The Insolvency and Bankruptcy Code of 2016, the new bankruptcy law of India, seeks to consolidate the existing laws by creating a single law for the insolvency and bankruptcy of corporate entities, partnership firms, and individuals. The Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 are repealed upon enactment of the code. Additionally, eleven regulations are amended. The DRT Act of 1993, the SARFAESI Act of 2002, the SICA Repeal Act of 2003, the LLP Act of 2008, and the Companies Act of 2013 are examples. Multiple overlapping laws and adjudicating authorities in India that deal with financial defaults and insolvency of corporate enterprises, partnership firms, and individuals give rise to a variety of conflicting situations. Thus, the existing framework does not provide creditors, debtors, and other stakeholders with certainty regarding the resolution process's outcome and duration. In this context, the legislation of the code, which is part of the second generation of economic reforms in India, has been drafted with the intention of resolving the extant problems with the timely settlement of the insolvency resolution process. The current legal and institutional framework hinders the effective and expeditious recovery or restructuring of non-performing assets, putting an unnecessary strain on the Indian credit system. Recognizing these challenges, the Code's legal framework seeks to complete the entire resolution process within a specified time frame. If implemented correctly, the Code has the potential to enhance the business environment and alleviate distressed credit markets.
PURPOSE OF THE CODE:
In the Code's preamble, the objective has been made crystal plain. """"An Act to consolidate and amend the laws relating to the organization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all these stakeholders, including modification in the order of priority of payment of government dues, and to establish an Insolvency and Bankruptcy Board of India,
KEY HIGHLIGHTS:
The code contains five sections. While Parts I and V contain no chapters, each of the remaining parts contains seven. Part II, which deals with insolvency resolution and liquidation for corporate persons, contains seventy-four (74) sections. Part III, which deals with insolvency resolution and bankruptcy for individuals and partnerships, contains the most sections (110), followed by Part II, which contains seventy-four (74) sections. There are thirty-six (36) sections in Part IV, which deals with the regulation of insolvency professionals, agencies, and information utilities. Part V, which covers miscellaneous topics, comprises thirty-two (32) sentences. Part I, which focuses primarily on definitions, is divided into three sections.
• The code does not address the legal framework for financial institution and financial service provider bankruptcy resolution.
• The code introduces for the first time in Indian insolvency and bankruptcy law the concept of a few entities. Insolvency Professional Agencies (IPAs), Insolvency Professionals (IPs), Interim Resolution Professionals (IRPs), Resolution Professionals (RPs), Resolution Applicants (RAs), Information Utilities (IU), Committee of Creditors (CCs), Financial Creditor (FCs), Operational Creditor (OCs), and Corporate Debtors (CDs) are these entities.
• Financial, operational, secured, unsecured, and decree creditors have been categorized.
• The NCLT is the Adjudicating Authority (AA) for corporations, while the DRT is the AA for partnership firms and individuals.
• The deadline for completing the insolvency resolution procedure is 180 days, with an extension of 90 days for a total of 270 days.
• The AA would issue an order declaring a moratorium for the duration of the insolvency resolution process, preventing anyone from taking coercive action against the corporate debtor's operations as a continuing concern.
• A first-track resolution procedure for corporate insolvency has been implemented for certain categories of corporate debtors.
• Any party involved in the company's resolution procedure who is dissatisfied with the AA's decision may file an appeal with the National Company Law Appellate Tribunal (NCLAT). Those who are dissatisfied with the NCLAT's decision may file an appeal with the Supreme Court.
• Individuals and partnerships have access to both the Debt Recovery Appellate Tribunal and the Supreme Court.
• STEPS TO BE FOLLOWED BY FINANCIAL CREDITOR FOR CORPORATE INSOLVENCY RESOLUTION PROCESS
Financial Creditors (FCs), either individually or in concert with other FCs, submit a complete application to AA.
AA receives the application/repair of defects.
Within seven days, AA sends out a notice to correct defects.
4. AA accepts the application within fourteen days, assuming compliance with all Code requirements, and notifies the secured creditor and corporate debtor.
5. bankruptcy Resolution procedure commences (ICD).
AA designates an IRP within fourteen days of ICD.
IRP is responsible for managing the affairs of CD.
IRP gathers all required information/data/claims and determines CD's financial standing.
9. IRP comprise a CC.
10. Either CC adopts IRP as RP or AA appoints a new RP.
RA submits a proposed resolution plan.
The RP evaluates the plan and presents it to the CC for approval.
After this, two scenarios are possible.
Situation 1:
1. The CC approves the proposal with a vote of at least 75% of FC's voting share.
RP provides AA with the approved proposal.
3. The AA authorizes the plan, which binds the CD and all other stakeholders, including guarantors.
Or
AA denies the proposal and orders the company's liquidation.
When the liquidation process begins, RP takes all the necessary measures to liquidate the company in accordance with the provisions of the code.
Situation 2:
The CC rejects the proposal with a majority vote.
2. AA orders for Liquidation.
3. The liquidation process initiates, and RP takes all necessary steps to liquidate the company in accordance with the provisions of the code.
In the case of an operational creditor, the steps are nearly identical, with the exception of the submission of distinct documents to AA. The procedures for corporate clients are nearly identical to those for financial creditors.
REDIRECTION OF CENTRAL GOVERNMENT POLICY FOR ADDRESSING INDUSTRIAL ILLNESS AND CONSEQUENT INCREASE IN NON-PERFORMING ASSETS
In any economy, a favorable industrial climate must provide favorable conditions for conducting business and a swift exit route for failing industrial units. When the government realized this in the early 1980s, it began to loosen its control over the industries. Government-protected incompetent industries participated in a serious discussion. Nationalization was deemed ineffective as a remedy. In the absence of appropriate bankruptcy laws and an exit policy, market-driven restructuring was also found to be ineffective in the country. Due to pressure from multiple political factions, the government ultimately chose a middle ground. The enactment of the SICA, 1985, was the result of such a central government policy resolution. BIFR, which was established to implement the provisions of SICA, did not, however, operate as anticipated by policymakers. The corporate debtors abused SICA to such an extent that it was used as a shield to avoid fulfilling their obligations to creditors. This was primarily owing to the provisions of Section 22 of the SICA of 1985. In the interim, other acts, such as the DRT Act of 1993 and the SARFAESI Act of 2002, were enacted with the primary objective of recovering secured creditors' dues, rather than restructuring and rehabilitating ailing companies. Even then, there were no tangible results in terms of revival or the recovery of delinquent debts. The result was a sharp rise in the number of NPAs. In this economic climate, investors showed little interest in investing in India. The government was also under pressure from international organizations, namely the IMF and the World Bank, to implement economic reforms of the second generation. The consequence was the 2016 Insolvency and Bankruptcy Code.
Conclusion
In terms of resolving insolvency, India ranks 136 out of 189 countries. In India, it takes approximately 4.3 years to resolve insolvency, compared to the global average of 2.6 years. According to World Bank data, there is a positive correlation between the recovery rate for creditors and the efficacy of the insolvency legal framework. In this regard, the code pledges extensive reforms with a focus on a creditor-driven insolvency resolution procedure. Regardless of the Code, which is a unified law outlining a structured and time-bound process for insolvency resolution and liquidation, it remains to be seen over time whether the Code's various provisions and steps will make any difference in addressing the growing problem of industrial illness. When a specialized body of experts, such as the BIFR, has failed, it remains to be seen whether the NCLT, with its combined and composite functions, will be able to effectively address the spectrum of problems associated with the country's underperforming industrial activities. In addition, a review of the literature on the insolvency systems prevalent in various nations indicates that well-designed insolvency laws do not necessarily guarantee the recovery of debts to the extent predicted. Again, there are economies that have well-designed laws but struggle to effectively implement them. Yet, the enactment of the Code, which stipulates a sequential, time-bound, and collective procedure for insolvency resolution and liquidation, is a step in the right direction.""
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