In an effort to improve the ease of doing business in India, the Insolvency and Bankruptcy Bill, 2015, will repeal the current insolvency Acts and amend various other legislations including the Companies Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Sick Industrial Companies (Special Provisions) Repeal Act, 2003, among others. The Code seeks to create a unified framework for resolving insolvency and bankruptcy in India, making it easy for investors to exit within a fixed time frame. The Government wanted to enact the bill at the earliest so as to increase the ease of doing business.
The Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government. The Bill proposes to establish an Insolvency Regulator along with an Insolvency Adjudicating Authority and aims to regulate insolvency professionals and provide for insolvency information utilities. An Insolvency Regulator will exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities. Under the Regulator’s oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals. The information utilities would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. The insolvency-adjudicating authority will have the jurisdiction to hear and dispose off cases by or against debtors. While the Debt Recovery Tribunal will be the adjudicating authority with jurisdiction over individuals and unlimited liability partnership firms, the National Company Law Tribunal will be the authority with jurisdiction over companies and limited liability entities. Till the Insolvency and Bankruptcy Board of India is set up, the Central Government will exercise the powers of the Board or designate any financial sector regulator the powers and functions.
Moreover the Code creates an Insolvency and Bankruptcy Fund. Deposits to the Fund will include: (i) grants made by the Central Government, (ii) amount deposited by persons, and (iii) interest earned on investments made from the Fund. Any person who has contributed to the Fund may apply for withdrawal, in case of proceedings against him.
Currently it takes, on an average, more than four years to resolve insolvency in India. The Bill lays down a clear, coherent and speedy process for early identification of financial distress and revival of the companies and limited liability entities if the underlying business is found to be viable. The new code seeks to cut down the time to less than a year. According to the provisions of the bill, corporate insolvency applications will have to be decided on within 180 days, with an option of extending it by an additional 90 days if 75% of the financial creditors agree.
One of the major changes this Bill seeks to bring about in the process of corporate liquidation is introduction of the concept of insolvency resolution process (hereinafter, IRP). This is a process under which the corporate debtor and the creditors would try to negotiate on and draft a repayment plan. In the event that they are able to reach a suitable negotiable plan which receives the prescribed assent of the creditors as well as the corporate debtor, the company can be protected from liquidation. When a corporate debtor defaults in his payments, the process of Insolvency Resolution can be initiated by an operational creditor, or the debtor himself.
The IRP for individuals varies from that of companies. These processes may be initiated by either the debtor or the creditors. The Bill also proposes for a fast track insolvency resolution process for companies with smaller operations, to be completed within 90 days, which may be extended if 75% of financial creditors agree.
The Bill also provides for priority with regard to distribution of proceeds following liquidation of the company. In the order of priority, the first charge will be insolvency resolution process cost and liquidation costs to be paid in full. Liquidation proceeds will then be used to clear debts owed to secured creditors, and then to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors, in that order. Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment. It also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.
Currently, there is no single consolidated legislation administering insolvency and bankruptcy in India. High Courts handle liquidation of companies individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The other laws viz SICA (Sick Industrial Companies Act), 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993, SARFAESI and Companies Act, 2013 have respective provisions for governing cases of insolvency. As a result, four different agencies, the High Courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs), have overlapping jurisdiction, giving rise to the potential of systemic delays and complexities in the process. A strong bankruptcy law can help overcome these challenges. The Code also seeks to balance the interest of all the stakeholders including alteration in the priority of payment of government dues.
The implementation of the Bill might lead to the establishment of an effective legal framework that would facilitate investment, leading to better economic growth and development. The presence of a strong framework to deal with corporate insolvency and protection of creditor and debtors is critical to open up new avenues for funding and nurture advancement in credit markets. Such a consolidated legislation would secure the position of lenders, who have always been on the receiving end, and impose a stricter regime for defaulting borrowers.
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