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Insolvency and Bankruptcy Code

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Insolvency and Bankruptcy Code, 2016is one of the major economic reformCode initiated by the Government in the year 2015. There were multiple overlapping laws and adjudicating forum dealing with financial failure and insolvency of companies and individuals in India.

The existing laws also were not aligned with the market realities, had several problems and were inadequate. As per that legal framework, provisions relating to insolvency and bankruptcy for companies could be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of financial assets and Enforcement of security interest Act, 2002 and the CompaniesAct, 2013. Resolution and jurisdiction vesting with multiple agencies with overlapping powers were leading to delays and complexities in the process.

To facilitate easy and time-bound closure of the business in India and to overcome these challenges, a strong bankruptcy law was required.

Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha on 21st December 2015 and referred to the Joint Committee on the Insolvency and Bankruptcy Code, 2016. The Committee had presented its recommendations in the modified Bill based on its suggestions.

Further, the Insolvency and Bankruptcy Code,2016 was passed by both the Houses ofParliament and notified in May 2016. Being one of the major economic reforms it paves the way focusing on creditor driven insolvency resolution.

Insolvency and Bankruptcy Code, 2016is intended to strike the right balance of interests of stakeholders of the business enterprises that the corporates and other business entities enjoy the availability of credit and at the same time the creditor does not have to bear the losses on account of default. As per the Preamble to the

Code, the purpose of this Act is as under:-

(a) To consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, and individuals.

(b)To fix time periods for execution of the law in a time-bound manner.

(c)To maximize the value of assets of interested persons.

(d)To promote entrepreneurship

(e)To increase the availability of credit.

(f)To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues.

(g)To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.

Distinguishing features of Code

(a) Comprehensive Law: InsolvencyCode is a comprehensive law which envisages and regulates the process of insolvency and bankruptcy of all persons including corporates, partnerships, LLPs, and individuals.

(b) Withering away of Multiplicity of laws: The Code has withered away from the multiple laws covering the recovery of debts and insolvency and liquidation process and presents a singular platform for all the reliefs relating to recovery of debts and insolvency.

(c)Low Time Resolution: TheCode provides a low time resolution and defines fixed time frames for insolvency resolution of companies and individuals. The process is mandated to be completed within 180 days, extendable by a maximum of 90 days. Further, fora speedier process there is provision for fast-track resolution of corporate insolvency within90 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.

(d) One Window Clearance: The Code has been drafted to provide one window clearance the applicant whereby he gets the appropriate relief by the same authority unlike the earlier position of law wherein case the company is not able to revive the procedures for winding up and liquidation, has to be initiated under separate laws governed by separate authorities.

(e) Clarity in Process: There is a clear and unambiguous process to be followed by all stakeholders. There is also a shift of control from shareholders and promoters to creditors.

(f) One Chain of Authority: There is one chain of authority under the code. It does not even allow theCivil Courts to interfere with the application pending before the adjudicating authority, thereby reducing the multiplicity of litigations. The NationalCompanyLaw Tribunal (NCLT) will adjudicate insolvency resolution for companies. TheDebt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.

(g) Protects the Interests of Workmen and Employees: The Code also protects the interests of workman and employees. It excludes dues payable to workmen under the provident fund, pension fund and gratuity fund from the debtor’s assets during liquidation.

(h) New Regulatory Authority: It provides for constitution of a new regulatory authority, ‘Insolvency and bankruptcy Board of India’ to regulate professionals, agencies and information utilities engaged in the resolution of insolvencies of companies, partnership firms, and individuals. The Board has already been established and has started functioning.

(i) Establishment of information utilities (IUs): A unique feature of code establishment of Information Utilities (IUs) which are intended to function as a databank to collect, collate and disseminate financial information and to facilitate insolvency resolution. It is envisioned that in the long run, IUs will have data on debts and credits of all the business houses and it will be able to create an automatic trigger in case of default by any debtor and the authority may initiate the insolvency process as required. Such a system will reduce the risk of credit in the economy.

Need for a New Law

According to the Ease of Doing BusinessReport of the World Bank, it takes an average of four to five years in insolvency resolution process in India. The main reason behind such delay in the legal process is the existence of overlapping legislation and adjudicating authorities dealing with the insolvency of companies and individuals in India.

TheGovernment of India then formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate hassle-free and time-bound revival and closure of businesses.

The framework of law which was in existence earlier had failed to resolve insolvency situations.

Financial failure –a persistent mismatch between payments by the enterprise and receivables into the enterprise, even though the business model is generating revenues.

Business failure– which is a breakdown in the business model of the enterprise, and is unable to generate sufficient revenues to meet payments.

Malfeasance and mismanagement by promoters

The laws which were in existence were not aligned with the market realities and had several inadequacies. There was no single window resolution available and the resolution and jurisdictions with the multiple agencies with overlapping powers that were leading to delays and complexities in the process. TheCompanies Act deals with the corporate insolvency law and the individual insolvency laws were being dealt with by a century old two Acts, i.e., The ProvincialTowns Insolvency Act and the Presidency Towns InsolvencyAct.

Multiple laws governing Debt resolution and multiple forums

Parallel proceedings by different parties on the same debtor in different forums and conflicts between laws and over jurisdictions.

Multiple laws governing Debt resolution and multiple forums

Asymmetry of information

Regulatory Mechanism

Insolvency and Bankruptcy Code, 2016 provides a new regulatory mechanism with an institutional set-up comprising of five pillars:-

Insolvency Professionals

Insolvency Professional Agencies

Information Utilities

Insolvency and Bankruptcy Board of India

Adjudicating Authority

Applicability of the Code the code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities:-

(a)Any company incorporated under the CompaniesAct, 2013 or under any previous law.

(b) Any other company governed by any special activities for the time being in force, except insofar as the said provision is inconsistent with the provisions of such Special Act.

(c)Any Limited Liability Partnership under the LLP Act 2008.

Any other body incorporated under any law for the time being in force, as the Central Government may by notification specify in this behalf.

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Insolvency and Bankruptcy Code. (2018, August 05). GradesFixer. Retrieved January 13, 2021, from https://gradesfixer.com/free-essay-examples/insolvency-and-bankruptcy-code/
“Insolvency and Bankruptcy Code.” GradesFixer, 05 Aug. 2018, gradesfixer.com/free-essay-examples/insolvency-and-bankruptcy-code/
Insolvency and Bankruptcy Code. [online]. Available at: <https://gradesfixer.com/free-essay-examples/insolvency-and-bankruptcy-code/> [Accessed 13 Jan. 2021].
Insolvency and Bankruptcy Code [Internet]. GradesFixer. 2018 Aug 05 [cited 2021 Jan 13]. Available from: https://gradesfixer.com/free-essay-examples/insolvency-and-bankruptcy-code/
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