An easy understanding of The Insolvency & Bankruptcy code 2016
By: – CA.VINOD CHAURASIA
Goods and Services Tax – GST
Dated:- 23-10-2017
An easy understanding of The Insolvency & Bankruptcy code 2016
Introduction: The Insolvency and Bankruptcy Code, 2016 (the “Code”) passed by the Lok Sabha on 5th May 2016 seeks to provide a framework for time-bound settlement of insolvency by formulating a survival mechanism or by ensuring speedy liquidation through a formal insolvency resolution process (“IRP”).
According to World Bank data, the average amount of time required to resolve insolvency is just over 4 years in India.
The proposed law aims to increase confidence for creditors in the Indian market.
The past regime
The Code has amended the existing laws governing bankruptcy and liquidation in India which inter alia include the Companies Act, 2013, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industria
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uthorities
The Debt Recovery Tribunals (“DRTs”) will adjudicate the insolvency resolution process (IRP) of individuals and partnership firms.
Any person aggrieved by the order of DRT may appeal to the Debt Recovery Appellate Tribunal (DRAT).
The National Company Law Tribunal (the “NCLT”) have jurisdiction over the corporate insolvency resolution process (CIRP) for companies and Limited Liability Partnerships.
Any person aggrieved by the order of the NCLT may appeal to NCLAT within 30 days of the order.
An appeal from the order of the respective appellate tribunals may be filed before the Supreme Court of India.
The insolvency resolution process
The Code provides for separate IRPs for individuals and companies.
The insolvency resolution process can be initiated by either debtors, or creditors.
Individuals
In case of individuals, the Code provides for two different methods for solving disputes, namely:
• a fresh start; and
• insolvency resolution process (IRP).
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ng authority.
If such adjudicating authority is satisfied, it shall by order approve the plan, which shall then be binding or it may reject the plan.
Liquidation can be initiated, inter alia in the following cases:
• on the expiry of maximum period permitted for IRP;
• on rejection of the resolution plan by the adjudicating authority; or
• in the event a committee of creditors decide to liquidate.
If the process cannot be resolved within the 180-day period mentioned above (or as extended) the assets of the company may be sold to repay the creditors.
The Code further makes provision for a fast track insolvency process for companies with smaller operations.
The process will have to be completed within 90 days from the insolvency commencement date unless extended for a further period of 45 days with the approval of 75% of creditors.
Liquidation
In relation to corporate entities, the Code provides for an order of priority for distribution of assets during liquidat
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ions
The Code provides for treatment of preferential transactions and transactions that are undervalued in nature.
In case of undervalued transactions, the adjudicating authority may declare such transactions to be void and reverse the effect of such transactions.
Penalties
The Code provides penalties for offences committed by a corporate entity under corporate insolvency.
Officers of the company can be penalized for not declaring assets and property owned by it or for willfully concealing any property.
In such cases, the officer shall be penalized with imprisonment of up to 5 (five) years or with a fine of up to INR 1 crore or both. However, he shall not be punished if it is proved that he had no intent to defraud.
The Code also penalizes individuals for offences including the provision of incorrect information and the punishment will vary based on the offence committed by an individual.
For the majority of the offences, the fine is specified to be up to INR 500000 or impri
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filed within 3 (three) months from the date the order sanctioning bankruptcy is passed by the adjudicating authority.
Conclusion
The Code intends to rationalize the processes and procedures for bankruptcy and insolvency and improve the recovery rates of debt and increase creditor confidence in India.
It should hopefully go some way to address the rights of lenders to enforce security in a distress situation and bring down the rate of non-performing loans.
However, it should be noted that the orders from the NCLT and the DRT could be further challenged before the respective appellate tribunals and then before the Supreme Court of India.
Much work will need to be done to make the work of IPs coherent under the regulatory authority of the Board.
Arguably, the penalties for not declaring assets are not stringent enough (and we assume that those penalties will fall under the amounts owed to the government in the insolvency waterfall).
Generally, the provisions for appeals could prov
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