Mansukhlal Hiralal and Company

NEW BANKRUPTCY CODE 2016 | SNAPSHOT

Very recently both the houses of parliament have approved the Insolvency and Bankruptcy Code, 2016 (``IBC``) fulfilling the need for codification of multiple laws related to insolvency into a single law. IBC is now awaiting the presidential assent.

Presently the Contract Act, 1872 and special laws such as the Companies Act, 2013;Sick Industrial Companies (Special Provisions) Act, 1985; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; Recovery of Debts due to Banks and Financial Institutions Act, 1993; Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act 1920 etc govern the issue of insolvency.

IBC aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation and provide for their reorganization and resolution in a time bound manner for maximization of value of their assets. The essential idea of the new law is that when a corporate entity defaults on its debt, decisions are taken in a time-bound manner, so that there is a greater chance ofsaving the corporate entity as a going concern.

Key features of IBC:

1. Makes no distinction between the rights of international and domestic creditors or between classes of financial institutions: In contrast to the current regulatory landscape, IBC does not make any distinction between the rights of international and domestic creditors or between financial institutions and funds. All financial creditors are, in general, entitled to participate in the insolvency resolution process irrespective of the size of their debt.
2. Allows creditors to assess the viability of a debtor as a business decision: When a corporate entity defaults on its debt, IBC shifts the control of the corporate debtor from its shareholders/promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation. IBC therefore allows creditors of the corporate debtor to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation.
3. Insolvency process for corporate debtors:To initiate an insolvency process for corporate debtors, the default by the corporate debtor should be at least INR 100,000 (which limit may be increased up to INR 10,000,000 by the Government). IBC proposes two independent stages:
   • Insolvency Resolution Process - As mentioned above, during this process financial creditors assess whether the debtor's business is viable to continue and they mull over the ways to rescue the business; and
   • Liquidation - If the aforesaid Insolvency Resolution Process fails or financial creditors decide to wind up, the assets of the corporate debtor are distributed.

4. Changein the priority waterfall of distribution of liquidation proceeds: IBC has changed the priority waterfall of creditors at the time of distribution of assets after liquidation of a corporate debtor.The priority waterfall is now as follows:
   
   • Insolvency resolution cost and liquidation cost;
     
   • Debts owed to secured creditor (who have relinquished their security interest) and workmens’ dues (for 24 months before commencement);
     
   • Wages and unpaid dues to employees (other than workmen) (for 12 months before commencement);
     
   • Financial debts owed to unsecured creditors and workmen’s dues for earlier period;
     
   • Amounts to the Central and the State Government and debts to secured creditor following enforcement of security interest;
     
   • Remaining debts;
     
   • Preference shareholders and
     
   • Equity shareholders or partners.

5. Adjudicating Authorities for insolvency: The adjudicating authority for corporate insolvency and liquidation is the National Company Law Tribunal, from which the appeals lie in the National Company Law Appellate Tribunal and thereafter go the Supreme Court of India. For individuals and other persons, the adjudicating authority is the Debt Recovery Tribunal (DRT) from which the appeals lie to the Debt Recovery Appellate Tribunal and thereafter go the Supreme Court. IBC separates commercial aspects of the insolvency proceedings from judicial aspects and therefore the role of adjudicating authorities is limited to ensuring due process and they are now given the power to adjudicate on the merits of the insolvency resolution.
6. Insolvency regulator,Insolvency Resolution Professionals, Information Utilities: IBC provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). The role of the Board is mainly to oversee the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities (explained below) and to regulate the insolvency process. IBC also provides for Insolvency Professionals who are private intermediaries and deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organising their meetings, examination of the claims of the creditors, runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan. IBC also creates the institution of ‘Information Utility’ which would store financial information and data and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.
7. Insolvency resolution process for partnerships and individuals: For individuals and unlimited partnerships, IBC becomes applicable in cases where the minimum default amount is INR 1000 and above (which the Government may later revise). IBC envisages two separate processes in case of insolvencies i.e. Automatic fresh start and insolvency resolution:
   
   • Under the automatic fresh start process, eligible debtors (basedon their gross income) can apply to the DRT for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh;
   • Under the insolvency resolution process the debtor prepares a repayment plan for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order.

8. Cross border insolvency: Given that many corporate transactions and businesses involve an international element, IBC provides that the Central government can enter into agreements with any country outside India for enforcing provisions of the Code and notify applicability of the same from time to time.
9. Miscellaneous: In addition, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. And also has provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.
   

MHCO COMMENT

IBC seeks to achieve certainty in the recovery and enforcement proceedings in insolvency cases and maythereforeresult in the growth of investments by Private Equity funds in India and the financial institutions increasing their exposure in Indian entities. It will help the failing business ventures to move on smoothly and rapidly and therefore is a systemic reform, which will give a quantum leap to the functioning of the credit market in India.

This update was released on 30 May 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.