The Insolvency and Bankruptcy Code is a special act related to insolvency proceedings, the act was enacted due to the increase in the number of financial defaulters in India and for smooth insolvency proceedings. The law came into force on 28.05.2016. The Act is enacted with a purpose to regulate the insolvency proceedings in India and also act in protecting the interests of financial creditors against that of debtors.
As per Government’s data, India lags behind many countries in the time taken for resolution of an insolvency proceeding, it takes an average of 4.5 years for completion of such proceeding1.
Recently, a huge increase in the number of Non-Performing Assets (NPA) and consequent filing for Bankruptcy has paved the way for better law for Insolvency proceedings. The code’s jurisdiction extends to the whole of India except Part III (Insolvency Resolution and Bankruptcy for Individuals and Partnership firms) which is not applicable in the state of Jammu and Kashmir.
Insolvency and Bankruptcy code can be divided into two parts in purview with insolvency proceedings, where one part describes the insolvency proceedings for corporate debtor also known as corporate insolvency process and the other part describes insolvency procedure for an individual debtor or partnership firm. The foundation of these two parts and have the same soul, a similar procedure but different authorities in dealing with such proceedings.
Part IV of the Act define Insolvency and Bankruptcy Board in India which will helps in providing assistance in dealing with insolvency and bankruptcy proceedings.
- The Corporate Insolvency Resolution Process
The Corporate Insolvency Process begins by an application either by the corporate debtor or the financial creditor or an operational creditor before the NCLT which is the Adjudicating Authority under this process. The process gives certain rights and obligation to both financial creditors as well as the corporate debtor.
Under the procedure, the applicant appoints a Resolution professional. The Resolution professional can be appointed by any party to the proceeding, that is, either by financial or operational creditor or by corporate debtor whoever being the applicant to the proceeding. The appointment of Resolution Professional is referred to the National Company Law Tribunal (NCLT) which is in this Insolvency Proceedings is the Adjudicating Authority. The Adjudicating Authority before appointing the resolution professional, it is firstly scrutinized by Insolvency and Bankruptcy Board and if found appropriate with no disciplinary action against it shall finalize the appointment. If the Board finds that the resolution professional is under any disciplinary action the Board may suggest the appointment of another Resolution Professional to NCLT. Under this proceeding, the corporate debtor is granted moratorium from the date of initiation of the proceedings till the time of one year or till the date of the end of the corporate Insolvency process.
The Insolvency Process
Under the corporate Insolvency process ends either in two ways :
- Acceptance of Resolution plan.
- By Initiation of the Liquidation process.
- Acceptance of Resolution plan.
The primary method which is used for ending the debt of corporate debtor is through a resolution plan, under which the committee of creditors, corporate debtor and the resolution professional come into a consensus for a repayment plan. If the resolution plan gets the assent of NCLT, the resolution plan comes into effect for ending the debt.
- By Initiation of Liquidation Process.
Where resolution plan under consideration between the corporate debtor, the committee of creditors and the resolution professional fails, the committee of creditors can initiate a liquidation process towards the corporate debtor by application to NCLT. Under Liquidation Process, the resolution professional is replaced by a Liquidator appointed by NCLT with the recommendation of Insolvency and Bankruptcy Board. Under Liquidation process, the assets of Corporate Debtor is sold by the Liquidator.
Important points for Corporate Insolvency Resolution process
- The Adjudicating Authority is NCLT ( National Company Law Tribunal )
- A Corporate debtor who defaults in payment of debts.
- Resolution Professional by whom the insolvency procedure is done.
- The Bankruptcy Proceedings.
Bankruptcy is similar to that of corporate insolvency process but it concerns to an individual debtor or a partnership firms which comes under Part III of the Act. The default of unsecured debt to initiate a Bankruptcy Proceedings should not be less than one thousand rupees of debt or should not be more than one lakh rupees or as the central government under notification specify. The Adjudicating Authority in bankruptcy proceedings is Debt Revenue Tribunal (DRT) and application can be made by a creditor or the debtor himself.
Insolvency resolution process can be done under this part by two methods.
- Resolving through the Repayment plan.
- By the filing of Bankruptcy.
- The Insolvency Process by the Repayment Plan
The insolvency proceeding can be initiated by an application either by a financial creditor or by the debtor himself. The applicant on application appoints a resolution professional. The resolution professional takes the charge of the dispute and a settlement plan is created between the committee of creditors and the debtor, known as the repayment plan.
The repayment plan constitutes the amount of debt is upon the debtor, information of each debt payable to creditors in the committee of creditors and the manner in which the assets of the debtor is to be sold.
- Bankruptcy process
Where such a repayment plan fails and the amount of debt still exists, then an application for bankruptcy is made to the Adjudicating Authority. The Adjudicating Authority appoints a Bankruptcy Trustee who act as a Trustee to the assets and debts of the debtor. Here the appointed insolvency resolution professional takes the responsibility of a Bankruptcy Trustee. Under S.149 the Bankruptcy Trustee shall perform function accordance to
- Investigate the affairs of the bankrupt.
- Realise the estate of the bankrupt.
- Distribute the estate of the bankrupt.
Some Important Points
- The Adjudicating Authority – The Debt Revenue Tribunal as under the RDDBFI Act, 1992
- Bankrupt – An individual Debtor or a Partnership Firm
- Resolution professional – Undertakes the process of insolvency proceedings.
Insolvency and Bankruptcy Board of India
In Part IV of S.188 establishes Insolvency and Bankruptcy Board as the central government may appoint. The board is a 10 member body consists of Chairperson, 3 members from Central Government not below the rank of joint secretary one each from Ministry of Finance, Ministry of Corporate Affairs and Ministry of Law, One member nominated by RBI, 5 other members nominated by Central Government of whom at least 3 shall be whole time members.
The Insolvency and Bankruptcy board of India has right to rectify a Resolution Professional for insolvency proceedings or suggest a resolution professional where there has been no appointment in such proceedings. The Board acts as a licensing authority for resolution professional. The Board can hold a trial against those Resolution Professional agencies for any complaint against them and award punishment for acting contrary to the law. The Board also acts a body which keeps records of insolvency proceedings held in India.
Regulation of Insolvency Professional’s & Offence and Penalties
Insolvency Professionals are specially trained agencies which do the job of insolvency proceedings under this law. All Insolvency Professional agencies need to register before the Insolvency and Bankruptcy Board of India. The Insolvency and Bankruptcy Board act as a regulatory authority for resolution professional. All Resolution Professional Agencies needs to register before the Board to act as a Resolution Professional. The Board creates guidelines and regulations for the proper functioning of resolution professional agencies.. The Board also has the power to try agencies for offenses against their acts and conducts which are contrary to the law.
Thus, Insolvency and Bankruptcy Code is a law which has presented another alternative and effective way of dealing with the recovery of debts. The Code has Corporate insolvency process and insolvency proceedings for private individuals or partnership firms for recovery of debts. The Code creates The Insolvency and Bankruptcy Board which acts as a regulatory body in helping and assisting with the smooth functioning of Insolvency and Bankruptcy Proceedings. The Board also acts as an authority for Resolution Professionals, which are agencies established which does the work of Insolvency Proceedings. The Code gives rights to Debtor and to the Creditors as well for any acts which become contrary according to the law. The Code thus would help in benefiting the financial environment of the country.