A transformation in the Indian
Economic reform with the passing of the Insolvency and Bankruptcy Code 2016 (hereinafter
referred as ‘Code’) with regard to the functioning of the credit market in
India. This shall provide a big boost to Ease of doing business in India. The
law has been enacted with a vision to encourage entrepreneurship and innovation
which will further boost the startups in India. This is an another government
initiative to enhance the startups in India.
The code is a comprehensive and
systematic reform which shall give a significant increase in the functioning of
the credit market in India and would take the country from among relatively
weak insolvency regimes to becoming one of the world's best insolvency regimes.
The Insolvency and Bankruptcy Code
2015 was introduced by the Finance Minister in Lok Sabha in December 2015 and
was subsequently referred to Joint Committee of
Parliament. Thereafter the
committee submitted its recommendations and the modified code was accordingly
passed in the Lok Sabha on May 5, 2016. The code creates a framework for resolving
insolvency in India. Insolvency is a situation where an individual or a company
is unable to repay the outstanding debt.
The Code repeals the Presidency
Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it
11 laws, including the Companies
Act, 2013, and the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993, among others.
Insolvency and Bankruptcy Code 2016 – A brief
The Insolvency and Bankruptcy Code
2016 has been enacted to consolidate and amend the laws relating to
reoganisation and insolvency resolution of corporate persons, partnership firms
and individuals in a time bound manner for maximization of value of assets of
such persons, to promote entrepreneurship, availability of credit and balance
the interests of all the stakeholders including alteration in the order of
priority of payment of Government dues and to establish an Insolvency and
Bankruptcy Board of India, and for matters connected therewith or incidental
- Any company incorporated under the
Companies Act, 2013 or under any previous company law.
- Any other company governed by any
special Act for the time being in force.
- Limited Liability Partnership
incorporated under the Limited Liability Partnership Act, 2008.
- Any other body incorporated under
any law for the time being in force, as the Central Government may, by
notification, specify in this behalf.
- Partnership firms and individuals.
The objective of the code is to
promote entrepreneurship, availability of credit, and balance the interests of
all stakeholders by consolidating and amending the laws relating to
reorganization and insolvency resolution of corporate persons, partnership
firms and individuals in a time bound manner and for maximization of value of
assets of such persons and matters connected therewith or incidental thereto.
The law strives to consolidate the
laws relating to insolvency of companies and limited liability entities
(including limited liability partnerships and other entities with limited
liability), unlimited liability partnerships and individuals, presently
contained in a number of legislations, into a single legislation. Such
consolidation will provide for a greater clarity in law and facilitate the
application of consistent and coherent provisions to different stakeholders affected
by business failure or inability to pay debt.
Setting up of the
The code proposes the setting up
of new entity, the Insolvency and Bankruptcy Board of India, which will
regulate insolvency professionals and information companies – those which will
store all the credit information of corporates.
Further, the code proposes two
authorities to deal with insolvency – The National Company Law Tribunal will
adjudicate cases for companies and Limited Liability Partnerships and the Debt
Recovery Tribunal will do the same for individual and partnership firms.
Salient features of
Insolvency Resolution Process –
the code specifies similar insolvency resolution processes for companies and
individuals, which will have to be completed within 180 days. This limit may
extend to 270 days in certain circumstances. The resolution process will
involve negotiations between the debtor and creditors to draft a resolution
Fresh Start process – the code
provides a fresh start process for individuals under which they will be
eligible for a debt waiver of up to Rs. 35,000/-. The individual will be
eligible for the waiver subject to certain limits prescribed under the code.
Insolvency professionals and
agencies – the resolution process will be conducted by a licensed insolvency
professional (IP). The IP will control the assets of the debtor during the
process. Insolvency professional agencies will be created to regulate these
IPs. The agencies will conduct examinations to enroll IPs and enforce a code of
conduct for their functioning.
Information utilities – the code
establishes multiple information utilities to collect, collate and disseminate
financial information related to a debtor. This will include a record of debt
and liabilities of the debtor.
Insolvency and Bankruptcy Fund –
the code creates an Insolvency and Bankruptcy Fund. The Fund will receive
voluntary contributions from any person. In case of insolvency proceedings
being initiated against the contributor, he will be allowed to withdraw his
contribution for making payments to workmen, protecting his assets, etc.
Cross border insolvency – cross
border insolvency relates to an insolvent debtor who has assets abroad. The
Central Government may enter into agreements with other countries to enforce
provisions of the code.
Offences – the code specifies
penalties for offences committed under corporate insolvency (such as concealing
property). This penalty will be imprisonment of up to five years, or a fine of
up to one crore rupees or both. For offences committed under individual
insolvency (such as providing false information), the imprisonment will vary
based on the offence. For most of the offences, the penalty will be
imprisonment of up to six months, or a fine up to five lakh rupees or both.
Implication of the Code
The essential idea of the new law
is that when a firm defaults on its debt, control shifts from the
shareholders/promoters to a Committee of Creditors, who have 180 days in which
to evaluate proposals from various players about reviving the Company or taking
into liquidation. When decisions are taken in a time – bound manner, there is a
greater chance that the firm can be saved as a going concern, and the
productive resources of the economy (the labour and the capital) can be put to
the best use. This is complete departure with the experience under SICA regime
where there were delays leading to destruction of the value of the firm. Thus
giving more power in the hands of Creditors.
Further, the law strives towards
the entrepreneurship and innovation. It is seen that some business ventures
will fail, but with the new law in force they will be handled rapidly and
swiftly. Entrepreneurs and lenders will be able to move on, instead of being
bogged down with decisions taken in the past. The Code empowers the operational
creditors (workmen, suppliers etc.) also to initiate the insolvency resolution
process upon non-payment of dues. The Code lays down the foundations for the
development of the Corporate bond market, which would finance the
infrastructure projects of the future.