Preface

India did not have a single bankruptcy code. What we had were age-old laws which are
in conflict with each other. Lack of an insolvency and bankruptcy code had proved costly
for the creditors (mainly banks) in many cases like the recent Kingfisher Airlines case.
The Insolvency and Bankruptcy Code seeks to create a unified framework to resolve
insolvency and bankruptcy in India.

The laws relating to insolvencies and bankruptcies in

the earlier centuries were framed for penalizing the
defaulting debtors and in the most of the cases with
imprisonment. As the historical aspects relating to
insolvencies evidences that the European insolvency
framework, started in the 15th century was the
preliminary base for countries that had developed
insolvency framework in the subsequent centuries.
There has been revamping shift in the global
regulatory framework towards corporate insolvency.
The principal focus of modern insolvency legislation
and business debt restructuring practices are not
liquidation and elimination of insolvent entities but on
the remodeling of the financial and organizational
structure of debtors experiencing financial distress so
as to permit the rehabilitation and continuation of
their business. Indeed, Chapter 11 of US Bankruptcy
Code is considered to be one of the best insolvency
frameworks in the global platform. Companies Act
2013 also facilitates rehabilitation of debtor instead of
winding up. If the rehabilitation is not possible it
enables effective winding up of companies in time
bound manner through single regulator National
Company Law Tribunal. The whole exercise of
rehabilitation and liquidation are done in time bound
manner through single forum, National Company
Law Tribunal.
The Code covers insolvency, liquidation, voluntary liquidation and bankruptcy. The bill
makes it easier for weak companies to exit or restructure their businesses. The code
seeks to amend 11 laws, including the Companies Act, 2013 and the Sick Industrial
Companies (Special Provisions) Repeal Act, 2003.

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India
which seeks to consolidate the existing framework by creating a single law for
insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was
introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May
2016. The Code received the assent of the President of India on 28 May 2016.
Certain provisions of the Act has come into force from 5 August and 19 August
2016.

India had numerous acts in place to punish the defaulters like the Indian Contract
Act, the Recovery of debts due to Banks and Financial Institution Act 1993, the
Securitizations and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act,
1985 (SICA). The Government decided to replace the existing insolvency laws with
new stringent laws which would take care of the existing defaulters in a time
bound manner.

The proposed bankruptcy legislation seeks to address the issues faced currently
in the context of insolvency and winding up. The provisions of the Code are
applicable to companies, limited liability entities, firms and individuals (i.e. all
entities other than financial service providers).

After passing the bankruptcy code in Parliament for time-bound settlement of

insolvency cases in non-financial firms, the finance ministry has released a draft
bill to set up a resolution corporation to address similar issues among financial
firms.

To quote the Finance Minister Mr. Arun Jaitley” “A systemic vacuum exists with
regard to bankruptcy situations in financial firms. This code will provide a
specialized resolution mechanism to deal with bankruptcy situations in banks,
insurance firms and financial sector entities. This code, together with the
Insolvency and Bankruptcy Code 2015, when enacted, will provide a
comprehensive resolution mechanism for our economy,” Unquote.

The proposed legislation will not only improve the ease of doing business in India,
but also facilitate a better and faster debt recovery mechanism. It is widely
believed that this legislation, when implemented in letter and spirit, will change the
negative perception of NPAs, recovery and litigation associated with India.

The new bankruptcy law will be a useful tool for international creditors and
investors from the perspective of PE funds continuing to grow their investments in
India

According to the World Bank’s Ease of Doing Business report, it takes more than
four years on an average to resolve insolvency in India. The proposed insolvency
and bankruptcy law seeks to cut down the time to less than a year. This will not
only improve the ease of doing business in India, but also facilitate a better and
faster debt recovery mechanism in the country. It is widely believed that this
legislation will change the negative perception of recovery and litigation
associated with India.

The Government has formulated a plan to refurbish the prevailing bankruptcy laws
and replace them with one that will facilitate stress-free and time-bound closure of
businesses. The draft legislation, since the report issued in November 2015 by a
panel headed by former law secretary Mr. T.K. Viswanathan, has gone through
various changes, including changes recommended by the Joint Parliamentary
Committee in April 2016. The Insolvency and Bankruptcy Code, 2016 (“Code”) has
now been passed by the Lok Sabha and the Rajya Sabha.

Insolvency is when an individual, corporation, or other organization cannot

meet its financial obligations for
paying debts as they are due. Bankruptcy is not exactly the same as insolvency.
Technically, bankruptcy
occurs when a court has determined insolvency, and given legal orders for it to
be resolved. Bankruptcy is a
determination of insolvency made by a court of law with resulting legal orders
intended to resolve the
insolvency. Insolvency describes a situation where the debtor is unable to meet
his/her obligations.
Bankruptcy is a legal scheme in which an insolvent debtor seeks relief.