Insolvency and Bankruptcy Code Bill, 2015


• The Insolvency and Bankruptcy Code, 2015 was introduced by the Minister of Finance, Mr. Arun Jaitley, in Lok Sabha on December 21, 2015.  The Code seeks to create a unified framework for resolving insolvency and bankruptcy in India.  Insolvency is a situation where individuals or organizations are unable to meet their financial obligations.

• The Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.  In addition, it seeks to amend 11 laws, 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.

• Bankruptcy and Insolvency Adjudicators: The Code proposes two separate tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law: (i) the National Company Law Tribunal will have jurisdiction over companies and limited liability partnerships, and (ii) the Debt Recovery Tribunal will have jurisdiction over individuals and partnership firms.  Appeals against orders of these tribunals may be challenged before their respective Appellate Tribunals, and further before the Supreme Court.

• Insolvency regulator: The Code seeks to establish the Insolvency and Bankruptcy Board of India, to oversee insolvency resolution in the country.  The Board will have 10 members, including representatives from the central government and Reserve Bank of India.  It will register information utilities, insolvency professionals and insolvency professional agencies under it, and regulate their functioning. 

• Insolvency and Bankruptcy Fund: 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.

• Offences and penalties: The Bill specifies that for most offences committed by a debtor under corporate insolvency (like concealing property, defrauding creditors, etc.), the penalty will imprisonment invite of up to five years, with a fine of up to one crore rupees.  For offences committed by an individual (like providing false information), the imprisonment will vary based on the offence.  For most of these offences, the fine will not exceed five lakh rupees.

• Insolvency Resolution: The insolvency resolution process (IRP) for individuals varies from that of companies.  These processes may be initiated by either the debtor or the creditors.

• Resolution process for companies and limited liability partnerships: The resolution process will have to be completed within a maximum period of 180 days from the date of registration of the case.  This period may be extended by 90 days if 75% of the financial creditors agree.  The process will involve negotiations between the debtor and creditors to draft a resolution plan.

• The process will end under two circumstances, (i) when a resolution plan is agreed upon by a majority of the creditors and submitted to the adjudicating authority, or (ii) the time period for negotiation has come to an end.  In case a plan cannot be negotiated upon, the company will go into liquidation.

• There will be provision for a fast track insolvency resolution process for companies with smaller operations.  The process will have to be completed within 90 days, which may be extended if 75% of financial creditors agree.

• In case of insolvency resolution, negotiations between the debtor and creditors will be supervised by an insolvency professional.  If negotiations succeed, a repayment plan, agreed upon by a majority of the creditors, will be submitted to the adjudicator.  If they fail, the matter will proceed to bankruptcy resolution.

• Insolvency professionals and agencies: The IRP will be managed by a licensed professional.  The professional will also control the assets of the debtor during the process.  The Code also proposes to set up insolvency professional agencies.  These agencies will admit insolvency professionals as members and develop a code of conduct and evolve performance standards for them.

Why does India need a Bankruptcy law?

• India is ranked 136 out of 189 countries in resolving insolvency in doing business 2016 report.

• On an average a secured creditor in India recovers 25.7% for every $ of credit from an insolvent firm which takes 4.3 years for proceedings to conclude in comparison in OECD countries creditors recover 72.3 cents and the process takes just 1.7 years to conclude.

• At present, in India there are multiple laws and bodies dealing with insolvencies which leads to over lapping of jurisdiction and confusion. Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Other laws which deal with the issue include SICA (Sick Industrial Companies Act), 1985, Recovery of Debt Due to Banks and Financial Institutions Act, 1993, SARFAESI (Securitisation and Reconsutriction of Financial Asseets and Enforcement of Security Interest) Act, 2002 and Companies Act, 2013. 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. 

• Current environment in India leads to delays in making decision on viability of business ,also number of tactics are employed by company promoters to delay reorganization or selling of assets, the cost of delay due to change in management are serious on jobs and economic growth. Though India has Corporate Debt Restructuring Scheme and Sick Industrial Companies Act, but they are hardly implemented.

• Delaying a decision on whether to shut a firm or to try reviving it causes destruction of values for all the parties involved.

• For  banks, money recovered from quick disposal of sick companies could be lent again, which will not only decrease the NPA but will also promote efficient allocation of resources besides development of financial market such as bond market with clarity on repayment of debt.

• A swift and efficient insolvency law would ensure great availability of credit or funds for business by freeing up capital and would increase innovation & productivity.

• Bankruptcy law will focus on speedy closure and will help firms on the brink to be either restructured or sold off in limited time and limited pain.

Challenges faced by new bankruptcy code bill:

• Time bound disposal as mandated by the new code is very difficult to achieve as seen from the Debt recovery tribunal experience which has to dispose case within 6 months but has failed to do so.

• The code must be supported by larger legal system to prevent resolution and liquidation plans from being stalled by unending series of appeals.

• Bankruptcy code proposal must address existing shortage of liquidators, since final law won't be effective till already over-worked adjudicating authorities are provided with additional resources.