EVOLUTION OF INSOLVENCY AND BANKRUPTCY CODE, 2016

Commercial life of a Corporate Person or an Individual may not remain financially sound for ever. There are times when they may face financial stress. When a Corporate Person or an Individual goes through financial stress, an immediate intervention is required for resolution so that assets belonging to such persons can continue to remain productive resource for the society and the nation. When such efforts fail, then only a Corporate Person or an Individual should be pushed to liquidation or bankruptcy, as the case may be.  

Existing framework for resolution of Corporate Persons or Individuals was not sufficient. There was no comprehensive law for prompt resolution of financial affairs of Corporate Persons or Individuals in default resulting in increasing Non-Performing Assets (NPA) in economy.

EXISTING FRAMEWORK FOR RESOLUTION OF CORPORATE PERSONS

Orgnisations with limited liability are the most popular structures of business worldwide. Such orgnisations are recogonised as separate legal person by law. In India, Companies registered under Companies Act, 2013 or any other previous Companies Acts, and Limited Liability Partnerships incorporated under Limited Liability Partnership Act, 2008 are popular structures of businesses with limited liability.  Such orgnisations may face financial stress due to operational issues, mismanagement, competition or change in business environment.

Prior of enactment of Insolvency and Bankruptcy Code, 2016, there were limited legal options for resolution and revival of Corporate Persons under financial stress.

There were provisions for revival of sick companies under Sick Industrial Companies Act, 1985 (SICA).  SICA has been enacted on the recommendation of T. Tiwari Committee with objective of timely detection of sick companies owning industrial undertakings; speedy determination by a board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies; and expeditious enforcement of the measures so determined. SICA suffered from various lacunae.  Coverage of companies under the SICA was limited as only Industrial Companies were covered under the act. “Industrial Company” has been defined as one or more industrial undertaking pertaining to industry specified in 1^st schedule of Industries (Development and Regulation) Act, 1951. Further, the act was only applicable to Sick Industrial Companies as defined under the said act. A “Sick Industrial Company” meant an Industrial Company (being a company registered for not less than five years), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Thus, coverage of Companies under the Sick Industrial Companies Act, 1985 was very limited. Functioning of the act showed that it was not effective in revival and rehabilitation of sick companies. Although   the object of the Code was speedy determination, there was huge delay in resolution of sick companies.

Provisions related to revival and rehabilitation of sick companies were shifted to Companies Act, 1956 vide Companies Act (Second) Amendment Act, 2002.  Section 424A to 424L were introduced in Companies Act, 1956 regarding revival and rehabilitation of sick companies. Board of Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were to be replaced by National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). These provisions were never notified and hence never came into effect. SICA Repeal Act, 2003 was enacted to repeal SICA and abolish BIFR and AAIFR.  But due to delay in constitution of NCLT and NCLAT, the said Act could not be notified.

The Companies Act, 2013 had also provisions regarding revival and rehabilitation of the sick companies under Chapter XIX from Section 253 to Section 269.   These provisions were also not notified and hence did not come in force.

EXISTING FRAMEWORK FOR LIQUIDATION OF CORPORATE PERSONS

The Companies Act, 1956 had extensive provisions regarding winding up of companies under part VII.  Section 425 of the Companies Act, 1956 provided two modes of winding of companies i.e.  voluntary winding up and winding up by tribunals.    Jurisdiction to handle winding up matters was with jurisdictional High Courts. Although NCLT had been empowered to hear winding up matters vide Companies (Second Amendment) Act, 2002, the same could not be notified and hence the High Courts continued to have jurisdiction to hear winding up matters.

The Companies Act, 2013 had also provisions of voluntary winding up and compulsory winding up by tribunals.

After enactment of Insolvency and Bankruptcy Code, 2016, provisions in the Company Act, 2013 in respect of winding up of companies for inability to pay debts and voluntary winding up have been omitted.  For winding up under remaining provisions, petitions have as yet to be filed under Companies Act, 2013.

Now, jurisdiction to entertain petitions in respect of liquidation under Insolvency and Bankruptcy Code, 2016 and winding up under Companies Act, 2013 lies exclusively with NCLT.

EXISTING FRAMEWORK FOR INDIVIDUAL & PARTNERSHIP FIRMS

Insolvency of Individuals was being addressed by Presidency Town Insolvency Act, 1909 for Calcutta, Bombay and Madras and Provincial Insolvency Act, 1920 for the rest of the country. Partnership Firm does not have any separate legal entity and hence insolvency proceedings have to be initiated against partners under the aforesaid acts only. Jurisdiction to entertain insolvency petitions was with civil courts. Individual insolvency was extensively court led process and lacked provisions for resolution of  Individual Insolvency.

Under the Code, comprehensive provisions have been introduced in respect of Insolvency and Bankruptcy of Individuals and Partnerships.  There is Fresh Start Process for eligible debtors. In the new framework, there is lots of space for negotiation between the debtor and creditor(s). If the resolution process fails then the debtor or a creditor can file an application before Debt Recovery Tribunal (DRT) for initiation of Bankruptcy Proceedings.

INCREASING NON-PERFORMING ASSETS IN ECONOMY

Non- Performing Assets (NPA) were increasing in the Indian economy despite various legislative interventions for recovery of outstanding dues.  

The Parliament had enacted specific legislation i.e., Recovery to Debt due to Banks and Financial Institution Act, 1993 for expeditious adjudication and recovery of outstanding debts due to banks and financial institutions. Various Debt Recovery Tribunals (DRT) and Debt Recovery Appellate Tribunals (DRAT) were established under the said act for expeditious recovery of debt.

The Parliament further passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for inter alia enforcement of security interest.  Banks and Financial Institutions were empowered under the said act to take possession of secured interests without intervention of courts.

Despite the same, the issue of increasing Non-Performing Assets (NPA) in the economy has not been resolved.  A new approach was required to resolve the issue of Non-Performing Assets and convert them into productive assets for economy.  

REPORT OF BANKRUPTCY LAW REFORMS COMMITTEE (BLRC)

Bankruptcy Law Reforms Committee (BLRC) was established by Ministry of Finance on 22^nd August, 2014 to study corporate insolvency legal framework and to submit a report. The Bankruptcy Law Reforms Committee submitted it Report on 4^th November, 2015.

BLRC highlighted the difficulties faced by the Indian economy. Even if companies had defaulted in payment of loan amount, debtors used to remain in possession and used to contest recovery proceedings. Recovery of loan amount used to take long time. Due to low rate of recovery, banks had become very cautious in sanctioning credit facility and tended to sanction credit facility against secured assets and as a result only big industrial houses were able to get credit facility.

Although BLRC has been given mandate to study and submit report in respect of corporate bankruptcy legal framework, BLRC made a comprehensive study of insolvency of not only Corporate Persons but also Individuals and Partnership Firms and made comprehensive recommendations.

BLRC recommended that there should be unified code for Corporate Persons, Partnerships and Individuals.  BLRC was of the view that unified code will lead to more legal clarity where there arises question of insolvency and bankruptcy. Common bankruptcy framework for enterprise and individual will enable coherent policies when they interact.  BLRC also recommended that insolvency trigger should place least cost on the Adjudicating Authority. A creditor or a debtor both can trigger insolvency process. BLRC further recommended creation of a regulated information utility that will make available all relevant information to all stakeholders in resolving insolvency and bankruptcy. BLRC also recommended that role of adjudicator should be focused on matters of procedure. The business aspect should be delegated to the Insolvency Professional.  BLRC recommended for creation of industry of regulated professional under the Code. BLRC also recommended establishment of Insolvency & Bankruptcy Board of India which will have regulation making powers.  BLRC also recommended two phases of resolution. In the first phase there should be calm period wherein interests of creditors will be protected and efforts will be made for revival of the company. If the first phase does not succeed, liquidation of the company can be initiated.

ENACTMENT OF THE CODE

The Insolvency and Bankruptcy Code, 2016 was enacted on the basis of recommendations of the Bankruptcy Law Reforms Committee. The Insolvency and Bankruptcy Code, 2016 was passed by Lok Sabha on 5^th May, 2016 and Rajya Sabha on 11^th May, 2016 and got the presidential assent on 28^th May, 2016.

The objective of the Code is reorgnisation and insolvency resolution of Corporate Persons, Partnership Firms, and Individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship; availability of credit and balance the interests of all stakeholders including alternation in the order of priority of payment of government dues; and to establish an Insolvency and Bankruptcy Board of India.

It has been made mandatory under the act to make efforts for resolution of Corporate Persons before initiation of liquidation.  If efforts of resolution fail in case of Corporate Persons, liquidation proceeding is initiated. If efforts of resolution fail in the case of Individual and Partnership Firms, bankruptcy proceedings can be initiated by the debtor or a creditor.

The Code consists of five parts. Part I consists of preliminary details including definitions which are applicable to the whole Code. Part II consists of provisions related with Insolvency Resolution and Liquidation of Corporate Persons. Part III consists of provisions related with Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms. Part IV consists of provisions related with regulation of Insolvency Professionals, Insolvency Professional Agencies and Information Utilities. Part V consists of miscellaneous provisions.

INSOLVENCY LAW COMMITTEE (ILC)

The Ministry of Corporate Affairs has constituted Insolvency Law Committee (ILC) to monitor the progress and implementation of the Code; consider issues raised by various stakeholders; identify gaps and various bottlenecks; and recommend corrective measures for optimal functioning of the Code. The Insolvency Law Committee have already submitted five reports on the Code.  1^st Report submitted in March, 2018, 3^rd Report submitted on February, 2020 and 5^th Report submitted in May 2022 were general reports on the Code. ILC has submitted its 2^nd   Report on Cross Border Insolvency in October, 2018.  ILC has submitted its 4^th Report on Pre-Packaged Insolvency Resolution Process in July, 2021.

AMENDEMENTS TO THE CODE

The act has gone through various amendments during brief period of five years.

Insolvency and Bankruptcy Code (Amendment) Act, 2018 w.e.f.  23^rd November, 2017 was amended to strengthen the insolvency resolution process by facilitating phased implementation of the Code; providing clarity as to the persons who can submit a Resolution Plan; making certain persons ineligible to submit Resolution Plan; casting responsibility on the Committee of Creditors for approving Resolution Plan by vote of not less than 75% of voting share of Financial Creditors etc.

Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 w.e.f. 6^th June, 2018 was amended to balance the interest of stakeholders, especially home buyers and MSMEs and to promote resolution over liquidation by clarifying the status of homebuyers as Financial Creditors; granting certain exemptions to MSME; clarifying the non-applicability of Moratorium over Personal Guarantors; reducing the voting threshold from 75% to 66% etc.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 w.e.f. 16^th August, 2019  was amended to ensure maximisation of value of Corporate Debtor as a going concern while adhering to strict timeline by introducing the deadline of 330 days for completion of Corporate Insolvency Resolution Process; making it mandatory for the  Adjudicating Authority to pass speaking order in case there is delay beyond 14 days; introducing majoritarian criteria of 50% or more for voting among a particular class of creditors; clarifying that merger, demerger, and amalgamation are part of Resolution Plan; clarifying that Resolution Plans are binding on the government agencies etc.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 w.e.f. 28^th December, 2019 was amended to remove certain difficulties being faced during Corporate Insolvency Resolution Process by protecting last mile funding; minimum threshold for initiation of Corporate Insolvency Resolution Process by class of creditors; ensuring supply of essentials for continuation of Corporate Debtor as a going concern during Corporate Insolvency Resolution Process; clarifying that the licenses etc cannot be terminated;  no liability of Corporate Debtor for an office committed prior to commencement of Corporate Insolvency Resolution Process etc.

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 w.e.f. 5^th June, 2020  was amended to provide relief to companies affected by COVID 19 pandemic and to recover from the financial stress without facing immediate threat of being pushed into insolvency proceedings by providing temporary suspension of initiation of Corporate Insolvency Resolution Process under Section 7, 9, and 10 of the Code; providing permanent carve-out for the purpose of initiation of CIRP in respect of defaults arising during the suspended period; disallowing the Resolution Professional from filing application for action against the directions or partners of the Corporate Debtor with respect to default arising during the suspended period. . Further government increased the threshold of default for filing an insolvency petition under the Code from Rs. 1 lakh to Rs. 1 crore.

Insolvency and Bankruptcy (Amendment) Act, 2021 w.e.f. 4^th April, 2021 was amended to provide a Pre-Packaged Insolvency Resolution Process framework that aims at causing minimal disruption to MSME debtor’s business activities to ensure job preservation, by combining the efficiency, speed, cost, effectiveness and flexibility of workouts outside courts with the binding effect and structure of formal insolvency proceedings. The framework envisages debtor-in- possession model during the process with well designed checks and balances. The pre-pack is available for corporate MSME with a minimum default of Rs. 10 lakhs and no maximum limit and the timeline for completion is 120 days from the pre-packaged insolvency commencement.

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