Insolvency and Bankruptcy Code, 2016

OVERVIEW OF INSOLVENCY AND BANKRUPTCY CODE, 2016

Before the start of the discussion, lets have a look on Arun Jaitley's words in Rajya Sabha on May 12, 2016 on the Insolvency and Bankruptcy Code, 2016

NEED FOR A NEW LAW

1. According to the Ease of Doing Business Report of the World Bank, it takes an average of 4-5 years in insolvency resolution process in India.

2. The main reason behind such delay in the legal process is the existence of overlapping legislations and adjudicating authorities dealing with insolvency of companies and individuals in India.

3. The Government of India then formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate hassle-free and time-bound revival and closure of businesses.

4. The framework of law which was in existence earlier had failed to resolve insolvency situations.
 (a) Financial failure – a persistent mismatch between payments by the enterprise and receivables into the enterprise, even though the business model is generating revenues.
 (b) Business failure – which is a breakdown in the business model of the enterprise, and is unable to generate sufficient revenues to meet payments.
 (c) Malfeasance and mismanagement by promoters.

INTRODUCTION

1. The Insolvency and Bankruptcy Code, 2016 is one of the major economic reform Code initiated by the government in the year 2015.

2. There were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India.

3. The existing laws also were not aligned with the market realities, had several problems and were inadequate 

4. As per the legal framework, provisions relating to insolvency and bankruptcy for companies and could be found in the following laws:

   a) Sick Industrial Companies (Special Provisions) Act, 1985.

   b) Recovery of Debt due to Banks and Financial Institutions Act, 1993.

   c) SARFAESI, 2002

   d) Companies Act, 2013.

5. Resolution and jurisdiction vesting with multiple agencies with the overlapping powers was leading to delays and complexities in the process.

6. To facilitate easy and time bound closure of business in India and to overcome these challenges, a strong bankruptcy law was required.

7. The IBC, 2016 was introduced in the Lok sabha on 21st December 2015 and referred to the Joint Committee on the IBC, 2016. The Committee had presented its recommendations in the modified Bill based on its suggestions.

8. Further the Insolvency and Bankruptcy Code, 2016 was passed by the Both the houses of the parliament and notified in May 2016. Being one of the major economic reforms it paves the way focusing on creditor driven insolvency resolution.

What is meant by Insolvency and bankruptcy?

1. The term insolvency is used for both individuals and organizations.
For individuals, it is known as bankruptcy and for corporate it is called corporate insolvency.
Both refers to a situation when an individual or company are not able to pay the debt in present or near future and the value of assets held by them are less than liability.

2. Insolvency in this Code is regarded as a “state” where assets are insufficient to meet the liabilities. If untreated, insolvency will lead to bankruptcy for non-corporates and liquidation of corporates.

3. While insolvency is a situation which arises due to inability to pay off the debts due to insufficient assets, bankruptcy is a situation wherein application is made to an authority declaring insolvency and seeking to be declared as bankrupt, which will continue until discharge.

4. From the above, it is evident that insolvency is a state and bankruptcy is a conclusion. A bankrupt would be a conclusive insolvent whereas all insolvencies will not lead to bankruptcies. Typically insolvency situations have two options – resolution and recovery or liquidation.


RELATIONSHIP BETWEEN BANKRUPTCY, INSOLVENCY & LIQUIDATION.

1. “Bankruptcy” is a legal proceeding involving a person or business that is unable to repay outstanding debts.

2. The bankruptcy process begins with a petition filed by the debtor, or by the creditors.

3. All of the debtor’s assets are measured and evaluated, and then these assets may be used to repay a portion of outstanding debt.

4. In lucid language, if any person or entity is unable to pay off the debts, it owes to its creditors, on time or as and when they became due and payable, then such person or entity is regarded as “insolvent”.

5. “Liquidation” is the winding up of a corporation or incorporated entity. There are many entities that can initiate proceedings that will lead to Liquidation, those being:-
 (a) The Regulatory Bodies;
 (b) The Directors of a Company;
 (c) The Shareholders of a Company; and
 (d) An Unpaid Creditor of a Company.

6. In nut shell, insolvency is common to both bankruptcy and liquidation. Not being able to pay debts as and when they became due and payable is the leading cause for Liquidation and is the only way that can cause a natural person to become a bankrupt.

PURPOSE BEHIND ENACTMENT OF INSOLVENCY AND BANKRUPTCY CODE, 2016

1. The Insolvency and Bankruptcy Code, 2016 is intended to strike the right balance of interests of all stakeholders of the business enterprise so that the corporates and other business entities enjoy availability of credit and at the same time the creditor do not have to bear the losses on account of default.

2. As per the Preamble to the Code, the purpose of this Act is as under:-
 (a) To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals.
 (b) To fix time periods for execution of the law in a time bound manner.
 (c) To maximize the value of assets of interested persons.
 (d) To promote entrepreneurship.
 (e) To increase availability of credit.
 (f) To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues.
 (g) To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.

*The following is the link to the website of Insolvency and Bankruptcy Board of India
http://www.ibbi.gov.in/

STRUCTURE OF THE CODE

1. The Code has been divided in to five parts comprising of 255 sections and 11 Schedules.

2. Out of these some sections have been notified by the Ministry of Corporate Affairs.

3. In order to bring clarity and a better understanding, certain Regulations have also been notified by the Government.