THE INSOLVENCY AND BANKRUPTCY CODE

Introduction                             

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 5th May, 2016 and by Rajya Sabha on 11th May, 2016. The code received the assent of the President of India on 28th May, 2016.

The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. Applicability and a brief description about the insolvency resolution process for corporate entities.

Who does it apply to?

The IBC applies to the following:

• Any company incorporated under the companies act, 2013;
• Any other company incorporated by any special statute;
• Any limited liability partnership (“LLP”) firm registered under the limited liabilities partnership act, 2008;
• Any partnership registered under the partnership act, 1932;
• And any individual person.

When will an insolvency resolution process trigger?

An insolvency resolution process under the IBC can be initiated by any creditor in the event there is a minimum default of INR 1,00,00,000 (Rupees One Crores only) of such creditor’s debt by the debtor. Such an application can be filed by an operational creditor or a financial creditor before the National Company Law Tribunal (“NCLT”) of the relevant jurisdiction. The NCLT will consider the following elements before admitting such an application:

• Existence of a debt;
• Existence of default; and
• Notice of default (in the event the application is filed by an operational creditor).

An appeal from any order or judgment of the NCLT, within the time specified therein, will lie with the National Company Law Appellate Tribunal (“NCLAT”). Further, appeals from the NCLAT will lie with the Supreme Court.

A creditor, for the purposes of the IBC may be an operational creditor or a financial creditor. A debtor is any entity or an individual who owes any liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. If the debtor is either a company or an LLP, then such a debtor is referred to as a corporate debtor.

Default is defined as non-payment of debt when whole or any part or installment of the amount of debt has become due and payable but has not been repaid by the debtor.

Categories of creditors under the IBC:-

The IBC provides for 2 (two) main categories of creditors i.e.

• Financial creditors:-  A financial creditor is any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; A financial debt is a debt along with interest, if any, which is disbursed against the consideration for the time value of money (time value of money refers to the concept that money acquired sooner or held onto longer has a greater worth or potential worth due to the possible accumulation of interest or return on investment). The following is an indicative list of what may be considered as a financial debt.

1. Money borrowed against repayment of interest.
2. Any amount raised against any accepted credit facility.
3. Any amount raised pursuant to any-note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
4. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian accounting standards or such other accounting standards as may be prescribed;
5. Receivables sold or discounted other than any receivables sole or non-recourse basis.
6. Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
7. Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken inti- account; Any counter – indemnity obligation in respect of a guarantee, indemnity, bound, documentary letter of credit or any other instrument issued by a bank or financial institution;

Financial creditors may either be secured creditors or unsecured creditors. The main difference between secured and unsecured financial creditors is that in the event of liquidation and asset distribution proceedings, secured creditors are given a higher priority than unsecured creditors. Further, during the liquidation process, secured financial creditors are given the same priority of repayment as workmen and employee dues and are given a higher priority that other operational creditors, who are treated as unsecured creditors for the purposes of liquidation.

When compared to operational creditors, the procedure for financial creditors to initiate insolvency proceedings is a lot easier. The IBC allows financial creditors to make an application to the NCLT directly and such financial creditors will only need to show that there is a default. It is also important to note that only financial creditors constitute the committee of creditors, and no operational creditor can be part of this committee.

• Operational Creditors: The term operational creditor has been defined as any person to whom operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Operational debt has been defined in the IBC as a claim in respect of the provision of goods or services, including employment or debt in respect of the repayment of dues arising under any law for time being in force and payable to the Central Government, any State Government or any local authority.

The Supreme court, in the case of Mobilix Innovations Pvt. Ltd v. Kirusa Software Private Limited held that while determining if a dispute exists with the debtor with regards to the payment of any debt, the NCLT will be required to see only if there is a dispute and that the NCLT may not go into the merits of such dispute.

How does the corporate insolvency resolution process work?

During this process, the financial creditors investigate the corporate debtor to determine whether it is viable to continue its business. The creditors also come up with a plan to restructure the corporate debtor. The various steps involved in a CIRP are:

• Application to the NCLT: The creditor will need to file an application with the NCLT for initiating insolvency resolution proceedings. The NCLT shall be required to either accept or reject the application within 14 days of filing the application.

• Initiation of the insolvency process and suspension of management: Once the application has been accepted by the NCLT, the management of the debtor is suspended and the intermediate authority, appointed by the NCLT and referred to as the ‘interim insolvency resolution professional’ takes over the management of the corporate debtor. Further, as soon the application for CIRP is admitted by the NCLT, a moratorium takes effect on the corporate debtor, which prohibits the continuation or initiation of any legal proceedings against the debtor, the transfer of its assets, or the enforcement of any security interest.

• Appointment of the committee of creditors: The interim resolution professional investigates the claims made by the creditors and constitutes the committee of creditors within 30 days of the NCLT admitting the application for CIRP.

• Appointment of the resolution process: The committee of creditors then appoints an independent person as the resolution professional, referred to as the Insolvency Resolution Professional (“IRP”) to take over the management of the corporate debtor for the remainder of the CIRP.

• Approval of the resolution plan: Within 180 days of the initiation of the CIRP, the IRP is required to draw up a resolution plan for the revival of the corporate debtor. Such a plan needs to be approved by creditors holding at least 75% of the debt of the corporate debtor.

• Liquidation Process:  In the event that the CIRP fails, the financial creditors have the option to wind up the corporate debtor and liquidate and distribute its assets in the order of liquidation preference prescribed under the IBC.

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CONCLUSION:

The IBC has taken its first steps to regularize the insolvency process in India. However legislation has been ridden with controversies and speedy resolutions. It has also become a very important tool for banks to regularize multitudes of non-performing assets.