NOTE ON INSOLVENCY & BANKRUPTCY CODE, 2016


OBJECT:

The objective of the Insolvency & Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. As we are aware that there is no single law in India that deals with Insolvency and Bankruptcy. As per present legal framework, provisions relating to Insolvency and Bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. Liquidation process of the Companies is being handled by the High Court under Companies Act and other Courts are dealing Insolvency & bankruptcy of Individual. As the existing framework is inadequate, ineffective and results in undue delays in resolution, therefore the Insolvency & Bankruptcy Code, 2015 was introduced in Lok Sabha on December 21, 2015 and same was referred to Joint Committee of both the Houses of Parliament which submitted its Report on April 28, 2016 and Lok Sabha passed on May 5, 2016 and Rajya Sabha passed the Bill on May 14, 2016.

BOARD:

The Bill proposes to establish a Board by the name of the Insolvency and Bankruptcy Board of India regulating the insolvency professionals, agencies and information utilities.

CORPORATE INSOLVENCY:

Part-II of the Bill provides complete code on the Insolvency and Bankruptcy of Corporate Persons defined as Companies and Limited Liability Partnerships. The Part shall apply where the minimum amount of the default is Indian Rupee One Lakh, however, it is provided that Central Government may by notification specify that minimum amount of default of higher value which shall not be more than India Rupee One Crore (Section 4). Further to give effect to the Code, Section 271 of the Companies Act, 2013 has been amended and has been substituted with new provisions limiting scope of Winding Up of Company on 5 grounds only which are (a) By Special Resolution of the Company (b) If Company has acted against the interest of the sovereignty and integrity of India, (c) on Application made by Registrar (d) If company default in filing with Registrar (e) if the Tribunal (NCLT) is of the opinion that it is just and equitable. Code provides that where any Corporate Debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process (IRP) in respect of such Corporate Debtor (Section 6).

A.      IRP by Financial Creditors

Any Financial Creditor can initiate the corporate insolvency resolution process where the corporate debtor has defaulted in paying a debt that has become due and payable but not repaid. The Financial Creditor or two or more Financial Creditors jointly can file an application before NCLT along with proof of default and the name of resolution professional proposed to act as the interim resolution professional in respect of the corporate debtor. The requirement to provide proof of default ensures that financial creditors do not file frivolous application(s), which are premature. The Adjudicating Authority (NCLT) can within 14 days from the date of receipt of the application, ascertain the existence of a default from the records of a regulated information utility. A default may also be proved in such manner as may be specified by the Board. Once NCLT is satisfied as to the existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed Resolution Professional, it shall admit the Application. The NCLT is not required to look into any other criteria for admission of the Application (Section 7).

B.      IRP by Operational Creditors

The process of initiation of the corporate insolvency by an Operational Creditor is different from the procedure applicable to Financial Creditors as Operational Debts (such as trade debts, salary or wages claims) tend to be small amounts (in comparison to financial debts) or are recurring in nature and may not be accurately reflected on the records of Information Utilities at all times. Further possibilities of disputed debts in relation to Operational Creditors are also higher in comparison to Financial Creditors (Bank & FIs). Once a default is occurred, Operational Creditor has to deliver a demand notice a copy of an Invoice demanding payment of debt in default to the Corporate Debtor in such form as may be prescribed. The Corporate Debtor has a period of 10 days from the receipt of the demand notice or invoice to bring to the notice of the Operational Creditor, of the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute or of the repayment of the debt. This process will ensures that Operational Creditors are not able to put the Corporate Debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations (Section 8). On the expiry of the period of 10 days from the receipt of Invoice/Notice, if Operational Creditor does not receive either the payment of the debt or a notice of existence of dispute in relation to the debt claim from the Corporate Debtor, he can file an application with the NCLT for initiating the insolvency resolution process. He is required to furnish (a) a copy of Invoice or Demand Notice delivered to Corporate Debtor (b) a certificate from the Bank for non-payment of the debt (c) an affidavit verifying that no notice given by the Corporate Debtor relating to a dispute of the unpaid operational debt along with the Application. Within 14 days from the receipt of the Application, if NCLT is satisfied as to the existence of the debt and has ensured that the Application is complete and no disciplinary proceedings are pending against the proposed Resolution Professional, it shall admit the Application (Section 9).

C.      IRP by Corporate Debtor

Corporate Debtor itself can initiate the process of insolvency resolution process. Corporate Applicant, (means Corporate Debtor, Member or Partner, Individual in charge of managing overall operations of Corporate Debtor) may make an application to NCLT along with Books of Accounts and such other documents and the name of a person proposed to be appointed as the Interim Resolution Professional. NCLT shall admit the application within 14 days from receipt of application in completion. Application shall be maintainable only if default has occurred not on the likelihood of default (Section 10).

TIME FRAME:

Code has prescribed a time limit of 180 days extendable by further 90 days for the completion of corporate insolvency process. The Application for the extension can only be made by the Resolution Professional and has to be supported by a resolution passed at a meeting of the committee of creditors by a majority of 75% of the voting shares (based on the proportion of financial debt). No other person is entitled to seek such an extension of time. NCLT shall have no discretion to extend these time lines (Section 12).

ACTION BY NCLT:

NCLT shall take action once an application for initiating the corporate insolvency resolution process has been admitted. The NCLT shall (a) declare a moratorium (b) cause a public announcement of the initiation of corporate insolvency resolution process with respect to the Corporate Debtor to be made and call for claims in the specified manner and (c) appoint the Interim Resolution Professional for the Corporate Debtor (Section 13). The purpose of moratorium include keeping the assets of the Corporate Debtor together during the insolvency resolution process and facilitating orderly completion of the process which period shall continue to be in effect till the completion of the corporate insolvency resolution process or the approval of a resolution plan by NCLT or resolution of the committee of creditors to liquidate the corporate debtor whichever is earlier (Section 14).

ROLE OF RESOLUTION PROFESSIONAL:

Resolution Professional plays a significant role in the corporate insolvency. NCLT within 14 days from the date of admission of the Application for Corporate Insolvency by A, B or C above, appoint the Interim Resolution Professional who shall performs various functions such as the collection of claims, the collection of information about the corporate debtor, the constitution of committee of creditors and the interim management of the company’s affairs and monitoring of the company’s assets till a Resolution Professional is appointed. The Interim Resolution Professional is appointed for a period of 30 days from the date of his appointment. It is also relevant to mention here that once the Interim Resolution Professional is appointed, the management of the corporate debtor is taken over by him and the powers of the Board of Directors or the Partners of the Corporate Debtor as the case may be, are suspended. The officers and managers of the Corporate Debtor shall report to the Interim Resolution Professional and cooperate with him in providing access to documents and records of the Corporate Debtor. The Financial Institutions maintaining the accounts of Corporate Debtor shall also act on the instructions of the Interim Resolution Professional and furnish all information relating to Corporate Debtor to them (Section 17). Interim Resolution Professional has to maintain the operations of the Corporate Debtor as a going concern to enable him to protect and preserve the value of the property of Corporate Debtor. Committee of Creditors shall appoint Resolution Professional who shall carry out the entire Corporate Insolvency Resolution Process and managing the operations of the Corporate Debtor and has same powers and shall perform the same duties as the interim resolution professional. Resolution Professional shall prepare an information memorandum to provide solutions for resolving the insolvency of the Corporate Debtor and Resolution Professional shall prepare a Plan that shall be presented for approval to NCLT after approval by Committee of Creditors. If the Plan meet the criteria, NCLT shall sanction the Plan which shall be binding on the Corporate Debtor, Creditors, Employees, Shareholders, Guarantors and other stakeholders and moratorium imposed earlier, ceases to have effect upon approval of the Plan.

LIQUIDATION:

Liquidation of the Corporate Debtor shall be carried out in four scenarios (a) where NCLT is of the opinion that the Resolution Plan does not meet the criteria (b) where the NCLT does not receive a Resolution Plan or before expiry of the maximum period (c) where committee of creditors resolve by 75% majority that the Corporate Debtor is to be liquidated and (d) where the corporate debtor violates the terms of the resolution plan and on an application by a person whose interests are adversely affected by such violation. Upon Liquidation order, the powers of the board of directors, key managerial personnel or partners shall be vested in the liquidator and Resolution Professional shall be appointed as Liquidator unless replaced by NCLT.

OFFENCES & PENALTIES:

Chapter-VII to Part-II of the Code provides punishment for concealment of property, for transactions defrauding creditors, for misconduct in course of corporate insolvency resolution process, for falsification of books of corporate debtors, for willful and material omission from statements relating to affairs of Corporate Debtor, for false representation to creditors, for contravention of moratorium or the Resolution Plan shall be punished with imprisonment for a term which shall not be less than 3 years but which may extend to 5 years or with fine which shall not be less than 1 Lakh Rupee but which may extent to 1 Crore Rupees. Code also prescribes fines of 1 Lakh Rupee extend to 1 Crore Rupee for knowingly furnishing false information or knowingly not disclosing material information as part of Application under Para A above. Further if Operational Creditor knowingly not disclosed a dispute or repayment of debt at the time of application as under Para B above, shall be punished with imprisonment for a term which shall not be less than 1 years but which may extend to 5 years or with fine which shall not be less than 1 Lakh Rupee but which may extent to 1 Crore Rupees.




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