Insolvency and Bankruptcy Code

1. By Priyanka & Praveen Jayram

2. 1. What is Insolvency?
2. What is Bankruptcy?
3. What is Insolvency and Bankruptcy Code,2016?
4. Laws for dealing with insolvency and bankruptcy in India.
5. Why Insolvency and Bankruptcy Code came into existence?
6. Journey of the IBC,2016 and its applicability , persons involved.
7. Different parties associated with Insolvency and Bankruptcy Code.
8. INSOLVENCY RESOLUTION PROCESS
9. What does it change for the lenders?
10. What does it change for the borrowers?
11. Advantages and Critique of the bankruptcy code
12. Way Forward
13. Changes in Insolvency and Bankruptcy Code (Amendment) Bill, 2017
14. Conclusion

3. Insolvency:An individual/company is not able to pay off its debts due to the
excess of liabilities over assets, called as balance sheet insolvency. Temporary and
amount can be recoverable.
Bankruptcy: An individual/company is unable to pay off its outstanding debts and
files an application with a court to get himself declared as an insolvent or the creditor
can file an application in the court against the insolvent. Permanent, resulting in wind
up of an individual or entity's assets.
Resolution: refers to a plan proposed by any authorised person/entity for enabling
the overdue payments of a corporate debtor through restructuring or through part
payments, while allowing the corporate debtor to continue as a going concern.
What is Insolvency and Bankruptcy Code,2016?
The Insolvency and Bankruptcy Code, 2016 aims to consolidate and amend the laws
relating to insolvency resolution of companies and and LLP, partnerships and
individuals, into a single law. The main focus of this legislation is at providing
resolution in a time bound manner for maximization of value of debtor’s assets.

4. Laws for dealing with insolvency and bankruptcy in India
For individuals:
1.The Presidency Towns Insolvency Act, 1909
2.The Provincial Insolvency Act, 1920- this included insolvency as proprietors
too.
For corporate:
1.The provisions of the companies Act,2013
2.LLP Act, 2008 -for closure of LLPs
3. MSME Development Act, 2006- also registers a MSME but has no
framework for closure of MSMEs.
4.SARFAESI Act, 2002
5. Recovery of debts due to Banks and Financial Institutions Act, 1993-
Grants special rights to unsecured creditors for recovery of defaulted
debts.
6. Sick Industries Companies (Special Provisions) Act, 1985- Revival of
sick companies.

5. Why Insolvency and Bankruptcy Code came into existence?
1. India stood in 130th rank in ease of doing business in 2017.
2. Currently, only 25% of the asset value is recovered by the creditors even after the
liquidation process.
3. Time taken for recovery is 4.3 years compared to 0.8 years in Singapore and
Canada.
4. Bad loans of Indian banks eating their profits significantly as many large
corporate borrowers have defaulted repayments running in lakhs of crores , many
a times willfully.
5. Such a unified code is essential because currently the issue of insolvency is
handled under at least 13 different laws creating conflict between the laws.
6. Legal process are pretty lengthy in India.
7. This leads to court cases as lenders tried to get back their dues through legal
means
8. Banks are now seeking liquidation of those willful defaulting companies but at a
shortest possible time.

6. Journey of the IBC,2016 and its applicability , persons involved
 22nd August 2014-BLRC formed under the chairmanship of T.K.Vishwanathan.
 21st December 2015-Code introduced into the parliament.
 05th May 2016-IBC passed by Lok Sabha.
 11th May 2016-IBC passes by Rajya Sabha.
 28th May 2016-President assent received.
Persons covered
 Incorporated under the Companies Act, 1956
 Companies governed by any special Act, to the extent the provisions are consistent with
that Act.
 Individuals, Partnership firms,LLPs
 Any other body corporate, incorporated under any Act for the time being in force, as the
Central Government may specify

7. Different parties associated with Insolvency and Bankruptcy Code
 Insolvency professionals and agencies: The Insolvency Code also proposes to set up
insolvency professional agencies, which can recruit the professionals and regulate
them. The professionals will also have the power and duty to control the assets of the
debtor during the process.
 Information Utilities: The code also proposes to establish information utilities which
will maintain a range of financial information about firms. Their duty is to collect and
disseminate the information to facilitate the insolvency resolution process.
 Insolvency Regulator: The Code establishes the insolvency regulator, the Insolvency
and Bankruptcy Board of India, IBBI, which will have the mandate to oversee the
insolvency resolution in the country.
 Bankruptcy and Insolvency Adjudicators: There are two different adjudicators
 The National Company Law Tribunal :Companies and Limited Liability Partnerships,
 Debt Recovery Tribunal : individuals and partnership firms.
 Credit Committee: it is to be composed of financial creditors. The primary aim of the
committee is to ensure payments to operating creditors on a pre-scheduled priority
order

8. INSOLVENCY RESOLUTION PROCESS
Initiation
 When any corporate or business entity is not able to pay back the amount to its
creditors or investors or lenders on time and this goes on for a very long period of
time, this leads to the process of insolvency for which the application of insolvency
is submitted to the National Company Law Tribunal (NCLT).
 The insolvency resolution process can be initiated by any one of out of following
three
 Financial creditor
 Operational creditor
 Corporate debtor himself
Insolvency resolution process by creditor
 Financial creditor himself or jointly will initiate by filing an application for the
insolvency proceedings against the corporate debtor before NCLT.
 If NCLT is of the opinion that there is no default on the part of the corporate debtor
or there is a proceeding pending against the proposed resolution professional NCLT
may reject the application.
 NCLT has to entertain the application within 14 days of making the application.

9. Insolvency resolution process by operational creditor
 Before initiating insolvency resolution process operational creditor will
serve the corporate debtor with a prior notice of 10 days to the corporate
debtor asking him to pay back the dues.
 If the corporate debtor does not pay back in that time period or does not
bring to the attention of the operational creditor about any record of
repayment of unpaid operational debt, then the operational creditor can
file an application for the insolvency resolution process.
Resolution of insolvency by the corporate debtor
 Where the corporate debtor is at fault, the corporate debtor or any
corporate applicant can file an application for the initiation of the
insolvency resolution process.

10. What does it change for the lenders?
1. Right to control the borrower upon default and maximize recovery
2. Option to initiate the insolvency process.
What does it change for the borrowers?
 Any creditor can file insolvency petition on default of Rs. One Lakh or
more
 Insolvency Professional(IP) to take over the management and
operations of the borrower during the Corporate Insolvency
Resolution Process(CIRP)
 In case of fraudulent diversion of assets, personal contribution can be
sought, imprisonment possible.

11. Advantages of the code
 Address cross-border insolvency through bilateral agreements with other
countries
 Having a robust insolvency resolution mechanism can help creditors recover
a larger part of their investment faster, allowing them to re-invest in other
businesses, thereby facilitating the efficient flow of capital across the
economy
 Creation of a new class of insolvency professionals that will specialize in
helping sick companies.
 Ensure time-bound settlement of insolvency, enable faster turnaround of
businesses and create a data base of serial defaulters.
 Improve India’s position in the World Bank’s Doing Business ranking.
 There will be one single law in place of multiple laws and remove the
overlapping jurisdiction.

12. Critique of the bankruptcy code
 Time-bound insolvency resolution will require establishment of several new
institutional mechanisms.
 IPAs, regulated by the Board, will be created for regulating the functioning of
IPs. This approach of having regulated entities further regulate professionals
may be contrary to the current practice of regulating licensed
professionals. Further, requiring a high value of performance bond may
deter the formation of IPAs.
 The order of priority to distribute assets during liquidation is unclear. For
instance – why secured creditors will receive their entire outstanding
amount, rather than up to their collateral value; why unsecured creditors
have priority over trade creditors? and why government dues will be repaid
after unsecured creditors?
 The Code creates an Insolvency and Bankruptcy Fund. However, it does not
specify the manner of usage of the fund.

13. Way Forward
 It is a progressive step towards improving the investor confidence and ease of
doing business
 The possible demerits can be addressed through discussions and consensus
building
 If implemented earnestly, it will give a boost to the job creation promise
through skill development mission ( to create 40 cr jobs by 2022) and also
provide the required ecosystem for the success of “Make in India”.
 This will be a positive step as , the people who file for bankruptcy will have to
repay their debts.

14. Changes in Insolvency and Bankruptcy Code (Amendment) Bill, 2017
 Provisions of bankruptcy to be made applicable to personal guarantors -
Code will apply to personal guarantors of corporate debtors as a category
different from individuals. The intention is make the provisions relating to
Insolvency Resolution and Bankruptcy for individuals and partnership firms
applicable to personal guarantors.
 Provisions of Insolvency Code to be made applicable to proprietary firms -
By making Code applicable to proprietary firms also, the drafting error in the law
has been removed.
 Joint preparation of resolution plan - Section 5(25) of the Code did not make
provision for submission of resolution plan by more than one person. This section
has been amended to make provision for submission of resolution plan by more
than one persons. Thus, a joint venture or AOP can be constituted to prepare
and, if required, execute the resolution plan.

15.  Corporate debtor cannot make back entry to the defaulting corporate
debtor through its associate companies - It was observed that corporate
debtors were trying to gain control of the defaulting body corporate
through its associate companies or group companies. This was clear
misuse of the Code as they were getting loan waivers and re-gaining
control of the defaulting corporate debtor.
 Ineligible persons cannot purchase property of corporate debtor - They
will not be permitted to purchase property of the defaulting corporate
debtor.
 Provisions relating to ineligible applicants apply to existing plans which
have not been approved - It has been specifically clarified that this
provision applies even to resolution plans which have not been approved
by the Committee of Creditors till 23-11-2017.
 Penalty provisions - section 235A has been inserted to make penalty
provisions for violation of Code as-3 to 5years imprisonment and/or one
lakh to one crore fine.

16. Conclusion:
 India's insolvency regime, significant inefficiencies are some of
the reasons for the distressed state of credit markets in India
today.
 The Code promises to bring reforms in insolvency resolution.
 It aims early identification of financial failure and maximizing the
asset value of insolvent firms.
 The Code also has provisions to address cross border insolvency
through bilateral agreements with other countries.
 The unified regime envisages a structured and time-bound
process for insolvency resolution and liquidation, which should
significantly improve debt recovery rates.