Parliament passes Insolvency and Bankruptcy Code Bill

• The Lok Sabha on Monday passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, which provides that insolvency proceedings against defaulting companies will not be initiated for at least six months starting from March 25.
• It was earlier passed by the Rajya Sabha.
• Responding to the issues raised by the members during the discussion, Finance Minister Nirmala Sitharaman said the Code was not a recovery law. The creditors, including MSMEs (micro, small and medium enterprises), had several other options to recover their claims. The proposed amendments, brought in the form of an Ordinance on June 5, suspended the application of three provisions to prevent any company, stressed due to the COVID-19 situation, from being pushed into insolvency proceedings. A proviso for further extension of six months has also been given. The initial six-month period would end on September 24, she said.
• Comparing the performance, Ms. Sitharaman said the recovery rate under the Code was 42.5%, while under Lok Adalat (2018-19), the figure was 5.3%; DRT proceedings had led to 3.5% recovery and under the SARFAESI Act, 14.5% of the dues were recovered.
• Initiating the debate, Congress leader Adhir Ranjan Chowdhary said the proposed amendments had a lot of grey areas, leaving loopholes for large debtors. The worst casualty would be the MSME sector, which employed 1.2 million people and catered to large corporates.

What is Insolvency and Bankruptcy Code (IBC) 2016?

Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament. It got Presidential assent in May 2016. The law was necessitated due to huge pile-up of non-performing loans of banks and delay in debt resolution. Insolvency resolution in India took 4.3 years on an average against other countries such as United Kingdom (1 year) and United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.

What does the IBC aim to do?
IBC applies to companies, partnerships and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency. Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.

What is the timeframe for completion of the exercise under the Code?
Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections on the extension. For smaller companies including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn’t happen the company goes for liquidation.

Who regulates the IBC proceedings?

Insolvency and Bankruptcy Board of India has been appointed as a regulator and it can oversee these proceedings. IBBI has 10 members; from Finance Ministry and Law Ministry the Reserve Bank of India.

Who facilitates the insolvency resolution?

A licensed professional administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

Who adjudicates over the proceedings?

The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies and the Debt Recovery Tribunal (DRT) for individuals. The courts approve initiating the resolution process, appointing the insolvency professional and giving nod to the final decision of creditors. The Insolvency and Bankruptcy Board regulates insolvency professionals, insolvency professional agencies and information utilities set up under the Code.

What is the procedure to resolve insolvency under the Code?

When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.

What does the committee of creditors do?

A committee consisting of the financial creditors who lent money to the debtor is formed by the insolvency professional. The creditors’ committee decides the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule or selling the assets of the debtor to get their dues back. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.

What happens under liquidation?

If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of order: First insolvency resolution costs, including the remuneration to the insolvency professional, second secured creditors, whose loans are backed by collateral and third dues to workers, other employees, forth unsecured creditors.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020

This Bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 . Therefore please refer to our legislative brief on the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020.

• The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 was introduced in Rajya Sabha on September 15, 2020.  It amends the Insolvency and Bankruptcy Code, 2016.  The Code provides a time-bound process for resolving insolvency in companies and among individuals.  Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.  The Bill seeks to temporarily suspend initiation of the corporate insolvency resolution process (CIRP) under the Code.  It replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 promulgated on June 5, 2020. 

• Prohibition on the initiation of CIRP for certain defaults:  When a default occurs, the Code allows the creditors of the company or the company itself to initiate CIRP by filing an application before the National Company Law Tribunal (NCLT).  The Bill provides that for defaults arising during the six months from March 25, 2020, CIRP can never be initiated by either the company or its creditors.  The central government may extend this period to one year through notification.  The Bill clarifies that during this period, CIRP can still be initiated for any defaults arising before March 25, 2020.
   
• Liabilities for wrongful trading: Under the Code, a director or a partner of the corporate debtor may be held liable to make personal contributions to the assets of the company in certain situations.  This liability can occur if despite knowing that the insolvency proceedings cannot be avoided, the person did not exercise due diligence in minimising the potential loss to the creditors.  The Resolution Professional may apply to the NCLT to hold such persons liable.  The Resolution Professional is appointed to manage the resolution process upon the acceptance of an application for initiation of CIRP.  The Bill prohibits the Resolution Professional from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited.