Insolvency and Bankruptcy code in India: Ensuring insolvency resolution

In India, Insolvency and bankruptcy law governed by the insolvency and bankruptcy code(IBC), 2016 gets implemented and regulated by the insolvency and bankruptcy board of India(IBBI).

The board consolidates and amends the laws related to the insolvency resolution process of corporate persons, partnership firms or individual persons in a time-bound manner to maximise the value of assets of such entities.

The board ensures to protect the interest of creditors as well the insolvent debtor.

The board regulates the laws to promote entrepreneurship and the availability of credit and balances all the stakeholders’ interests. It acts as a regulatory board for both the process and profession.

It regulates the conduct of insolvency professionals, insolvency professional entities, insolvency utilities and professional insolvency agencies by writing rules for its enforcement.

The IBC manages the rules for corporate and individual insolvency resolution, corporate liquidation, and individual bankruptcy rules through IBBI.

Insolvency and bankruptcy board of India got established as an authority under section 188 sub-section(1) of the IBC, 2016. It is also considered a registration authority under section 2(g) of the companies (registered valuers and valuation) Rules, 2017.

Difference between Insolvency and Business Bankruptcy

  • Insolvency gets defined as when an entity (i.e. an individual or a company) cannot pay off its debts. He becomes insolvent, and the state of being insolvent is called insolvency.

    When the cash flow of a company or an individual lacks in repaying their debts or that entity lacks financial liquidation and becomes insolvent, then insolvency occurs.

  • Bankruptcy is a legal declaration of one’s insolvency or one’s inability to pay off his debt.

    When a person becomes insolvent, he files for bankruptcy so that the assets remaining or owed by him get used to repay his debts.

    In a bankruptcy proceeding, all the assets of a debtor get measured and valued. And those assets are used to pay off the debts or position of the debt of the creditors. Thus it frees the debtor from legal obligations to repay the debt.

    A proceeding for bankruptcy in India is initiated either by the creditor or the debtor.

    A person who has submitted a bankruptcy petition to the court of law and assessing whose debts is in the process is called an ‘Undischarged insolvent‘.

    As a court of law does not discharge an undischarged insolvent from all the debts, so is subject to all disqualifications laid on him by the court of law related to his financial status, dealings & election, etc.

Insolvency is a process, while bankruptcy is a legal state. Insolvency leads to the process of filing for bankruptcy.

A bankrupt can be insolvent, but an insolvent need not be bankrupt.

Features Of Insolvency and bankruptcy board of India

The insolvency and bankruptcy code 2016 protects the interests of both creditors and debtors and discharges the debtor from his obligation to pay off the debt. It covers individuals, companies, partnership firms, limited liability partnerships, etc. There are some features of IBC, 2016. These are:-

  • The insolvency and bankruptcy code, 2016 lays down the separate insolvency resolving procedures for companies, individuals and partner companies. Either the creditor or debtor can initiate this process.

    The code also laid down a time limit for completing the insolvency procedure for both individuals and corporations.

    In the case of a company, the insolvency proceedings must get completed in 180, which can further get extended by 90 days when most creditors consent to it.

    In the case of start-ups, small organizations except for partnership firms (having less than Rs 1 crore worth of assets), the resolution procedure should get completed within 90 days and can get extended by a maximum of 45 days.

    Cross border insolvency procedures also get addressed through this procedure.

  • The Insolvency and bankruptcy board of India established under IBC governs the insolvency proceedings and regulates all the organizations that the board has registered.

    The IBC shall consist of 10 members, including the representatives of the Law and Finance ministries and the Reserve bank of India.

  • The licensed insolvency professionals registered under section 196(1) of the code shall manage the insolvency procedures. They control the debtor’s assets at the time of the insolvency proceedings.

    Insolvency professionals assess the financial positions of an individual, company, partnership firm and LLP’s, etc. and ensure the feasible dissolution process. Manage the process of settlement between creditors and debtors.

  • The Code has introduced two adjudicating authorities for regulating the Insolvency resolving procedure for companies and individuals.

    (i) The National Company Law Tribunal for Companies and Limited Liability Partnerships;

    (ii) The Debt Recovery Tribunal for governing the insolvency resolution process for individuals and partnership firms.

  • An insolvency plea is presented to the authority adjudicating the corporate insolvency resolution process by the operational creditor, financial creditors or the corporate debtor. The time limit for accepting the plea will be a maximum period of 14 days.

    If the plea gets accepted, the tribunal will have to appoint an Insolvency professional to draft a resolution plan within 180 days that can get extended by 90 days.

    Then, the court will initiate the corporate insolvency resolution process. The company’s directors will remain suspended till that period and will not have any say in the company’s management.

    In case the corporate insolvency resolution process fails, then the process of liquidation shall get initiated.

  • Insolvency professional agencies are the agencies registered under section 201 of the code. It develops professional standards, codes of ethics and acts as a regulatory body for insolvency professionals leading to a competitive industry development for such professionals.

    These agencies lay bye-laws and terms and conditions which ought to be followed by these professionals.

The procedure of Corporate Insolvency resolution

A corporate insolvency resolution process, also referred to as CIPR, is initiated by filing an insolvency petition at the adjudicating authority by either the financial or operational creditor or corporate debtor.

The maximum time to either accept or reject the plea is 14 days.

If the plea is accepted, the tribunal will have to appoint an insolvency resolution process for drafting a resolution plan within a time frame of 180 days, which can get extendable by 90 days.

After the submission of the resolution plan, the resolution process will get initiated by the tribunal.

If the CIRP fails, the process of ending business and distributing the assets to the claimants(i.e. liquidation) gets initiated.

CIRP process gets initiated for default of a minimum of 1 lakh rupees and a maximum of 1 crore rupees.

If the liquidation process gets started, the insolvency professionals will act as the company’s board of directors or as a liquidator.

The corporate debtors can apply for liquidation on their own by passing a special resolution in the meeting.

These professionals will have to prepare an information memorandum containing a resolution plan for a committee of creditors. If 75% of the committee agree to the plan, then NCLT will proceed with the liquidation process and implement that resolution plan.

The liquidators prepare the list of assets, creditors, debtors and arrange the liquidation process as per the code.

The priority of payment in the process of liquidation will be as follows:-

  1. Insolvency related costs and the liquidation cost.
  2. The secured creditors and workers dues up to 24 months (rank equally).
  3. Outstanding salaries of other employees and dues up to 12 months.
  4. Dues of unsecured creditors.
  5. Government dues up to 2 years and unpaid amount of secured creditors (rank equally).
  6. Remainder of debts and dues.
  7. To Preference shareholders.
  8. To equity shareholders

Bankruptcy process

Bankruptcy, a legal process in which a person having financial obligations fails to repay his debts. Either the debtor or creditor files a plea for bankruptcy in a court of law and the court after evaluating and measuring the value of that person’s assets and repaying his outstanding debts.

In other words, bankruptcy is a legal course undertaken by an individual or a company to free itself from its financial obligations or debts.

A Bankrupt is a person legally declared by a court to be insolvent and unable to repay his debts and whose property gets disposed of for the benefit of his creditors.

Development of bankruptcy and insolvency laws

Previously, there were multiple laws to deal with insolvency and bankruptcy of companies, partnerships and individuals, and other legal entities in India.

  • The Sick Industrial Companies (Special Provisions) Act (SICA), 1985

    The act made prohibition for rehabilitation of sick companies and repayment of loans availed by them were found to fail entirely, as observed by the supreme court in Arcelor Mittal India Pvt. Ltd. v. Sushil Mittal & Ors.

  • The Recovery of Debt Due to Banks and Financial Institutions Act, 1993;
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002;
  • The Companies Act, 2013;
  • The Limited liability partnership act, 2008;
  • The Indian partnership act, 1932;

As a result, the courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs) have jurisdiction at various stages, resulting in systemic delays and complexities resolution process.

High courts handle companies’ liquidation; individual cases are dealt with under the Presidency Towns Insolvency Act, 1909, applicable to Calcutta, Madras and Bombay and Provincial Insolvency Act, 1920, applicable to the whole of India except these towns.

These many laws resulted in jurisdictional issues and ambiguities in dealing with the matters related to insolvency and bankruptcy laws.

Instead of having so many laws, the formulation of insolvency and bankruptcy code 2016 was required.

So, the insolvency and bankruptcy code, 2016, was formulated, which came into effect after receiving presidential assent on 28th May 2016.

Case Study Involving Insolvency and bankruptcy board of India

Hindustan construction company ltd. v. Union of India & Ors.

Whether the IBC applies to government companies like NHAI?

In the case of Hindustan construction company ltd. v. Union of India & Ors. WP (Civil) No. 1074 of 2019, the supreme court observed that as per the definition of a ‘company‘ and ‘government company‘ under companies act 2(20) and 2(45). And the definition of ‘corporate person‘ under section 3(7) of this code can get inferred clearly that NHAI is a statutory body and performs governmental functions that cannot be taken over under this code by an insolvency professional.

Punjab National Bank v. Vindhya Cereals

Whether the proceedings under the SARFAESI act prevent the financial creditor from initiating proceedings under section 7 of the code?

In the case of Punjab National Bank v. Vindhya Cereals Company Appeal (AT) (Insolvency), No. 854 of 2019, the NCLAT held that a financial creditor could initiate proceedings against a financial debtor under the SARFAESI Act and the insolvency and bankruptcy code simultaneously.

The NCLAT further observed that the non-obstante clause under section 238 of the code would prevail over any other law contrary to the code for the time being in force.

Conclusion

The Insolvency and bankruptcy code, 2016, and the IBC rules applicable to adjudicating authorities, registered valuers, or IBBI made a landscape for liquidation and insolvency resolution to protect the interest of financial creditors, operational creditors or financial debtors.

The swift procedure for insolvency resolution of an individual, company, partnership firm or a limited liability partnership, etc., is provided under this code being insured by the Insolvency and bankruptcy board of India (IBBI), which acts as an independent regulator. The IBBI checks the implementation of the code.

The code provides for establishing an adjudicating authority to deal with the issues of corporate or individual or partnership insolvency resolution process. The decisions of these adjudicating authorities played a significant role in implementing the code and laying principles through its precedents.

FAQs Regarding Insolvency and bankruptcy board of India

In which case the supreme court held that “it is not necessary that the bid of the resolution process shall match the liquidation value”?

Maharashtra seamless limited v. Padmanabhan Venkatesh & Ors civil appeal no. 4242 of 2019.

Under which section of IBC, 2016 specifies the minimum and maximum amount of default in a CIPR process?

Section 4 of the insolvency and bankruptcy code, 2016.

In which case the National company law appellate tribunal held that a sole proprietorship firm comes under the purview of section 2 of the code?

Neeta Saha v. Ram Niwas Gupta company appeal (AT) (Insolvency) no. 321 of 2020.

Under which section of the adjudicating authority appoints an interim insolvency professional within 14 days from the commencement date of insolvency?

Section 14 of the insolvency and bankruptcy code, 2016.

Under which section of the code does the adjudicating authority for corporate persons gets mentioned?

Under Chapter VI, section 60 of the code national company law tribunal gets mentioned as an adjudicating authority for corporate persons.

Which part of the code covers the insolvency and bankruptcy for individuals and partnership firms?

Part III of the insolvency and bankruptcy code, 2016

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