Insolvency Law Expectations and Reality

Aim of the code

 

The Insolvency and Bankruptcy Code, 2016 applies to both the individuals and the companies. The Code helps in resolving the insolvency by providing with a time-bound process. In case there is a default in the repayment, the creditors are required to take decisions to resolve insolvency within a period of 180 days once they have taken control over debtor’s assets. The debtors are provided with immunity from the Code, for the purpose of resolutions claims of the creditors. This ensures an uninterrupted resolution process. In order to resolve insolvency, a common forum for all classes of debtors and creditors is formed by the code to provide provisions of the current legislative framework. [1]

The main criteria to enact the law of insolvency as a social legislation is to safeguard the interests of honest debtors and assist them in case of any unfortunate circumstances due to which it becomes difficult for them to pay back their debts.

Insolvency Laws for Individuals and Corporate:

The insolvency and bankruptcy of an individual and a corporate person is governed under two major laws:

  1. Presidency Towns Insolvency Act, 1909
  2. Provincial Insolvency Act, 1920

These two major enactments, The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency Act, 1920 provides parallel provisions to deal with the concept of personal insolvency. Although the fundamentals of both the enactments are very similar to each other yet they are different from each other in respect of their territorial jurisdiction. Presidency towns such as Kolkata, Mumbai and Chennai are covered under the Presidency Towns Insolvency Act, 1909 while Provincial Insolvency Act, 1920 applies to all the rest of India. However, these two acts are still applicable to individuals as well as to sole proprietorships and partnership firms.[2]

 

Insolvency resolutions under the Code

Various institutions are created by the code in order to facilitate the resolution of insolvency such as:

  1. Insolvency professionals- A team comprising of specialized licensed professionals to be created in order to administer the resolution process, manage the debtor’s assets, provide relevant information to the creditors and assist them in decision making.
  2. Insolvency professional agencies- The insolvency professional agencies will register the insolvency professionals so that they can certify the insolvency professionals on the basis of the examinations conducted by them and enforce a code of conduct for their performance.
  3. Information utilities- The financial information report of the debt owed by the debtor is to be reported by the creditors. The information will include records of debts, defaults and liabilities.
  4. Adjudicating authorities- The national companies law tribunal (NCLT) will adjudicate the proceedings of the resolutions process for companies, and the Debt Recovery Tribunal (DRT) will do the same for the individuals. The authorities are obliged to perform certain duties such as approval to initiate the resolution process, approve the final decision of creditors and appoint the insolvency professionals.
  5. Insolvency and Bankruptcy Code- Insolvency professional agencies, insolvency professionals and information utilities set up under the code will be regulated by the board. Hence, the board will comprise of representatives of Reserve Bank Of India, corporate affairs and law and ministers of finance.[3]

Procedure to resolve insolvency in the code

Following steps are proposed by the court to resolve insolvency-

  1. Initiation- The resolution process is initiated by the creditor or debtor in case a default has occurred and the process is further administered by the insolvency professional. The professional basically acts as a mediator between the creditor and the debtor. The professional manage the debtor’s assets by providing financial information of the debtor from the information utilities to the creditor. Any legal action is prohibited against the debtor during a period of 180 days, till the whole process lasts.
  2. Decision to resolve insolvency- Insolvency professionals’ form a committee which consists of the financial creditors who had lent the money to the debtors. The creditors committee is therefore bound to take decisions regarding the future of outstanding debt owed to them. The debt owed to them can be revived either by liquidating the assets of the debtor, repaying the schedule or by repaying the debts owed to them. The debtor’s assets would be liquidated if no decision is taken within 180 days.
  3. Liquidation- it is the duty of an insolvent professional to administer the liquidation process the debtor goes into liquidation. Sale of the debtor’s assets are distributed in the following order of preference:
  • Costs of insolvency resolutions which includes the remuneration to the insolvency professional.
  • Secured creditors
  • Unsecured creditors
  • Dues to government
  • Priority shareholders
  • Equity shareholders.[4]

Pros and cons of the Insolvency and Bankruptcy Code

Owing to personal losses, business or company, any individual, firm or company can go bankrupt. An economic unit is unable to pay its debts and clear its liabilities once it becomes bankrupt. It becomes difficult to deal with this situation in case there is not enough clarity regarding the law. Under such circumstances, both the creditors as well as the company which goes bankrupt has to face heavy losses. Currently, there are enough laws to deal with the conditions of insolvency and bankruptcy out of which some are even 100 years old. The major reform in the bankruptcy law has been the new bankruptcy code bill that has been passed in the parliament under the guidance of BJP government. The ‘new bankruptcy code’ cleared its way to become the law after it was passed by both the houses of the parliament i.e. the upper house and lower house. The law would revoke the already existing laws i.e. Presidency Town Insolvency Act (1909) and Provisional Insolvency Act (1920) and amend many other laws such as the Companies Act, the Limited Liability Partnership Act, Securitisation Act etc. It is easy for the government to pass this bill as unlike other bills, the opposition parties did not have any arguments relating to this. As per the new bankruptcy code, creditors can easily take over the properties of the debtors in case he goes bankrupt. It further says that the action against a debtor can be taken within a time period of 180 days if 75% or more creditors give in their agreement. The person or firm will be declared insolvent automatically even if the debt is not paid. This simply implies that the new laws delays in recovery of loans through which the losses eventually come to an end. The companies and persons are required either repay the loan or declare themselves bankrupt in case they are not able to repay their loans in a prescribed time. An imprisonment of 5 years is given in case the debtor is found guilty of the misconduct. As per the new law, only a licensed professional can declare the process of bankruptcy and also the bankrupt fund needs to be created according to this law even though the law is still silent about how this fund would be used. However, there is no, one law which talks about how the bankruptcy action could be taken as stated by the the Joint Parliamentary Committee (JPC). Therefore, this attempts to focus on only one law instead of making several other laws. The JPC had made another observation that draft bill did not touched the overseas issues related to the bankruptcy. Therefore, legislation would not be complete if the overseas issues are left uncovered.  However, the suggestions given by the JPC could not be incorporated in the ‘New Bankruptcy Code’. Since the issues were complicated, the government stated that the laws would only be incorporated only after extensive discussions. As far as the issue of overseas assets of a bankruptcy is concerned, the government has come up with the idea of entering into agreements with foreign government to deal with the situation. In the year 2015-2016 there has been an increase in the quantum of stressed loans of bank by 7.3%. The labours are been taken immense care after the ‘New Bankruptcy Law’. In case a company goes bankrupt, the new code has several provisions which look after the salary of labours for a period of 2 years. However, it is necessary for the bankruptcy law to change with time as it is an important part of the financial system of a country. It is stated by few critics that the new law is incompetent to deal with the issues related to overseas bankruptcy. However, there is no provision given by the new law for balancing out between the Indian and foreign courts to deal with issues of insolvency and overseas. Critics also said that as per the new law, it will be difficult to attract talent in this as there would be excessive intervention by the government in respect of termination, appointment, insolvency and inspection. They feel that the new law highly favours the creditors while not looking into the problems faced by the debtors as there are not enough provisions to provide any solutions to the debtors. There have been several arguments regarding the inefficiency of the law to solve the problems of NPAs of banks as it will take a lot of time to implement the law. Therefore to meet up the situation of the present crisis of the banking system it is essential to take effective measures[5]

[1] https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know, last accessed on 24th June’19

[2] https://www.muds.co.in/insolvancy/, last accessed on 24th June’19

[3] https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know, last accessed on 24th June’19

[4] https://www.prsindia.org/theprsblog/first-session-17th-lok-sabha-what-expect, last accessed on 24th June’19

[5] https://www.thestatesman.com/opinion/pros-and-cons-of-bankruptcy-law-150116.html, last accessed on 24th June’19

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