Indian Parliament Passes The Insolvency and Bankruptcy Code, 2016

June 8, 2016

The Insolvency and Bankruptcy Code, 2016 (the ‘Code’) has been notified in the [Indian] official gazette on May 28, 2016. The Code completely overhauls laws governing insolvency in India and is a major initiative of the government towards improving the ease of doing business in the country.  

The Code applies to companies, partnerships, limited liability partnerships and individuals. The Code replaces the existing insolvency framework which was confusing and fraught with substantial delays. This note highlights the key provisions of the Code as applicable to corporate debtors,i.e., companies and limited liability partnerships (‘Debtors’).  

Insolvency proceedings against a Debtor commence with a resolution process that seeks to resolve the insolvency of a Debtor as a going concern by formulating a resolution plan. In case this process fails to achieve a resolution, the Debtor is subjected to liquidation proceedings to settle pending claims against it. These aspects of the Code are discussed below:  

1.      Resolution  

The Code sets out a detailed process for resolution that can be initiated by a creditor or by the Debtor, by making an application to the National Company Law Tribunal (the ‘Tribunal’). Upon the receipt of such application, the Tribunal has the power to order a moratorium on the affairs of the Debtor and appoint a licensed insolvency professional (‘IP’) to manage the resolution process. The IP is responsible for collecting information on the Debtor (including details relating to all claims against the Debtor), constituting a committee of creditors (to finalise a resolution plan, as discussed below), and managing the overall affairs of the Debtor during the resolution process.  

A resolution plan for resolving a Debtor’s insolvency can be made by any aggrieved person and presented to the IP. Once the IP receives the resolution plan, the IP is required to present this resolution plan to the committee of creditors (constituted by the IP). Once the committee of creditors has approved the resolution plan (by way of a three-fourths majority on the basis of the proportion of the creditors’ share in the outstanding debt of the Debtor), the resolution plan is placed by the IP before the Tribunal for the Tribunal’s approval. This resolution process is required to be completed within 180 days (extendable to 270 days in some limited circumstances) from the date on which the original application initiating the resolution process was made to the Tribunal.    

The Code also envisions the establishment of licensed organisations known as ‘information utilities’ which will collect, collate and disseminate financial information related to a Debtor including records of debts and liabilities of the Debtor. This information is utilised by the Tribunal and the IPs during the resolution and liquidation procedures. The procedures followed by the information utilities for collection and dissemination of financial information will be notified later by the Insolvency and Bankruptcy Board which, when established, will be empowered to license and regulate IPs and information utilities.  

2.      Liquidation  

At the end of the resolution process discussed above, if the committee of creditors is unable to devise a resolution plan or, if the resolution plan is rejected by the Tribunal for non-compliance with the provisions of the Code, the liquidation process will commence. The Tribunal conducts the liquidation process under its supervision. The proceeds from the sale of the assets of the Debtor are used to satisfy all outstanding claims. Upon liquidation, the assets of the Debtor are distributed in the following order of priority: (i) fees of IP and costs related to the resolution process, (ii) workmen’s dues and dues of secured creditors (that have relinquished their security interests), (iii) employees’ wages, (iv) dues of unsecured creditors, (v) government dues and remaining dues of secured creditors (that have enforced their security interests but continue to have outstanding debt), (vi) satisfaction of any remaining debt, and (vii) distribution to shareholders. The Code also sets out several procedural reforms in the conduct of proceedings of the Tribunal in order to reduce delays.  

3.      Cross-border Insolvency Provisions  

The Code also attempts to address cross-border insolvency issues. Firstly, the Code treats foreign and domestic creditors at par in the resolution and liquidation processes. Secondly, the Code includes an enabling provision that allows the government to enter into reciprocal arrangements with other countries to enforce the provisions of the Code against an insolvent Debtor that has assets outside India.  

4.      Operationalizing the Code  

The framework envisioned under the Code necessitates consequential amendments to current Indian corporate and securitization laws. The government must notify rules under the Code to lay down the detailed procedure for the insolvency process. Further, the government must establish the infrastructure to implement the Code including Tribunals and the Insolvency and Bankruptcy Board. Therefore, as a practical matter, it will take some time before the Code becomes fully operational.  

The Code is a welcome initiative for creditors, investors and debtors alike. The streamlining of procedures, simplification of the insolvency process and fast-tracking of recovery will have a positive effect on India’s lending and business environment.