide confidence to lenders of their right and their enforcement
What does it change for the lenders?
- Right to control the borrower upon default and maximize their recovery
- Option to initiate the process even if the default is in respect of the debt of another lender
- Need for more robust monitoring systems to enable judicious exercise of powers and rights.
- Lack of lender consensus on resolution plan can push the borrower into liquidation
- Clear priority of distribution (waterfall) upon liquidation; government dues subservient to those of secured and unsecured creditors.
What does it change for the borrowers?
- Any creditors can file an insolvency petitions on a default of Rs. One Lakh or more.
- Insolvency professional to take over the management and operation of borrower during the Corporate Insolvency Resolution Process.
- Borrower focus on liquidity- ensure tight cash flow forecasting and monitoring to stay current on payments
- Need to be proactive in identifying issues, communicating with lenders and developing/implementing a turnaround plan
- In case of fraudulent diversion of assets, personal contribution can be sought; imprisonment possible
How can the Code help fast-track resolution?
- Lender inertia during the CIRP would mean liquidation – Invariably an economically inferior outcome as compared to resolution
- Clarity of the Insolvency framework with attract Investors to invest into stressed and distressed situation.
- Moratorium clause to ensure smooth insolvency resolution process.
- An open floor for submission of resolution plan should facilitate the approval of the best plan
- The framework defines the role of the judiciary and leaves limited scope for the legal delay/deferred of the problem
