Q

Insolvency and Bankruptcy Code in India

The code protects the interest of small entrepreneurs as well as provides a process to tackle the Non-Performing Assets (NPA). Bankruptcy code in India was formed in the year 2016, to consolidate the existing framework and to create a single law for insolvency and bankruptcy.

India’s NPA ratio was more than any upcoming markets, and the markets such as energy, infrastructure, construction and mining had taken hit due to such weaknesses in the market.

Hence a major structural change through enactment of Insolvency and Bankruptcy Code, 2016 was made in India. The current bankruptcy code as per the finance minister was meant to be an entrepreneur-friendly legal insolvency framework which was not available with all.

The code of 2016 applies to companies that deal in providing time-bound resolution to the insolvency process. Whenever default in payment occurs, creditors gain control over the debtor’s assets under such circumstances; the insolvency matter should be resolved within 180 days, which is extendable up to 270 days.

Since the enactment of the law, the Bankruptcy Code has undergone several amendments so as to create a time-bound process for insolvency resolutions by the companies or individuals.

Who Can Consolidate Insolvency Resolution?

Under the insolvency and bankruptcy code, certain institutions have been given authority to facilitate the insolvency process:

Insolvency Professional and Agencies

The resolution process for resolving the insolvency is conducted by licensed insolvency professionals. The insolvency professionals are certified members of the agencies. The professionals will manage the entire insolvency process; they will have to manage the assets of the debtor and provide the information so that the creditors can make a decision on the matter.

The insolvency professionals are registered with the agencies which certify the professionals helping in the entire insolvency process after examination and enforcing a code of conduct upon the professionals.

Information Utilities

The creditors have to report any kind of financial information they have on the debtor. Any such information provided by the creditors should include the record of the debt owed, liabilities and defaults.

Adjudicating Authority

National Company Law Tribunal (NCLT) will carry on the resolution proceeding for the companies, whereas Debt Recovery Tribunal (DRT) for individuals. Both the adjudicating authority will have a duty to initiate the resolution process, approve the final decision of the creditors and appoint an insolvency professional.

Insolvency and Bankruptcy Board

The IB Board will consist of a representative from the Ministry of Finance, Corporate Affairs and law and Reserve Bank of India.

Eligibility for Initiating Proceedings:

Any proceeding for insolvency and bankruptcy can only be initiated if the debt for 1 lakh or more. If the debt is more than 1 lakh, the company creditors can initiate the proceedings with the NCLT. The entire process of insolvency can be completed in two stages:

1.Insolvency Resolution Process

During the Insolvency resolution process, the creditors weigh the option for the company resurrection. If the debtor company is not viable for continuing the business, the next stage of the process is initiated.

2.Liquidation

If the creditors reach a decision that the resolution process was not viable or has failed, the creditors can distribute the assets of the company and wind down the company.

What is the Procedure to resolve insolvency for Companies and Limited Liability Companies?

As per the code of insolvency and Bankruptcy, when an individual or a company is unable to meet the outstanding debts to the investors and its creditors an insolvency proceeding is carried on. The insolvency proceedings can be carried on through two different processes:

  1. Through modifying the repayment plan of the debt to creditors
  2. Or, you could sell off the assets of the company so that you can pay off all the company debtors and the creditors.

Who can Initiate Insolvency Process?

Following can initiate the process of corporate insolvency resolution process in case corporate debtor has committed default:

  1. Financial Creditors
  2. Operational Creditors
  3. Corporate Debtor

Steps to resolve insolvency in India

The insolvency code proposes the following steps to resolve insolvency:

Step-1: Initiation

When a debtor is unable to pay back the loan, the insolvency process can be initiated either by the debtor or the creditor. The state of not paying back the debtors or creditors is known as insolvency, and an application is to be submitted to the national company law tribunal (NCLT) by the corporate debtor.

If the corporate debtor files for insolvency, the operational creditor has to send a notice of demand (10 days) prior to the initiation of resolution proceedings, the entire insolvency process is administered by the Insolvency professionals and is responsible for providing the financial information about the debtor assets to assets.

The process of insolvency lasts for 180 days, which can further be extended for 270 days and no legal action against the debtor can be initiated during this period. The creditors cannot launch any coercive proceedings against the corporate debtor in any other court or forum until the process is completed or the liquidation process has been initiated.

Step-2 Decision to resolve Insolvency

NCLT will have to appoint a committee of financial creditors who have lent money to the debtor. The creditor committee will then take the decision regarding the future of outstanding debt owed to them all.

If the decision is not taken within 180 days, the debtor's asset goes into liquidation.

Step-3 Liquidation

Liquidation will only take place if the insolvency resolution process is unsuccessful or due to following reasons:

  1. If the resolution process is rejected or not submitted with the NCLT within the prescribed limit
  2.  If the debtor acts in contravention to the resolution plan
  3. Or, the liquidation is based on the vote of the majority

Process:

  • No legal proceedings should be initiated against the debtor except the proceedings normally carried on by liquidator through the permission of the NCLT
  • The liquidator is under the responsibility to form an estate of all the asset of corporate debtor called liquidation estate. The creditors have a responsibility to discredit any claims issued by the creditors within 14 days.
  • Assets of the debtor will be distributed by the liquidator in the manner the priority of the debts that are laid in the given code.
  • Once the assets of the corporate debtor are completely liquidated, the NCLT can pass an order dissolving the corporate debtor.


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