The Modi government’s ‘Ease of doing business’ has moved the corporate world. Being a part of the ease of business policy, the new bankruptcy code will provide an easy access to the market and guarantee an easy debt free exit. The Insolvency and Bankruptcy Code 2016 is not only important to ensure repayment of debt but also to assure timely repayment. The code is expected to address the issues of insolvency resolution of companies and individuals.
l The bill lays down the procedural time limit to ensure results in 180 days. The bill also includes provisions for force majeure and one time extension of 90 days in certain circumstances, the fast track option for a 90-day limit, and a single extension of 45 days, if needed. The bill also has provisions to deal with specialized matter as strong financial institutions play a major role in economic sustainability of a country, which will be ensured after enactment of the bill. Another unique feature of the bill is that it gives right to operational creditor to initiate procedure and the right is not limited to big creditors.
l One can take away the jurisdiction of civil court to ensure a speedy and effective procedure.
l The bill will also give a boost to lengthy winding process and reduce consumption of time.
l If a corporate debtor commits a default, a financial creditor, an operational creditors or the corporate debtor itself may initiate corporate insolvency resolution process. He will have to deliver a demand notice as may be prescribed.
l In clause 12, it is mentioned that the insolvency resolution process should be completed within 180 days which may be extended to 270 days.
l The bill mentions setting up of insolvency agencies and will identify the potential insolvency professionals.
l The bill promotes entrepreneurship, balances interest of all stake holders by consolidating and amending the laws relating to re-organisation and insolvency resolution of corporate firms.
l It is a landmark economic reform to improve ease of doing business and facilitate more investment leading to higher economic growth and development and help recovery of prior loans from banks and other organizations.
l The bill describes in detail information like whose role is to collect, collate and disseminate financial information related to a debtor. This will include a record of debt, assets and liabilities of corporate debtor.
l The code will also create Insolvency and Bankruptcy Fund for the purposes of insolvency resolution, liquidation and bankruptcy of persons under this Code.
Pros and Cons
The Code provides similar insolvency resolution processes for companies and individuals, as follows:
Initiation: When a default occurs, the creditors or debtor may apply to the tribunal (NCLT or DRT) for initiating the resolution process. Once the application is approved, the resolution process will have to be completed within 180 days. This time limit may be extended upto 90 days. During this period, the debtor will be immune towards creditors’ claims and lawsuits.
Appointment of Interim IP: When the resolution process begins, an interim IP will be appointed by the creditors or tribunal. The IP will:
l Take control of the debtor’s assets and company’s operations.
l Collect financial information of the debtor from information utilities
l Constitute the creditors committee.
Creditors Committee: A committee consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution. Financial creditors may either be:
l Secured creditors, whose loans are backed by collateral (security), or
l Unsecured creditors whose loans are not backed by any collateral. The creditors committee will take decisions by a 75% majority. It will oversee management of the debtor’s assets and appoint a permanent IP to conduct the resolution process.
Resolution: The creditors committee will decide to:
l Restructure the debtor’s debt by preparing a resolution plan such as revising the repayment plan.
l Liquidate (sell) the debtor’s assets to repay loans. If no decision is made during the resolution process, the debtor’s assets will be liquidated to repay the debt.
Approval of Plan: On the approval of a resolution plan by the creditors committee, the IP will submit it to the tribunal for final approval. The tribunal will approve the plan based on criteria which includes ensuring that operational creditors have received as much as they would have received during liquidation. The resolution plan will then be implemented.
Liquidation: In the case of liquidation, proceeds from the sale of the debtor’s assets will be used to repay the outstanding dues. A secured creditor may choose to not participate in the process, and enforce his security under any other law (such as the SARFAESI Act). The financial obligations of the debtor will be repaid in the following order:
l Fees of the IP and other costs related to the resolution process
l Secured creditors (if he chooses not to enforce his security) and worker dues (up to 12 months),
l Employee wages (up to 12 months),
l Unsecured creditors,
l Dues to government and remaining debt owed to secured creditors (residual amount, if the creditor enforces his security),
l Any remaining debt, and
The Code provides a Fresh Start Process under which an individual will be eligible for a debt waiver of up to `35,000. For an individual to be eligible for this process, he should have:
(i) Annual income of less than `60,000,
(ii) Assets under`20,000, and
(iii) No ownership of a house.
It is also envisaged that the Code can help alleviate bad loan issues faced by the public sector banks. Employee interests are safeguarded as money due to them from provident fund, pension fund and gratuity funds won’t be included in the liquidation assets of the bankrupt.
l Bankruptcy will ruin your credit. It can remain on the credit report for up to 10 years. One can lose one’s proper-ty that is not exempt from sale by the bankruptcy trustee. There can be loss of luxury possessions and credit cards.
l Bankruptcy will make it impossible to get a mortgage.
l Bankruptcy will not relieve you of your obligations to pay alimony or child support. It will not get rid of student’s loan debt.
l One has to explain it to the judge and the trustee about the financial mess.