THE INSOLVENCY AND BANKRUPTCY CODE, 2016

I.            Object of the Act:

An act to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

The Act deals with insolvency of the following persons:

·         Corporate Persons i.e companies

·         Partnership Firms

·         Individuals

II.         Institutions Established under the Act:

1.   The Insolvency and Bankruptcy Board of India:

2.   Insolvency Professionals

3.   Insolvency Professional Agencies

4.   Information Utility.

     

     (a )The Insolvency and Bankruptcy Board of India:

·         It is a body corporate, having perpetual succession and common seal. It has power to enter contract and to sue and to be sued.

·         It consists of a chairman and  members

·         Its functions are as follows:

-          Register insolvency professional agencies, insolvency professionals and information utility

-          Specify eligibility professionals, monitor performance of insolvency professionals

-          Make regulations and guideline on the matter relating to implementation of the code

     (b)  Insolvency Professionals:

·         Any degree holder, if he passes the exam conducted by Insolvency and Bankruptcy Board of India can register himself as Insolvency Professional. (yet to come)

·         Any Cost Accountant, Chartered Accountant and an advocate having 10 years post qualification experience, may attend limited insolvency professional exam and register as insolvency professional

·         Any Cost Accountant, Chartered Accountant and an advocate having 15 years post qualification experience, may attend limited insolvency professional exam and register as insolvency professional for a limited period of six months. (No Exam). Validity expires after six month from the date of registration.

       (c ) Insolvency Professional Agency:

It is a regulatory body wherein insolvency professional has to register themselves after qualifying exam conducted by Insolvency and Bankruptcy Board of India. As on date, Institute of Company Secretary of India, ICAI has floated the Insolvency Professional Agencies

(d)       INFORMATION UTILITY;

Since there were considerable amount times spent in earlier statutes to prove default, an information utility agency was created under the Code to be in charge of collecting and disseminating financial information and business information. The information received from information utility (like CIBIL) would be considered as conclusive proof of default.

III.       ADJUDICATION AUTHORITIES:

Corporate Persons : National Company Law Tribunal

Appeal : Appeal against the orders of NCLT with National Company Law Appellate Tribunal and then appeal would be before Supreme Court.

Individuals and Partnership Firms : Debt Recovery Tribunal

Appeal against the orders of DRT will be before DRAT and the orders of DRAT will be challenged before Supreme Court.

IV.        INITIATION OF INSOLVENCY PROCESS:

Pecuniary Limit of default required for initiation of insolvency process before Adjudication Authority:

Corporate Persons:  Default should be Rs 1 lacs

Individuals and Partnership Firms: Rs 1000

V.           WHO CAN INITIATE INSOLVENCY PROCESS IN CORPORATE PERSONS (COMPANIES):

-          Financials Creditors – like Banks, NBFC.,etc

-          Operational Creditors – Those creditors supplied goods, raw materials  and services to the company. 

-          Corporate Persons himself

VI.        IMPORTANT PROCESS UNDER INSOLVENCY OF CORPORATE PERSONS:

(i)         BY FINANCIAL CREDITOR:

• Financial Creditor, jointly with other financial creditor may file an application for initiating corporate insolvency resolution process against corporate debtor before National Company Law Tribunal
• Within 14 days, NCLT determines the existence of default
• IF there is no default, application will be dismissed
• If there is a default, the application is complete and the following steps occur:

-          Declaration of Moratorium and Public Announcement. Once Moratorium begins all the proceedings against the company, by the company will come to stand still including SARFAESI and DRT proceedings.

-          Public Announcement of Corporate Insolvency Resolution Process

-          Insolvency Professional will be appointed by Adjudicating Authority. IP would take over the company and run the company till resolution plan made. 

• Insolvency Professional shall do the following :

-          Constitute the Committee of Creditors

-          COC has power to change the Insolvency Professional

-          Preparation of Information Memorandum ( information of company assets and viability of restructure)

-          Submission of Resolution Plan by Resolutions Professional in consultation of Committee of Creditors, Directors, ..etc (Whether restructure is possible or not )

-          Approval of Resolution Plan will be approved by NCLT

• IF NCLT did not approve Resolution Plan within 180 days and further 90 days can be extended, Company will go in for liquidation process.
• Insolvency Professional shall not take any of the following actions without prior approval of the COC in the moratorium period:

-          (a) Raise any interim finance in excess of the amount as may be decided by the committee

-          (b) create any security interest over the assets of the corporate debtor

-          ( c) change the capital structure  

-          (d) record any change in the ownership interest of the corporate debtor.

-          (e) give instruction to financial institutions maintaining accounts of the corporate debtor for a debt transaction from any such accounts in excess of the amount as may be decided by the COC  in their meeting

-          (f) undertake any related party transaction

-          g) amend any constitutional documents of the corporate debtor

-          h) delegate its authority to any other person

-          i) dispose of  or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third party

-          j) make any change in the management of the corporate debtor or its subsidiary

-          k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business

-          l) make changes in the appointment or terms of contract of such personnel specified by the COC.

-          m) make changes in the appointment or terms of contract of statutory auditors, internal auditors of the corporate debtor.

-          To obtain approval to do the above IP should convene a meeting of COC where in 75% of creditors having voting share should approve the same.  Action of IP without approval of COC  is void and COC can report to the Board for action against IP.

II)        Corporate Insolvency Resolution Process By Operational Creditor:

Operational Creditor on occurrence of event default, a demand notice has to be sent demanding invoice amount

If the Corporate Debtor after receiving notice , did not pay the amount within 10 days, Operational Creditor can file application for insolvency against the defaulting corporate debtor.

iii)         LIQUIDATION PROCESS FOR CORPORATE DEBTOR:

On the following grounds Adjudication Authority (NCLT) can pass an order of liquidation process:

·         Resolution Plan is not received with the time (i.e 180 days + 90 days)

·         Resolution Plan so proposed is rejected

·         Committee of Creditors through Resolution Professional inform the NCLT for liquidation

·         Resolution Plan approved by NCLT is contravened by the Corporate Debor.

iv)          Appointment of Liquidator:

Once NCLT passes order for liquidation Resolution Professional appointed earlier may appointed as Official Liquidatior. ( Creditors can change the Resolution Professional through an application). Liquidator will consolidate estate and call for claims. After sale of assets, will be distributed by liquidator as per the priority prescribed under the Code. 

VII.      IMPORTANT PROCESS UNDER INSOLVENCY OF INDIVIDUALS AND PARTNERSHIP FIRMS :

( Rules and provisions yet to be notified)

FRESH START PROCESS :

                   It is like loan waiver scheme.  An debtor can file an application before DRT for fresh start.  Once he files application, interim moratorium will begin, a resolution professional will be appointed and he will examine the application and will file his report.  Adjudication Authority, ie Debt Recovery Tribunal will pass an order of discharge  of the debt to fresh start or reject the application.

Eligibility to file Fresh Start Process:

• Gross Annual Income does not exceed  Rs 60000/-
• Aggregate Value of Assets does not exceed Rs 20000/- but does not include excluded assets
• Aggregate qualifying debt does not exceed Rs 35000/- but it does not include excluded debt, debt to the extent it is secured, debt which has been incurred 3 months prior to the date of application. 

Excluded Asset : (i) Unencumbered tools, vehicles and other equipments for his personal use or for the purpose of his employment, business or vocation

(ii)         Unencumbered furniture,

(iii)        Unencumbered LIC Policy, Pension Plan

(iv)       Unencumbered signle dwelling unit owned by the debtor

Excluded Debt:

• Liability to pay maintenance
• Liability in student loan and any other to be prescribed