Insolvency and Bankruptcy Code

• The Code seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.
• In addition, it amends 11 laws including Companies Act, 2013, DRT Act, 1993 and SARFAESI Act, 2002.
• The Code specifies a framework for time bound (6 + 3 Months) insolvency resolution, with two similar processes for
• companies and limited liability partnerships (liability of partners restricted to their investment), and. (Company law appellate tribunal to Solve issue under Company Act 2013)
• individuals and partnership firms. The following institutions will be created under the proposed framework. (Debt Recovery Tribunal – to solve issue under 1913 Act)
• 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.
•  The Code creates time-bound processes for insolvency resolution of companies and individuals.
• These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
• The resolution processes will be conducted by licensed insolvency professionals (IPs).
• These IPs will be members of insolvency professional agencies (IPAs).
• Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
• The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies. The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
• The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

The Process

Initiation

• When a default occurs, the creditors or debtor may apply to the tribunal (NCLT or DRT) for initiating the resolution process.
• Once the application is approved, the resolution process will have to be completed within 180 days. This time limit may be extended by up to 90 days.
• During this period, the debtor will be immune towards creditors’ claims and lawsuits.

Appointment of interim IP:

When the resolution process begins, an interim IP will be appointed by the creditors or tribunal. The IP will:

• take control of the debtor’s assets and company’s operations,
• collect financial information of the debtor from information utilities,
• constitute the creditors committee.

(IP Act as Intermediate between Creditors Committee & Debtor)

Creditors committee:

(Financial Creditors (Who Give Loan) & Operational Creditors (Ex: Give raw material, security service at EMI, due to company loss, company not pay the due/ EMI)

• A committee consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution. Financial creditors may either be:
• secured creditors, whose loans are backed by collateral (security), or
• unsecured creditors whose loans are not backed by any collateral.
• The creditors committee will take decisions by a 75% majority.
• It will oversee management of the debtor’s assets and appoint a permanent IP to conduct the resolution process.

Resolution:

The creditors committee will decide to:

1. restructure the debtor’s debt by preparing a resolution plan (such as revising the repayment plan), or
2. liquidate (sell) the debtor’s assets to repay loans.
3. If no decision is made during the resolution process, the debtor’s assets will be liquidated to repay the debt.

Approval of plan:

(Plan file to Tribunal, Tribunal can approve or Reject it)

• On the approval of a resolution plan by the creditors committee, the IP will submit it to the tribunal for final approval.
• The tribunal will approve the plan based on criteria which includes ensuring that operational creditors have received as much as they would have received during liquidation. The resolution plan will then be implemented.

Process

Liquidation:

In case of liquidation, proceeds from the sale of the debtor’s assets will be used to repay outstanding dues. A secured creditor may choose to not participate in the process, and enforce his security under any other law (such as the SARFAESI Act).

1. The financial obligations of the debtor will be repaid in the following order:
2. fees of the IP and other costs related to the resolution process.
3. secured creditors (if he chooses not to enforce his security) and worker dues (up to 12 months).
4. employee wages (up to 12 months).
5. unsecured creditors.
6. dues to government and remaining debt owed to secured creditors (residual amount if the creditor enforces his security).
7. Any remaining debt (Ex: Operational Creditor), and
8. Shareholders.

Creditors

• Here, the Insolvency and Bankruptcy Code (IBC) classifies these two creditors under the following categories:
1. Financial Creditors – Section 5(7) and
2. Operational Creditors – Section 5(20).
• The financial creditors are basically entities (lenders like banks) that have provided funds to the corporate.
• Their relationship with the entity is a pure financial contract, such as a loan or debt security.
• On the other hand, business and other entities that have provided inputs and other materials and services and to whom the defaulted corporate owes a debt are called as operational creditors.
• Both have claims on the defaulted corporate or the defaulted corporate owe payments to both these categories.

Other Provisions

Fresh Start Process:

(People got less amount of Loan (Ex: Mudra loan of Rs. 50,000))

• The Code provides a Fresh Start Process under which an individual will be eligible for a debt waiver of up to Rs 35,000. For an individual to be eligible for this process, he should have:
1. annual income of less than Rs 60,000,
2. assets under Rs 20,000, and
3. no ownership of a house.
• Offences and penalties: The Code specifies penalties for offences committed by a debtor under corporate insolvency (like concealing property).
• The penalty will be imprisonment of up to five years, with a fine of up to Rs one crore.
• For offences committed by an individual (like providing false information), the imprisonment will vary based on the offence. For most of these offences, the fine will be up to Rs five lakh.

Other Provisions

• Insolvency and Bankruptcy Fund: The Code creates an Insolvency and Bankruptcy Fund for the purposes of insolvency resolution proceedings.
• Sources of the Fund will include grants from the government, deposits made by persons, and interest received from investments made from the Fund.

Recent Amendments

• The Code allows creditors to initiate an insolvency resolution process, if a company defaults on its payments. The Ordinance introduces an additional threshold for certain classes of financial creditors, including allotters of real estate projects, for initiating the resolution process. At least 10% of them or 100 such persons have to jointly initiate the process.
• The Ordinance empowers the resolution professional to require suppliers to continue providing goods and services.
• The Ordinance provides that the company will not be liable for any offence committed prior to the insolvency resolution process, if there is a change in the management or control of the company.
• Under the Code, the insolvency resolution process commences when the Insolvency Resolution Professional (IRP) is appointed. The Ordinance states that the IRP must be appointed on the date of admission of the application by NCLT, which will be considered as the insolvency commencement date.
• Licenses and permits not to be terminated due to insolvency: The Ordinance states that any existing license, permit, registration, or clearance given by any government authority to the debtor will not be suspended or terminated due to insolvency. This provision will be applicable as long as the debtor does not default in the payment of current dues arising for the use or continuation of such licenses or permits.