Summarising the INSOLVENCY AND BANKRUPTCY CODE, 2016

The Insolvency and Bankruptcy Code (IBC) is widely regarded as one of the most significant reforms of the Narendra Modi government. The legislation completes two years in December 2018. And yet what began as a game-changer is in danger of becoming entangled in a legal and procedural web.

The statistics show that, in India total bad debts amount to 11% of the total lending and it is seen to be increasing. In India compared to any other progressive economy, the time taken for resolving insolvency is much more, making it appear low on the list of countries with ease of doing business and resolving insolvency. Corporate bad debts constitute 56% of the total bad debts of nationalised banks. These are thousands of pending litigations for recovery of money, squarely due overlapping jurisdictions of various laws governing insolvency resolution and courts. Hitherto, there were about 12 laws concerning insolvency.

The Code received the President’s assent on 28th May, 2016

In the current setup, records show that it takes on an average 4 years to wind up a company in India. Clearly, India is lacking appropriate institutional and legal machinery to deal with debt defaults as per global standards. The recovery proceedings by creditors, either through the Contracts Act or through special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes. Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the winding up provisions of the Companies Act, 1956 have neither been able to aid effective recovery of outstanding debt, nor restructuring of debts. The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, dealing with individual insolvency, are almost a century old.

Considering the above mentioned reasons, the Government undertook a plan to replace existing insolvency laws with one consolidated and comprehensive law that will facilitate easy and time-bound closure of business. On 11th May, 2016 the Rajya Sabha passed the major Economic Reform Bill moved by the Government i.e. ‘Insolvency and Bankruptcy Code, 2016’. The Lok Sabha had already passed the Bill on 5th May, 2016. The Code received the President’s assent on 28th May, 2016 and was notified in the official gazette on the same day.

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The initial prognosis was good. For the first time since Independence, a strong law was passed by parliament to strike at the root of the bank NPA crisis: Willful defaulters who used legal shields with impunity to avoid repaying bank loans that were often obtained by using political patronage. Examine the facts. A total of 9,000 cases have come for redressal under the IBC over the past two years. Around 3,500 cases were resolved at inception - before they were admitted. The sword of a strong insolvency law can concentrate the most devious minds.

These 3,500 cases, resolved at the stage, led to banks and other credit- tors receiving payments of Rs 1.2 lakh crore from defaulting promoters.

The story now begins to wobble. Of the remaining 5,500 cases pending under the IBC, only 1,300 have so far been admitted for resolution. The rest await approval based on an assessment of their bona fides. The government is hopeful of quick settlements in of the 1,300 cases approved for resolution, taking likely recoveries up to Rs 2.40 lakh crore. Another Rs 60,000 crore in NPAs have become standard accounts in lenders' books by promoters paying overdue amounts. The report card of two years reads: Non-performing assets (NPAs) of around Rs 3 lakh crore across 4,800 insolvency cases have been resolved or are under active resolution.

That appears impressive and is. But for the remaining 4,200 cases still before the tribunals, legal hurdles have slowed progress. Several big cases have breached the 270-day resolution mandated by the IBC. The National Company Law Tribunal (NCLT) is The National Company Law Appellate Tribunal (NCLAT) too suffers from infrastructure and staff issues.

Here are some key aspects of the Insolvency and Bankruptcy Code:

1. IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.

2. IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the Companies Act.

3. The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.

4. The code aims to resolve insolvencies in a strict time-bound manner - the evaluation and viability determination must be completed within 180 days.

5. Moratorium period of 180 days (extendable up to 270 days) for the Company. Insolvency professional to take over the management of the Company.

6. Clearly defined ‘order of priority’ or the waterfall mechanism.

7. The waterfall to render government dues junior to most others is significant.

8. Antecedent transactions can be investigated and in case of any illegal diversion of assets personal contribution can be ordered by court.

9. Introduce a qualified insolvency professional (IP) as intermediaries to oversee the process

10. Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.

Corporate Insolvency Resolution and Liquidation

Corporate insolvency resolution process :

Application on default – Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment

Appointment of IP – IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company. From date of appointment of IP, power of Board of directors to be suspended and vested in the IP. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith

Moratorium period – Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the Company on going concern basis. A Resolution plan would have to be prepared and approved by the Committee of creditors

Credit committee - A credit committee of creditors will be constituted. Related party to be excluded from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditor approve the resolution plan same needs to be implemented.

Liquidation process

Initiation – Failure to approve resolution plan within specified days will cause initiation of Liquidation. Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.

Liquidator – The IP may act as the liquidator, and exercise all powers of the BoD. The liquidator shall form an estate of the assets, and consolidate, verify, admit and determine value of creditors’ claims.

Order of priority for distribution of assets

• Insolvency related costs

• Secured creditors and workmen dues upto 24 months

• Other employee’s salaries/dues up to 12 months

• Financial debts (unsecured creditors)

• Government dues (up to 2 years)

• Any remaining debts and dues

• Equity

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Addressing The loopholes in the IBC:

The code fails to provide adequate safeguards to protect the rights of the company before handing over the management to the resolution professional.The Code rides substantially on the unquestionable word of the creditors.The Code fails to provide any opportunity to the corporate debtor to make a representation at any stage of the resolution process.The Code is also deficient in providing criteria for the qualification of the interim and of the final insolvency resolution professionals. It also leaves too much discretion in the hands of the IP. It allows for any person to access the information memorandum put together by the insolvency professional without restricting competitors or imposing any confidentiality obligations.This goes against the right to business.The Code fails to define a resolution applicant. All such resolution plans are placed before the financial creditors and is implemented by way of an order by the NCLT.If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.The Code prohibits withdrawal of the application once it has been admitted. This means that there is no scope for settlement.

What could be done?

The code must be robust, decentralized, less costly, inclusive and speedy.This would help businesses exit sooner and capital to be redeployed faster to productive firms, thereby improving economic output and employment.The code should encourage decentralization, reduce the role of courts or insolvency professionals and allow for a greater role for a market-friendly approach.