Decoding Insolvency and Bankruptcy Code 2016 – Part I

(Introduction)

Insolvency and Bankruptcy code is very much in vogue these days. A new era of insolvency resolution has arrived and soon the Code shall be fully operational with its complete institutional infrastructure in place. The scope of Company Secretaries has increased manifold after the enactment of this code, as we have been recognized as Insolvency Professionals and can be appointed to conduct the corporate insolvency resolution process. Since the Law is new and at its inception, many of us have very little knowledge about it. I, through my blog, intend to explore the code and share my knowledge with professionals, stakeholders and people who want to know more about it.

Law of Insolvency owes its origin to the English law. Before the British came to India, there was no indigenous Law of Insolvency in the country. Its need was first felt in the Presidency towns, which were, Calcutta, Madras and Bombay. Presidency-Town’s Insolvency Act, 1909 and Provisional Insolvency Act 1920 dealt with insolvency of an individual and unincorporated entities and Companies Act and SICA were the acts which dealt with Corporate insolvency. But even though there were various acts that dealt with insolvency, many difficulties had to be faced by the corporates and individuals during the process of insolvency. It was found that there were a lot of hindrances in revival or quick disposal of companies due to multiplicity of litigation at different forums. On 31^st October, 2015, total 5141 winding up petitions were pending of which 1479 were more than 2 decades old. India though ranked at 130 out of 189 countries in ease of doing business, it stands at 136 for resolving insolvency, according to the world bank index report. There was a need of a uniform & comprehensive insolvency legislation. Various Committees such as Tandon Committee, Tiwari Committee, Goswami `Committee, Eradi Committee & J.J Irani Committee had earlier recommended creative restructuring, quick disposal, rehabilitation & revival and formation of Insolvency Tribunal. Owing to the need of a single insolvency framework The Code received the assent of the President of India on 28 May 2016. After the enactment of The Code, Presidency-Town’s Insolvency Act, 1909, Provisional Insolvency Act 1920 & SICA has been repealed. Further 11 legislations have been amended to fall in line with the Insolvency and Bankruptcy Code.  Much of the code has come into operation at present due to the fast release of notification & rules in the last quarter of 2016. The last legs of the institutional framework for insolvency resolution and liquidation of corporate persons are under process and the Insolvency and Bankruptcy Board of India (IBBI) has invited public comments on draft regulations on IUs (Information utilities – which we will study later) by February 7, 2017. “The code will help improve the ease of doing business as well as develop the debt market” - says IBBI chairperson M.S. Sahoo, a Company Secretary himself.

The Insolvency & Bankruptcy law aims to consolidate the existing laws into a single framework to facilitate reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

Usually, Insolvency and Bankruptcy are used interchangeably but there is a thin line differentiating the two. Insolvency, in legal terms, means a situation where the liabilities of a person or firm exceed its assets. It is a situation where an organization or an individual is unable to pay their debts to the lender(s). Whereas Bankruptcy is when the individual/organization is declared incapable of paying their dues and payable bills. It is interesting how the word Bankruptcy originated. In Italy, there was a famous medieval bridge over the Arno, where different merchants used to display their goods on a table. When a merchant could not pay his debts, their table (the "Banca") was physically broken ("rotta") by soldiers and thus the word Bankruptcy came into origin. Insolvency if handled correctly can prevent the debtor from becoming bankrupt. This is also the primary objective of IBL, to address the insolvency in a timely manner so as to provide the debtor with rehabilitation if possible.

The Code contains 255 sections (where section 245-255 relates to amendments to the various act) 5 parts, 7 chapters & 11 schedules. The 5 parts of the code are divided as follows:

Part I	Preliminary
Part II	Insolvency Resolution and Liquidation for Corporate Persons
Part III	Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
Part IV	Regulation of Insolvency Professionals, Agencies and Information Utilities
Part V	Miscellaneous

IBBI is the Regulatory body . NCLT/NCLAT is the Adjudicating Authority which will deal with the insolvency of Corporates whereas DRT/DRAT is the Adjudicating Authority which will deal with the insolvency of individuals and unlimited partnership. Insolvency agency, Insolvency Professionals and Information Utilities are the regulators in the code. (It is to be noted that the financial services sector are excluded in the code)

As corporate professionals, the important concept which we need to understand in detail is “Insolvency Resolution and Liquidation for Corporate Persons”. In my next blog, we will discuss more about it and some important definitions.

References:

-Webinar by ICSI

-Mondaq (Commencement Of A New Era Of Corporate Insolvency Resolution- The Insolvency And Bankruptcy Code, 2016 Close To Being Fully Implemented)

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