(Last Updated On: June 2, 2016)

Insolvency and Bankruptcy Code 2016

Key feature of Insolvency and Bankruptcy Code 2016

Scope of Insolvency and Bankruptcy Code 2016

It extends to the whole of India: Provided that Part III of Code shall not extend to the State of Jammu and Kashmir.

It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint: (Note Insolvency and Bankruptcy Code 2016 was published on 28.05.2016 read Insolvency and Bankruptcy Code 2016 Notified by Govt) . Different dates may be appointed for different provisions of this Code.

Applicability of Insolvency and Bankruptcy Code 2016

In relation to insolvency, liquidation, voluntary liquidation or bankruptcy, the provisions of Code shall apply to :-

(a) any company incorporated under the Companies Act, 2013 or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e) partnership firms and individuals

Creditors Power enhanced under Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code 2016 empowers the operational creditors (workmen, suppliers etc.) also to initiate the insolvency resolution process upon non-payment of dues.
In order to develop the credit market in India, in case of liquidation, financial debts owed to unsecured creditors have been kept above the Government’s dues in the list of priorities (waterfall).

Deadline set under Insolvency and Bankruptcy Code 2016

when a corporate entity defaults on its debt, control shifts from the shareholders/promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation.
The Code provides a fast track insolvency resolution process for corporates and LLPs. This will be an enabler for start-ups and small and medium enterprises (SMEs) to complete the resolution process in 90 days (extendable to 45 days in deserving cases).
An application for fast track corporate insolvency resolution process may be made in respect of the following corporate debtors, namely:—

(a) a corporate debtor with assets and income below a level as may be notified by the Central Government; or

(b) a corporate debtor with such class of creditors or such amount of debt as may be notified by the Central Government; or

An application for fast track corporate insolvency resolution process may be filed by a creditor or corporate debtor as the case may be, alongwith-—

(a) the proof of the existence of default as evidenced by records available with an information utility or such other means as may be specified by the Board; and

(b) such other information as may be specified by the Board to establish that the corporate debtor is eligible for fast track corporate insolvency resolution process. Manner of initiating fast track corporate insolvency resolution process.

Commercial and judicial Aspects separated under Insolvency and Bankruptcy Code 2016

The Code separates commercial aspects of the insolvency proceedings from judicial aspects. While Insolvency Professionals (IPs) will deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organising their meetings, examination of the resolution plan, etc., judicial issues will be handled by proposed Adjudicating Authorities (National Company Law Tribunal / Debt Recovery Tribunal).

Adjudicating Authority under Insolvency and Bankruptcy Code 2016

For Corporates :National Company Law Tribunal

For Individuals and Partnerships Firms :Debt Recovery Tribunal constituted under sub- section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

National Company Law Appellate Tribunal to act as Appellate Authority against the

orders passed by National Company Law Tribunal

No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code

Any person aggrieved by an order of the National Company Law Appellate Tribunal may file an appeal to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order

Storing of Financial information under Insolvency and Bankruptcy Code 2016

Important institution created under the Code is the ‘Information Utility’ which would store financial information and data and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.

Cross Boarder insolvency issue under Insolvency and Bankruptcy Code 2016

The Code also addresses the important issue relating to cross border insolvency by providing the enabling mechanism on the subject.

Voluntary liquidation of corporate persons under Insolvency and Bankruptcy Code 2016

A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of Chapter V.

Punishment for concealment of property under Insolvency and Bankruptcy Code 2016

Where any officer of the corporate debtor has within the twelve months immediately preceding the insolvency commencement date wilfully concealed /destroyed any property such officer shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both:

Insolvency process under Insolvency and Bankruptcy Code 2016

1.1 Corporate insolvency process can be initiated by

Financial Creditor: Financial creditor can file application before Adjudicating Authority for initiation of insolvency process against Corporate Debtor when the deafult has occured along with Proof of default and Name of resolution professional to act as an interim resolution professional

Note :

A)”financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to

B) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be;

C) default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

D) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

Operational Creditor: creditor can initiate corporate insolvency process by giving 10 day notice to Corporate-debtor.

Corporate Debtor: The Corporate Debtor himself can initiate corporate insolvency process by making a reference to adjudicating authority

1.2 The Adjudicating Authority shall admit or reject application within 14 days of receipt

1.3 The Authority shall declare moratorium to avoid institution of suits, transferring of assets, foreclosure, etc.

1.4 The Authority shall make Public announcement : It includes details of debtor, name of ‘interim resolution profession’ and last date of submission of claims.

1.5 Adjudicating authority to appoint interim resolution profession within 14 days from insolvency commencement date

1.6 Interim resolution professional shall constitute committee of creditors after collating all claims against debtors and determining their financial position. All decisions to be taken by 75% voting share of financial creditors. Resolution profession shall conduct the meeting of committee. Meeting may be in person or through electronic means

1.7 Any applicant can submit a resolution plan to resolution professional, such professional can forward the resolution plan to authority after taking creditors’ approval.

1.8 Adjudicating Authority can order liquidation if:

– Resolution plan is not presented in given time

– Resolution plan is not as per rules

– Committee of creditors demands liquidation

– Debtor-company violates the terms of resolution plans

1.9 Resolution professionals shall act as liquidator

1.10 Workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company ahead of secured creditors.

Insolvency and Bankruptcy Code 2016 Analysis