The Insolvency and Bankruptcy Code, 2015 has recently passed in Lok Sabha, and as economic survey suggests it in Chakravyuh chapter India needs a bill like this, this post is a PRS analysis of this bill.
What is insolvency?
Insolvency is a situation where individuals or companies are unable to repay their outstanding debt. It may be resolved by changing the repayment plan of the loans, or writing off part of the debt. If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay the outstanding debt.
Why do we need a new law?
Insolvency resolution in India took 4.3 years on an average, as of 2015 (see chart). This is higher when compared to other countries such as United Kingdom (1 year) and United States of America (1.5 years). These delays are caused due to pendency of resolution cases in courts and confusion due to lack of clarity in the current bankruptcy framework.
What does the current Bill aim to do?
The Bill provides for a time-bound process to resolve insolvency. Upon occurrence of a default, creditors have control over debtor’s assets and decisions to solve insolvency should be taken within a 180-day period by the creditors. To ensure uninterrupted resolution process, the Bill also provides immunity for debtors from the claims and court cases of creditors during this time period.
The Bill also consolidates provisions of the current legislative framework, to form a common forum for debtors and creditors of all classes to resolve insolvency. The Bill has provisions applicable to companies and individuals.
The Bill creates various institutions to facilitate a time-bound resolution process. These include licensed professionals who administer the insolvency resolution process, and utilities that will act as depositories of financial information of the debtor
Who facilitates the insolvency resolution under the Bill?
The Bill creates various institutions to facilitate resolution of insolvency. These are:
Insolvency professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making
Insolvency professional agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examination to certify the insolvency professionals and enforce a code of conduct for their performance
Information utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults
Adjudicating authorities: The proceedings of the resolution process will be adjudicated by National Companies Law Tribunal, for companies; and Debt Recovery Tribunal, for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors
Insolvency and Bankruptcy Board: The Board will regulate the insolvency professionals, insolvency professional agencies and information utilities set up under the Bill. The Board will consist of representatives from RBI, and Ministries of Finance, Corporate Affairs and Law
What is the procedure to resolve insolvency?
The Bill proposes the following steps to resolve the insolvency:
Initiation: 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.
Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding 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 sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go to liquidation
Liquidation: If the debtor goes to liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of debtor’s assets are distributed in the following order of precedence:
- i) insolvency resolution costs, including the remuneration to insolvency professional,
- ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees,
- iii) unsecured creditors,
- iv) dues to government,
- v) priority shareholders and
- vi) equity shareholders
Source: PRS Legislative Research