The Insolvency and Bankruptcy Code 2016 - A dawn of new era

POSITION ON INSOLVENCY BEFORE INTRODUCTION OF THIS CODE

The Existing insolvency laws and laws relating to recovery of loans enacted for the purpose of companies and banks namely the Sick Industrial Companies Act, The Recovery of Debt Due to Banks & Financial Institutions Act, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Companies Act 2013/Companies Act 1956 etc are not providing speedy remedy to recover the loans and debts due from debtors and in a way it has failed to improve the recovery position and possibility from debtor by the creditor.

The position remain the same in case of Individuals, sole proprietorships and partnership firms where the laws governing the insolvency namely The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency act, 1920 were not providing proper solution to recover the loans and debts due from individual and partnership debtors.

Therefore, it is felt by the Government that there is a need to have a consolidated law or code to govern and regulate the matters of recovery of money from debtors who have borrowed and failed to repay debts even after it becomes due more particularly when those debts are not secured.

If we look at the provisions in the Constitution of India, the item “Bankruptcy & Insolvency” is stated as Entry 9 in List III - Concurrent List, (Article 246-Seventh Schedule to the Constitution) that is to say both Central and State Governments can make laws relating to this subject.

It appears as follows:

From the above it can be seen that, laws relating to Insolvency and Bankruptcy can be legislated by both Central & State Governments. Whereas, since laws relating to regulation and winding up of companies / corporations / Banking are coming in List I, it appears  laws can be legislated only by Central Government leaving laws relating to regulation and winding up of corporations, other than those specified in List I to State Governments’ Legislative Power.

THE INSOLVENCY AND BANKRUPTCY CODE, 2015 - LEGISLATIVE HISTORY

The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha on 21 December, 2015 and the same was  referred to Joint Committee on The Insolvency and Bankruptcy Code, 2015  for examination. The report of the Joint committee was presented in Lok Sabha and was laid down in Rajya Sabha on April 28, 2016. The code has been passed by Lok Sabha on May 05, 2016 and by Rajya Sabha on May 11, 2016.

POSITION ON INSOLVENCY AFTER INTRODUCTION OF THIS CODE

It is stated in the preamble of the Code that the law is enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Fund, and for matters connected therewith or incidental thereto. Therefore upon the code becoming into force, various remedies as stated under the following laws will be  coming under one roof:

• SICA, 1985
• Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• SARFAESI Act, 2002; and
• Companies Act, 2013

The Code seeks to amend the following 11 enactments while repealing Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920;

• The Indian Partnership Act 1932
• The Central Excise Act 1944
• The Income Tax Act 1961
• The Customs Act. 1962
• Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• The Finance Act 1994
• The Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002
• Sick Industrial Companies (Special Provisions) Repeal Act, 2003
• The payment and Settlement Systems Act 2007
• The Limited Liability Partnership Act 2008
• Companies Act, 2013  / 1956

It is stated in the Press information released by Ministry of Finance dated 11th May 2016 that the objective of this new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto and the salient features of the law are as follows:

• Clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.
• Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”.
• Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authority and deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liabilities entities respectively. 
• Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
• Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals. 
• Information utilities would collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.
• Enabling provisions to deal with cross border insolvency. 

The Insolvency and Bankruptcy Code, 2016, is divided into 5 parts. It consists of 238 clauses and 1 schedule. 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 Code and this code extends to the whole of India, but Part III i.e. insolvency Resolution and Bankruptcy for individuals and Partnership Firms will not extend to Jammu & Kashmir.

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