The Insolvency and Bankruptcy Code, 2016 received President’s assent on May 28th, 2016. Besides, It is one of the most important codes introduced in recent times as it makes corporate insolvency process very simple. Moreover, it is important that every corporate must understand the mechanism of this code and recognize their rights.
In this blog, we will discuss the said code and its mechanism.
What are the objectives of Insolvency and Bankruptcy Code, 2016?
The main objectives of Insolvency and Bankruptcy Code, 2016 are:
- To consolidate and amend the laws relating to reorganization and insolvency resolution of Corporate, Partnership firms and Individuals in a time bound manner for maximization of the value of assets
- To promote entrepreneurship
- Availability of credit
- Balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues
- To form an Insolvency and Bankruptcy Board of India.
What do you understand by Insolvency and Bankruptcy?
There is no short cut when it comes to getting out of the debt and hence it is important for the businesses to adopt the structured code rather than looking for other shortcut means of getting out of the debt. The below terms would provide you with an overview for the same
Insolvency is when a person or a company is unable to pay the money owed by a person or company on time. The person in a state of insolvency is said to be insolvent.
Moreover, Insolvency is of two types:
- Cash-flow insolvency and
- Balance-sheet insolvency.
Cash-flow insolvency is when a person or company has enough assets to pay debts but insufficient liquid assets for the payment. For example, a person may own a farmhouse and a valuable car, but not have enough liquid assets to pay debts. Cash-flow insolvency can usually be resolved by negotiation.
Balance-sheet insolvency is when a person or company does not have sufficient assets to pay all of their debts.
Bankruptcy is a legal status of an inability of a person or other entity to repay the debts. In most of the jurisdictions, bankruptcy is imposed by a court and it is rarely initiated by the debtor.
Why there is a need of Insolvency and Bankruptcy Code?
The common man has many reasons to make an application for resolving his default when he is unable to pay his debts. However, the reason for which may be due to job cuts, crop failure for farmers and so on.
Some of the issues which are addressed through Insolvency and Bankruptcy Code are:
- Default in payment to banks, financial institutions and individuals by companies.
- Default in payment of dues to suppliers, employees etc.
- Failure of start-ups
- To help farmers tide over the crisis
- Job cuts
- Social stigma
Applicability of provisions of Insolvency and Bankruptcy Code
- Companies incorporated under Companies Act, 2013
- Any companies governed by any Special Act
- Limited Liability Partnership
- Any other body incorporated under any law as the Central Government may notify
- Partnership firms
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Who will get benefit from Insolvency and Bankruptcy Code?
Generally, the below stakeholders get benefit from the said code:
- Employees who do not get their salary from the employer
- Home buyers
- Those companies who default payment
- An individual struggling to pay off his debts
- The person facing social stigma
However, please note that the provisions relating to Individual Insolvency are yet to be notified.
Now let’s try to discuss in detail how the above stakeholders get benefit:
Startups which unfortunately fail to flourish can adopt Fast Track Insolvency Resolution Process to exit faster. This process provides a mechanism whereby the process must end in 90 days, with a one-time extension of 45 days.
- Employees who do not get their salary from employer:
Salaried employees can now claim their salary which is overdue under the Corporate Insolvency Resolution Process which is prescribed by this code.
In the code, now homebuyers have been recognized as a creditor which enables them to claim their dues.
Farmers will be able to apply for Fresh start process through which they can write off his debts up to Rs. 35,000 through a judicial order. The application can be filed by farmers on their own or it can be done by the insolvency professionals.
- An individual who is struggling to pay off his debts
Such an individual can apply for fresh process or Insolvency Resolution process which depends on the quantum of debt. If the said resolutions do not work out, then an application for bankruptcy can be made to discharge the individual of all the debts.
- The person facing social stigma
Here the individuals can apply for insolvency resolution process which will help them in dealing with the financial crisis by making the structured payments. It does not let them bogged down. It will further help in changing the outlook of the society towards bankrupts and insolvents.
Institutional Framework of Insolvency and Bankruptcy Code
This code is based on the following pillars:
- Adjudicating Authority
- Insolvency and Bankruptcy Board of India
- Insolvency professionals
- Professional Agencies
Now let us have a brief discussion of the above pillars:
This is a forum for filing applications and appeals by the aggrieved person. The following categories of aggrieved parties can file an application in the below manner:
|Aggrieved Party||Adjudicating Authority|
|For Companies and LLP||National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)|
|Individual and Partnership Firms||Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT)|
*However in this blog we will talk only about Companies and LLP
- Any person may initiate an application for the process of resolution to NCLT.
- Moreover, in case, any person aggrieved by the decision or the order of NCLT may file an appeal to NCLAT within a period of 30 days.
- Further, an extension of 15 days may be provided if there is a sufficient cause for not filing the application within the above 30 days prescribed period.
- However, a further appeal can be made with the Supreme Court for which a time limit is 45 days from the date of receipt of an order of NCLAT with an extension period of 15 days.
2. Insolvency and Bankruptcy Board of India
This Board was established by the Government of India on October 1, 2016.
Main core functions of IBBI are to regulate Insolvency Professionals, Professional Agencies and Information Utilities. Now let us try to understand a few more major functions of IBBI:
- Firstly, Making regulations and guidelines on matters which relates to insolvency and bankruptcy
- Secondly, Registration of insolvency professionals, insolvency professional agencies and information utilities.
- Thirdly, Inspection and investigation on insolvency professional agencies, insolvency professionals and information utilities.
- Fourthly, Collection and maintenance of records which relates to insolvency and bankruptcy cases.
- Fifthly, Specifying mechanism for grievances redressal against any insolvency professionals, insolvency professional agencies and information utilities.
- Sixthly, Promoting transparency and the best practices in its governance.
3. Insolvency Professionals
- Any individual who has passed the Limited Insolvency examination and has at least ten years of experience as a Chartered Accountant/Company Secretary/Cost Accountant/Advocate or Graduate who has passed Limited Insolvency Examination and has management experience of 15 years is eligible to be registered as an Insolvency Professional.
- They have to be registered with any of the professional agencies and also with IBBI.
- Moreover, they conduct the resolution process with respect to individuals and corporates.
- They work according to the IBBI and Professional agencies.
4. Insolvency Professional Agencies
These are those entities that have been incorporated as not for profit companies. Moreover, they are incorporated to enroll, educate, monitor and guide the insolvency professionals. However, the main role of such Agencies is to:
- Enroll professionals of insolvency and their suspension of membership, if required.
- Lay down standards of professional conduct for Professionals
- Educate and train its members
- Monitor Insolvency Professionals
- Safeguard the rights, privileges, and interest of its members
- Redress grievances of consumers against its members.
What is the resolution Process under Insolvency and Bankruptcy Code?
Under Insolvency and Bankruptcy Code, resolutions are divided into two parts:
- Corporate Insolvency Resolution Process (CIRP)
- Fast Track Insolvency Resolution Process
1.Corporate Insolvency Resolution Process (CIRP)
This process is generally for companies and Limited Liability Partnership firms.
When can CIRP be initiated?
The creditors or the debtor itself can initiate the insolvency resolution process which can be against a company or LLP when the minimum amount of default by the corporate debtor is Rs. 1,00,000.
Who can initiate CIRP?
- Financial Creditor: It includes Banks, any financial institutions/company, debenture/deposit holders, individuals etc.
- Operational Creditor: It includes Service providers, a supplier of goods, workmen, employees etc.
- Corporate Debtor: It includes a company or LLP which can initiate insolvency resolution process against itself.
An application for insolvency is submitted to the National Company Law Tribunal (NCLT) by anyone of Financial Creditor or Operational Creditor or Corporate Debtor himself. However, In the case of corporate debtor himself, the operational creditor needs to send prior notice of demand for 10 days to the corporate debtor before insolvency resolution process begins.
- Insolvency Resolution process by a Financial Creditor
- A Financial Creditor can either by himself or jointly can initiate the filing of an application before NCLT against the corporate debtor for any kind of insolvency proceedings.
- Further, Financial creditor needs to submit proof of default. Also, the name of the proposed insolvency professional to be appointed shall also be submitted along with the application.
- NCLT may reject the application if it is of the opinion that the corporate debtor does not default or if there is any proceeding pending against the proposed resolution professional.
- Finally, NCLT has to entertain the application within fourteen days of making application to it.
- Insolvency Resolution process by an Operational Creditor
- An operational creditor needs to serve at least 10 days of prior notice to the corporate debtor.
- Moreover, the notice must state him to pay back the dues before initiating insolvency resolution process.
- Further, in case the corporate debtor does not pay back the amount in that time period and does not bring it to the notice of operational creditor about any dispute or any arbitration proceeding which is pending against it, then the operational creditor can file an application for insolvency resolution.
- Insolvency Resolution by the Corporate Debtor
- Where a corporate debtor has defaulted on the payment of dues to a financial or operational creditor, then the corporate debtor or any applicant (i.e. financial or operational creditor) can file the application for the admission of the insolvency resolution process.
- Next, The corporate debtor shall also provide the name of the proposed resolution professional along with the application.
What is the time period for the completion of the insolvency resolution process?
- The insolvency process must be completed within 180 days from the date of admission of the application to the National Company Law Tribunal (NCLT).
- However, the claims of the Creditors shall be locked for a period of six months on the admission of an application by NCLT.
- Also, There must be no legal against the corporate debtor in any other forum or court unless the liquidation process is initiated or a resolution plan is made.
- Further, In all the above situations the application for initiation of insolvency resolution must be admitted or rejected by NCLT within 14 days of application received.
- Furthermore, NCLT shall also appoint the interim insolvency professional. However, it must take the permission of insolvency and bankruptcy board within 14 days of admitting the application.
2. Fast Track Insolvency Resolution Process
This process is exclusively for small companies, start-ups and Unlisted Companies for a faster resolution process
Who can apply under this process?
An Operational Creditor, Financial Creditor and Corporate Debtor on default of minimum Rs. 1,00,000 can apply to NCLT
Time Limit for completion of fast track process
The time limit is 90 days from the commencement of insolvency with a one-time extension of maximum 45 days if permitted by the NCLT.
Process under Fast Track Insolvency Resolution
The procedure for Fast Track Insolvency Resolution Process is contained in IBBI Regulations 2017. As per the procedures, the company shall appoint an insolvency resolution professional. However, a public announcement should be made.
Moreover, Proof of claims shall be obtained and a committee of creditors shall be formed. In fact, the meeting of these creditors shall be conducted by Insolvency Professional. Consequently, he will then conduct the fast track process as per process defined in Fast Track Insolvency Resolution for Corporate Persons Regulation, 2017. However, the process is as follows:
- An application for fast track process must be filed by a creditor or corporate debtor himself.
- Further, he can submit the application with the proof of him not being a defaulter in means as specified by the IBBI and the proof of him being eligible for fast track insolvency resolution process.
- Also, the resolution plan shall contain the details of resolution applicants and other stakeholders who would enable the committee to assess the credibility of the resolution.
- Moreover, The resolution professional will submit all the resolution plans which comply with requirement as mention in the Insolvency and Bankruptcy Code, 2016.
- He shall also submit the details of all the transactions like preferential transaction and extortionate credit transactions and fraudulent transactions.
- Likewise, he must also submit the copies of the order of Adjudicating Authority in respect to these transactions.
The Insolvency and Bankruptcy Code is a huge step towards the ease of doing business in India and has the potential of solving serious issues relating to insolvency and bankruptcy of corporate. Moreover, it provides a resolution of issues in a quick and hassle-free manner. It ensures speedy disposal of cases.
This code accepts that businesses can falter in repaying their debts and allows them to make a new start.