NEED, ORIGIN, AND OBJECTIVES OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (OBC)
INTRODUCTION: The Insolvency and Bankruptcy Code, 2016 (the “IBC”), that was passed by Parliament and received Presidential assent on May 28, 2016, aims at a significant overhaul of the existing legal framework of insolvency and bankruptcy resolution. The IBC seeks to consolidate the laws relating to insolvency and bankruptcy resolution for corporates, limited liability partnerships, partnership firms, individuals, and other body corporates as may be notified by the Central Government from time to time. The Central Government now has much work to do in establishing the institutional framework required to implement the IBC before the new law can take effect. This period is also a good time for corporate debtors and creditors to prepare themselves for the new regime. In fact, is legislation is considered as one of the biggest insolvency reforms in the economic history of India? Know The Insolvency And Bankruptcy Code, 2016
HISTORY AND RATIONALE FOR THE IBC Know The Insolvency And Bankruptcy Code, 2016
Prior to the IBC being passed, India did not have a single law dealing with all aspects of a company in financial distress. Instead, there were multiple laws, each of which applied to a particular legal process, type of company, or group of creditors. For example, the Sick Industrial Companies Act, 1985 (“SICA”) dealt with the rescue and rehabilitation of industrial companies only, while the Companies Act, 1956 provided a process for the liquidation and winding up of all types of corporate entities. There were also debt recovery laws such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) and the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”) that provided avenues for security enforcement and debt recovery, respectively, by banks and financial institutions. The result of this fragmented legal framework was delays, confusion, and conflicts between these multiples laws and legal fora. Further, many of these laws, such as SICA, had proved to be wholly ineffective in achieving a speedy restructuring that took into account the interests of both debtors and creditors. The World Bank’s Ease of Doing Business Index 2015 ranked India 137 out of 189 countries on the ease of resolving insolvencies based on various indicators such as time, costs, the recovery rate for creditors, the management of a debtor’s assets during the insolvency proceedings, creditor participation and the strength of the insolvency law framework. Efforts at insolvency law reform began in late 2014 when the Ministry of Finance constituted the Bankruptcy Law Reform Committee (“BLRC”) under the chairmanship of Mr. T.K. Viswanathan. The Finance Minister reiterated the Government’s commitment to insolvency reform in his 2015-16 budget speech when he identified having a new insolvency law as one of the key priorities for the year. The BLRC submitted its report, including a draft of the Insolvency and Bankruptcy Bill, 2015 (the “Bill”) on November 4, 2015, which was introduced in the Lok Sabha in December 2015 with a few amendments. The Bill was subsequently referred to a Joint Parliamentary Committee, which submitted a detailed report, including a revised draft of the Bill. The IBC that was eventually passed was the version proposed by the Joint Parliamentary Committee.
NEED OF THE NEW CODE Know The Insolvency And Bankruptcy Code, 2016
IBC provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency. Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.
This Act was implemented through an Act of Parliament. It got Presidential assent in May 2016. The law was necessitated due to the huge pile-up of non-performing loans of banks and delays in debt resolution. Insolvency resolution in India took 4.3 years on an average against other countries such as the United Kingdom (1 year) and the United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts. IBC applies to companies, partnerships, and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency. Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other. Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections on the extension. For smaller companies including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn’t happen the company goes for liquidation.
Read Also: Who May File Claim Under Insolvency and Bankruptcy Code 2016
OBJECTIVES OF THE CODE Know The Insolvency And Bankruptcy Code, 2016
- The Code intends to achieve these objectives such as to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner, to promote entrepreneurship and availability of credit, and to improve the ease of doing business and facilitate more investments leading to higher economic development.
- To simplify the insolvency and bankruptcy proceedings.
- Setting up an Insolvency and Bankruptcy Board of India.
- To promote entrepreneurship and availability of credit and to improve the ease of doing business and facilities more investments leading to higher economic development.
CHALLENGES AND GAPS IN THE IBC Know The Insolvency And Bankruptcy Code, 2016
The biggest challenge in getting the IBC off the ground would be to develop a robust institutional framework and a strong cadre of insolvency professionals required to implement the new law. However, there are also some areas that the law fails to address:
- Cross-Border Insolvency: The IBC does not adequately address the issues that would arise when a debtor has assets or creditors in jurisdictions outside India. The IBC does not discriminate between domestic and foreign creditors, and creditors who may be resident outside of India are permitted to commence and participate in proceedings under the IBC. However, the IBC does not provide any mechanisms by which an insolvency resolution professional or liquidator may access a debtor’s assets located abroad other than to state that the Central Government may enter into bilateral agreements with other countries to deal with cross border insolvency issues. The new law also fails to address what happens if insolvency proceedings against a debtor are commenced concurrently in more than one jurisdiction. Ways of dealing with these challenges are provided in the UNCITRAL Model Law on Cross-Border Insolvency, which a number of countries have adopted into their domestic legislation. The next step would be a review of the UNCITRAL Model Law on Cross-Border Insolvency to determine what modifications would be necessary to make it suitable in the Indian context.
- Inter-play with Debt Recovery Laws and the Corporate Debt Restructuring Process (“CDR”): The interplay of the IBC with debt recovery laws such as SARFAESI and the RDDBFI Act have not been fully addressed. There is an inherent tension between a statute that provides for collective insolvency resolution such as the IBC and debt recovery laws that enable individual creditors to enforce their security interests or recover their debt. However, for an insolvency regime to function effectively, there needs to be a clear delineation between these two types of laws. Amendments to the SARFAESI and RDDBFI Acts6 are currently being considered by the same Joint Parliamentary Committee that considered the IBC and it is hoped that these amendments would make the relationship between the IBC and debt recovery laws more seamless. Another issue on which the IBC is silent is the relationship of the IBC to out-of-court restructuring mechanisms such as CDR. For example, does an ongoing CDR process gets suspended if an application for IRP is filed? While the IBC aims to be a comprehensive law dealing with all aspects of insolvency resolution and liquidation, the continued existence of other laws and processes means that their interaction with the IBC will need to be ironed out.
APPLICABILITY OF THE CODE Know The Insolvency And Bankruptcy Code, 2016
The provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation, or bankruptcy of the following entities:-
- Any company incorporated under the Companies Act, 2013 or under any previous law.
- Any other company governed by any special Act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such Special Act.
- Any Limited Liability Partnership under the LLP Act 2008.
- Any other body being incorporated under any other law for the time being in force, as specified by the Central Government in this regard
- Partnership firms and individuals
Exceptions: There is an exception to the applicability of the Code that it shall not apply to corporate persons who are regulated financial service providers like-
- Banks;
- Financial Institutions; and
- Insurance companies.
CONCLUSION Know The Insolvency And Bankruptcy Code, 2016
It is prima-facie that IBC is 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 an endless time period causing a setback to the economy as a whole and affecting the creditors individually. It is very well hoped that the implementation of the Code be as effective as expected and live up to its legislative intent.
Author: This article was written by AAYUSH AKAR, Fifth Semester, BA.LLB (Honours), Student of National Law University Odisha, Cuttack.
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