India: IBC (Insolvency And Bankruptcy Code, 2016) – The Bankruptcy Law Of India

Last Updated: 26 July 2019
Article by Vidushi Trehan

It is better to have one codified legislation than multiple to deal with the aspects of a company which can have a singular umbrella. This is the exact rationale for the existence of The Insolvency and Bankruptcy Code in India which has been into effect since 2016.

IBC came into being repealing SICA (Sick Industrial Companies Act), SICA was repealed with effect from 1 December 2016.

To know the background of IBC, it is important to know more about SICA and why it failed to prevail as a law

The journey from SICA to IBC/ The SICA, 1985

The name SICA, itself connotes the reason for its actuality. India witnessed an atmosphere of rampant industrial sickness in the 1980s in furtherance of which the Government of India came up with key legislation i.e. The Sick Industrial Companies Act to combat the issue. Widespread industrial sickness affects the economy in a number of ways, thus The Act came into being to spot the sick or potentially sick companies owning industrial undertakings and take speedy remedial measures for their revival or in a scenario where there is no such measure, close such units. This was an action to get the locked up investment in such industrial units released and use them in a more productive manner.

SICA was repealed and replaced by the Sick Industrial Companies (Special Provisions) Act of 2003, which diluted certain provisions of SICA and filled certain gaps. One of the main changes to the new law was that, in addition to combating occupational diseases, it also aimed to reduce the growing incidence by ensuring that companies do not use a medical certificate simply to evade legal obligations and access concessions granted to financial institutions. to receive.

The comprehensive performance of the Act did not live up to the expected results and thus, IBC was notified as on 28th May 2016 and the repeal of SICA came into full effect from December 1, 2016.

IBC Kicks In

Mistakes of the past were taken in view and The Insolvency and Bankruptcy code came into being with a wider scope and aiming to resolve the issues via more effective provisions and implementation. It is an act to consolidate and amend the laws having reorganization and insolvency resolution issues as the subject-matter. The provisions of the Act shall apply to the following in case of insolvency, liquidation, voluntary liquidation or bankruptcy;

  • Company
  • Limited Liability Partnership
  • Partnership Firms
  • Corporate Persons
  • Individuals

The legislation holds the object as follow:

"An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto."

Establishments Under The Act

The code sets out provisions for the establishment of three new institutional structures important for the smooth functioning of IBC:

a. IBBI- Insolvency and Bankruptcy Code of India: The objective of the code itself specifies the establishment of this Board. The board shall act as a Regulator.

b. IPAs- Insolvency Professional Agencies: Only the companies registered under Section 8 of The Companies Act, 1956 can approach The IBBI for registration as an insolvency Professional Agency. The Insolvency Professional Agencies will develop professional standards, code of ethics and be the first level regulator for Insolvency professionals members. This will lead to the development of a competitive industry for such professionals.

c. Insolvency Professional– To render services as an insolvency professional an individual has to be:

  • A member of the Insolvency Professional Agency, and
  • Registered with the IBBI

d. Information Utilities: An information utility shall provide such services as may be specified including core services like collecting and storing information on debts and defaults to any person if such person complies with the terms and conditions as may be specified by regulations.

The regulator's mandate is to regulate insolvency professionals, insolvency professional agencies and information utilities as well as to frame regulations under the IBC.

Adjudicating Authority

  • National Company Law Tribunal (NCLT) constituted under Section 408 of The Companies Act, 2013 is the adjudicating authority under the code and shall hear insolvency resolution cases for corporate persons.
  • NCLT is a quasi-judicial body established by the Government of India to settle disputes arising between civil corporations. Whereas, National Company Appellate Tribunal (NCLAT) is a higher tribunal where appeals can be lodged in case the parties are not satisfied with the decision of NCLT.
  • The tribunals came into existence as on 1st JUNE, 2016 by exercising the powers given in Article 245 of the Constitution, enforced by the government.
  • The Code also recognizes Debt Recovery Tribunal (DRT) constituted under Section 3 (1) of the Recovery of Debts Due to Banks and Financial Institutions as the adjudicating authority for the purpose of insolvency resolution and bankruptcy cases for partnership firms and individuals. The Tribunal came into being for the purpose of expeditious adjudication and recovery of debts

The Adjudicating Authority may in the furtherance of the issue either declare a moratorium or cause a public announcement or Appoint an interim resolution professional for investigation and finding solutions.

Process Under The Code

APPLICATION FILING:

Who can file an application

An Insolvency Resolution Process can be initiated by :

  • Financial Creditor, or
  • Operational Creditor, or
  • Corporate itself

FINANCIAL CREDITOR:

Section 5(7) of the IBC states that 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"

A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

The Adjudicating Authority shall, within fourteen days of the receipt of the application, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

OPERATIONAL CREDITOR:

In the event of late payment, operational creditors may send a request for notification to an unpaid debtor in the form of a copy of an invoice requesting the payment of the amount corresponding to the late payment to the debtor company in accordance with FORM 3 OF IBC. the definition of Operational Creditor is given out in Section 5(20)[1] of the Act.

The debtor must send the notice to the mandatory creditor within ten days of receipt of the request or copy of the invoice.

After expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment if the operational creditors do not receive payment from the corporate debtor or notice of dispute the operational creditor may file an application to Adjudicating Authority in FORM 5 OF IBC for initiating the corporate insolvency resolution process.

CORPORATE:

As soon as default in payment occurs, a corporate applicant thereof may file an application to Adjudicating Authority in FORM 6 OF IBC for initiating corporate insolvency resolution process. It shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees

The corporate applicant shall, along with the application furnish the information relating to-

  • books of account and such other document relating to such period as may be specified; and
  • The resolution professional proposed to be appointed as an interim resolution professions

Unlike earlier existing laws, IBC provides early trigger for insolvency resolution with limited grace period for payment which situates the Companies in a position where they have to be very watchful and vigilant with timely payment to their creditors. SICA, for example, requires a 50% erosion in a company's net worth to trigger a requirement for the board of the company to monitor and report the deteriorating position, while the RBI guidelines requires loans that are overdue for 90 days or more to be declared as NPAs. The rationale for having the occurrence of a payment default as the trigger is that the early detection of financial distress helps preserve value and increases the chances that a business can be saved. Thus, IBC has given the power of initiating a process for a company's insolvency proceedings in case of payment default to safeguard their interest and to keep the company's in check.

Who Can Not File an Application?

  • Corporate debtor undergoing insolvency resolution process; or
  • Corporate debtor having completed corporate insolvency process twelve months preceding the date of making application; or
  • Corporate debtor or financial creditor who has violated any of the terms of plan which was approved twelve months before; or
  • The corporate debtor in respect of whom a liquidation order has been made.

Post Application Process

1. EMBARGO:

All the pending actions against the debtor are stayed and no new actions are allowed to be instituted under the umbrella of a 180 day moratorium period, during which the debtor is prohibited from disposing off his assets. Any claim under SARFAESI Act even is restricted for the time being and the pending actions are put on hold. The concerned 180 day period is fundamentally a time framework provided for companies and creditors to find a way out or take recourse to find a solution for the deteriorating state of the company by deciding their future course of action

2. ROLE OF INSOLVENCY PROFESSIONAL

The debtor ceases to have control of the business, which shifts to the committee of creditors. An insolvency resolution professional is appointed to manage the business of the debtor on behalf of the committee of creditors with a view to preserving its assets to the maximum extent possible and to coordinate the actions of the committee of creditors

The Insolvency Resolution process must be completed within 180 days of its commencement, one-time extension by a further period of 90 days may be allowed if Adjudicating Authority is satisfied. The committee of creditors needs to have approved the resolution plan for the debtor By the end of the 180-day period failing which the company goes into liquidation. The resolution is approved only when 75% voting in value of the financial creditors (both secured and unsecured) is attained.

Insolvency Or Liquidation?

IBC has provisions for initiating insolvency provisions which in a way are helpful for the Companies to detect their decaying financial conditions on time and have a proper chance for recovery But it is not a 100% possibility that a Company would be able to recover from such a condition. Thus, the insolvency turns into liquidation.

It is important to note the difference between the two concepts here. The procedure of insolvency has in it minimalist hope for the Company as the Company Administration aims to help the company to repay the debts in order to escape insolvency. Whereas, Liquidation is one step ahead followed by winding up of the company which includes the process of selling all assets before dissolving the company completely

Under IBC, If the resolution plan is not approved by 75% of the creditors or if they vote affirmatively to put the debtor into liquidation, the NCLT is required pass a liquidation order. The liquidator shall be the insolvency professional who managed the IRP or a new insolvency professional would then be appointed to manage the distribution of assets to creditors and winding up process of the company.

The moratorium is lifted and secured creditors may enforce their security interests under SARFAESI or other applicable laws, upon a liquidation order being passed. The IBC gives the secured creditor two options in a liquidation scenario:

  • The secured creditor can choose to relinquish its security interest and be part of the liquidation process, in which case its dues will rank high in the priority of distribution discussed below; or
  • The secured creditor can choose to stay outside the liquidation process and enforce its security interest, in which case, the secured creditor will lose its priority in the distribution of assets with respect to any portion of its debt that it could not recover on enforcement.

Conclusion

It is prima-facie that IBC is a comprehensive legislation with a speedy and specific procedure for dealing with the issue of insolvency. The time-bound nature of IBC is a win-win situation as the resources of the Companies are placed at the right place in time, whether it is by payment to creditors or by winding up. The Company does not keep running in losses for endless time period causing a setback to the economy in whole and affecting the creditors individually. It is very well hoped for that the implementation of the Code be as effective as expected and live up to its legislative intent.

References:

[1] "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred

[2] Sick Industrial Companies Act (SICA) https://www.investopedia.com/terms/s/sick-industrial-companies-act-sica.asp

[3] https://blog.ipleaders.in/sica-to-ibc-historical-analysis/

[4] https://lawnn.com/nclt-and-nclat/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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