Insolvency and Bankruptcy Bill 2015


The Finance Minister moved the Insolvency and Bankruptcy Bill 2015, known commonly as the Bankruptcy Code, in the Lok Sabha on December 21, 2015.
Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt obligations. India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation. The Bill envisages a new regulator — the Insolvency and Bankruptcy Board of India.
So who can initiate the IRP? One, a business or debtor who has defaulted on dues can initiate the IRP. Two, lenders and creditors to a firm, including employees — either secured or unsecured — can do it too.
When the IRP is on, creditors’ claims are frozen for 180 days, during which they will hear proposals for revival and decide on their future course of action. Within those 180 days, 75 per cent of the creditors must agree to a revival plan. If this minimum threshold is not met, the firm automatically goes into liquidation.
If three-fourths of the creditors decide that the case is complex and cannot be addressed within 180 days, the adjudicator can grant a one-time extension of up to 90 days on the process.
The Bill vests the insolvency professionals tasked with the job, with substantial powers. Criminal charges will apply if they notice any asset stripping by the promoters or responsible parties.
India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.
Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.
The new Code streamlines and consolidates all these laws to make the process simpler. Industry anticipates that the change will provide an easy exit option for insolvent and sick firms. The passage of this bill will enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the recovery amount. The creditors will not be stymied by red-tape and promoters will directly become accountable for any financial lapses.
The new bankruptcy code will also help India improve its ‘Ease of Doing Business’ rankings, currently at 130, as resolving insolvency is a key criteria in the World Bank’s survey, Nikhil said. The support infrastructure envisaged under the new code, including resolution professionals, information utilities, specialised law firms, claims management firms, and liquidators, need to be in place when the Bill is enacted, which may take a year or so to set up, he said.
Highlights of the Bill
- The 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. 
- The 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.
Information Utilities
 The Code proposes to establish information utilities which will maintain a range of financial information about firms.  These utilities will collect, collate and disseminate this information to facilitate insolvency resolution proceedings.
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.
Comparison with the US Law
In the US, there are two main bankruptcy procedures for corporations, Chapter 7 and Chapter 11. Chapter 7 is the liquidation code and provides for the appointment of a trustee by the court to oversee the liquidation of the company. Under Chapter 7, the business is closed down before sale and the assets auctioned.
Chapter 11 allows a firm to remain in operation while a plan of reorganisation is worked out with creditors. The Indian Code provides for quick identification of financial distress and a 180-day plan, extendable by 90 days, to revive a company, following which the company becomes insolvent.
With regard to management control, under the US Chapter 11, the company retains the management control while working to achieve pre-agreed goals within a certain timeframe. The Indian code provides for management control to pass over to resolution professionals with significant powers, once an insolvency resolution is underway.

Monday, 21st Mar 2016, 08:04:26 AM

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