INSOLVENCY AND BANKRUPTCY

CODE, 2016

Shreya Suri
Trupti Katale
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OVERVIEW
Introduction

Salient Features of the Code

Four Pillars of the Institutional Infrastructure of the Code

Who can file for Corporate Insolvency Resolution

Insolvency Resolution Process

Liquidation

Adjudicating Authorities

Penalties

Conclusion
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INTRODUCTION
Genesis:

Inefficient enforcement and court delays

Presence of multiple frameworks (Debt Recovery Tribunal, Corporate Debt

Restructuring, etc.)

Lack of adequate and credible data regarding assets, indebtedness and

security situation of companies

The Insolvency and Bankruptcy Code, 2016 (the Code) was passed
by the Rajya Sabha on 11th May, 2016 and received the Presidents
assent on 28th May, 2016.

Repeals:

Presidency Towns Insolvency Act, 1909

Provincial Insolvency Act, 1920

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INTRODUCTION
Amends:

Companies Act, 2013

Securitization and Reconstruction of Financial Assets and Enforcement of

Security InterestAct, 2002

Sick Industrial Companies Act, 1985

Recovery of Debt Due to Banks and Financial Institutions Act, 1993

Objectives:

promote entrepreneurship and availability of credit

balance the interests of all stakeholders

consolidating the laws relating to reorganization and insolvency resolution

of corporate persons, partnership firms and individuals
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SALIENT FEATURES OF THE CODE

Clear, coherent and speedy process for early identification of financial

distress and resolution of companies and limited liability entities if the
underlying business is found to be viable.

Two distinct processes for resolution of individuals, namely- Fresh

Start and Insolvency Resolution.

Minimum default amount is INR 1,000 and above

Also applies in the case of unlimited partnerships

The Code makes a distinction between creditors holding Financial

Debt (debt extended against consideration for the time value of
money) and creditors holding Operational Debt (debt incurred in
exchange for the provision of goods or services or debt in respect of
payment of dues arising under any law payable to the Central
Government or any State Government or any regulator).

SALIENT FEATURES OF THE CODE

The Code provides for an automatic moratorium of 180 days against

any debt recovery actions by the creditors.

The Liquidator has been provided with rights to cancel certain

transactions of preferential nature entered into to benefit a creditor or
a set of creditors

The directors of a company can initiate voluntary liquidation of the

company upon filing a petition for the voluntary winding up along
with an affidavit of solvency ofthe company.

Debt Recovery Tribunal and National Company Law Tribunal to act as

Adjudicating Authority and deal with the cases related to insolvency,
liquidation and bankruptcy process in respect of individuals and
unlimited partnership firms and in respect of companies and limited
liabilities entities respectively.
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SALIENT FEATURES OF THE CODE

Establishment of an Insolvency and Bankruptcy Board of India to

exercise regulatory oversight over insolvency professionals,
insolvency professional agencies and information utilities.

Insolvency professionals (IPs) would handle the commercial

aspects of insolvency resolution process. Insolvency professional
agencies (IPAs) will develop professional standards, code of ethics
and be first level regulator for insolvency professionals members
leading to development of a competitive industry for such
professionals.

Information utilities would collect, collate, authenticate and

disseminate financial information to be used in insolvency, liquidation
and bankruptcy proceedings.

Enabling provisions to deal with cross border insolvency.

FOUR PILLARS OF THE INSTITUTIONAL

INFRASTRUCTURE OF THE CODE

INSOLVENCY PROFESSIONALS

INFORMATION UTILITIES

ADJUDICATING AUTHORITIES

THE INSOLVENCY AND BANKRUPTCY BOARD OF INDIA

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WHO CAN FILE FOR CORPORATE INSOLVENCY

RESOLUTION
Financial Creditor

Person to whom Financial Debt is owed

Includes a person to whom such debt may have been legally assigned or
transferred in accordance with law

Operational Creditor

Person to whom Operational Debt is owed

Includes a person to whom such debt may have been legally assigned or
transferred in accordance with law

Corporate Debtor

Shareholder of the entity

Individual who is in charge of managing the overall operations
A person who has the control, supervision or oversight of the financial
affairs of the corporate debtor
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INSOLVENCY RESOLUTION PROCESS
The Code provides for separate Insolvency Resolution Processes
(IRPs) for individuals and corporate entities (companies or
limited liability partnerships)

A resolution process can be initiated by either debtors or creditors

Under the Code, in case of insolvency and liquidation of corporate

entities, a minimum default of INR 1 (one) lakh should have
occurred

The Code prescribes a limit of 180 days from the date of

admission of the application within which the IRP should be
completed

During the IRP, a moratorium is declared, forcing creditors to act

through an IP

A resolution applicant (debtors or creditors) may submit a

resolution plan to an IP and the same shall be approved only if
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INSOLVENCY RESOLUTION PROCESS

Once approved the IP shall submit the resolution plan to the

adjudicating authority

The resolution plan which shall be binding only if the adjudicating

authority approves such plan

Liquidation will be triggered in case the plan is rejected by the

adjudicating authority

The Code further makes provision for a fast track insolvency

process for companies with smaller operations

The fast track process will have to be completed within 90 days

from the insolvency commencement date
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LIQUIDATION

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

when a committee of creditors decide to liquidate, or

where the resolution plan approved by the adjudicating

authority is contravened by the corporate debtor

The Code provides for an order of priority for the distribution of

assets during a liquidation set out as follows
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LIQUIDATION
Insolvency resolution costs

Workmans dues and secured creditors (ranking equally)

Wages and unpaid dues to employees

Financial debts owed to unsecured creditors

Amounts due to government ranking equally with debts due to

a secured creditor for any amount unpaid following the
enforcement of security

Remaining debts and dues

Preference shareholders

Equity shareholders
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ADJUDICATING AUTHORITIES

The Debt Recovery Tribunals (DRTs) will adjudicate the IRPs of

individuals and partnership firms

Any person aggrieved by the order of DRT may appeal to the Debt
Recovery Appellate Tribunal

The National Company Law Tribunal (the NCLT) will have

jurisdiction over the IRPs for Companies and Limited Liability
Partnerships

Any person aggrieved by the order of the NCLT may appeal within
30 days

An appeal from the order of the respective appellate tribunals may

be filed before the Supreme Court of India
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PENALTIES

Officers of the company can be penalized for not declaring assets

and property owned by it or willfully concealing any property

In such cases, the officer shall be penalized with imprisonment of

up to 5 (five) years, with a fine of up to INR ten (10) million

However, he shall not be punished if he proves 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 will be up to INR 500,000
or imprisonment for up to 1 year or both
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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.

Much work will need to be done to make the work of IPs coherent.
Arguably, the penalties for not declaring assets are not stringent
enough.

The provisions for appeals and the lack of clarity on issues like
payments to creditors on liquidation could prove to be a set-back
for effective implementation of a scheme for insolvency disputes.

It remains to be seen to what extent IPs can essentially take

control over distressed assets and sideline promoters of
companies in default scenarios.
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THANK YOU