No single umbrella legislation governs insolvency and bankruptcy proceedings in India. Instead, there is a slew of legislation governing the legal framework, including:
- the Companies Act 2013;
- the Sick Industrial Companies (Special Provisions) Act 1985;
- the Recovery of Debts Due to Banks and Financial Institutions Act 1993;
- the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002;
- the Presidency Towns Insolvency Act 1909;
- the Provincial Insolvency Act 1920; and
- forums such as the Debts Recovery Tribunal, the company courts and the National Company Law Tribunal (this tribunal is proposed by the Companies Act and not yet in force).
The vast number of legislation and judicial forums, as well as the complex interplay between various legislation, has made the recovery of debts an agonising affair for creditors. Increasing inefficiency coupled with the archaic laws which govern insolvency were key factors for the substantial overhaul of India's insolvency laws.
A single piece of legislation to connect the various insolvency laws has been on the cards for some time, with recommendations from the Law Commission of India dating back to its 26th report on insolvency laws in 1964. Various committees have explored the idea of consolidating India's insolvency and bankruptcy laws, including:
- the Tiwari Committee (1985), which introduced the Sick Industrial Companies Act;
- the Narasimhan Committee I and II (1991 and 1998), which introduced the Recovery of Debts Due to Banks and Financial Institutions Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act;
- the Justice Eradi Committee (1999), which introduced changes to the Companies Act and proposed the repeal of the Sick Industrial Companies Act; and
- the LN Mitra Committee (2001), which proposed a comprehensive bankruptcy code.
However, it was not until November 4 2015 that the Bankruptcy Law Reforms Committee (chaired by TK Viswanathan) submitted its final report,(1) which recommended the passage of the Insolvency and Bankruptcy Code 2015.(2) On December 21 2015 Finance Minister Arun Jaitley tabled the code before the lower house of the Indian Parliament (the Lok Sabha).
The code is a giant leap forward in terms of streamlining India's somewhat scattered insolvency laws into a single piece of legislation which governs bankruptcy and insolvency for all debtors, including companies, unlimited liability partnerships, limited liability partnerships (LLPs), individuals and other entities (as and when notified by the central government). The code also seeks to repeal the Presidency Towns Insolvency Act 1909 and the Provincial Insolvency Act 1920 and amend many of the existing statutes that govern insolvency proceedings (eg, the Companies Act, the Recovery of Debts Due to Banks and Financial Institutions Act and the Sick Industrial Companies Act).
The code is aligned with the government's initiative to make doing business in India easier, and even creditors residing outside India are included in the definition of 'creditor'. Divided into various chapters, the code aims to address the different aspects of insolvency and bankruptcy proceedings and the varying processes used by different types of debtor.
Corporate insolvency resolution process
The corporate insolvency resolution process for body corporates aims to resolve insolvencies and the recovery of dues in a strict time-bound manner. For instance, the insolvency resolution process for companies and LLPs must be completed within 180 days of submission. This deadline can be extended by 90 days if more than 75% of the creditors agree. Even within body corporates, small companies are fast-tracked and their insolvency resolution processes must be completed within 90 days of submission.
For body corporates, the resolution process may be initiated by way of an application by the debtor body corporate or a creditor to the adjudicating authority. The National Company Law Tribunal, which was constituted under Section 408 of the Companies Act 2013, is the adjudicating authority for corporate persons such as companies and LLPs. As the tribunal is not yet in force, insolvency proceedings against companies are presently handled by company court benches in various high courts across India.
The resolution process begins with a public announcement of the process, after which an interim insolvency resolution professional(3) is appointed by the adjudicating authority and subsequently confirmed by the committee of creditors. This individual acts as an intermediary between the creditors and adjudicating authority during the determination of the debtor's assets, affairs and financial position.
The debtor must submit a resolution plan to the insolvency resolution professional with details of how it will pay for the resolution process and repay operational creditors. The adjudicating authority will then pass an order accepting or rejecting the resolution plan.
Liquidation and distribution of assets
If the adjudicating authority rejects the debtor's resolution plan as part of the corporate insolvency resolution process, it will order the liquidation of the debtor and appoint a liquidator to take charge of the debtor's assets and affairs. The liquidator will form a liquidation trust comprising of all of the debtor's assets and act as the fiduciary trustee of the trust for the benefit of the creditors.
After an extensive valuation of all the claims against the debtor, the code calls for the distribution of the debtor's assets in the following order:
- insolvency resolution process costs;
- dues owed to secured creditors;
- dues owed to workers for a 12-month period preceding the date on which liquidation was commenced (on par with dues owed to secured creditors);
- dues owed to other employees who are not workers for a 12-month period preceding the date on which liquidation was commenced;
- dues owed to unsecured creditors;
- dues owed to any state government or central government;
- dues owed to a secured creditor for any unpaid amount following enforcement of the security (on par with dues owed to any state government or the central government);
- any remaining debts;
- preference shareholders; and
- equity shareholders or partners.
The code proposes radical changes to the prioritisation of creditors in the liquidation process and is a remarkable shift from the existing regime, under which some of the dues owed to the government and statutory dues take precedence over the dues owed to secured creditors. The re-prioritisation of creditors in relation to the distribution of the insolvent body's assets is likely to act as a major incentive for investors and creditors alike, since it substantially increases the likelihood of successful debt recovery.
Insolvency resolution for individuals and partnership firms
An individual, unlimited liability partnership firm or any creditors may apply before the concerned adjudicating authority for an insolvency resolution. The Debts Recovery Tribunal, constituted under Section 1A of the Recovery of Debts Due to Banks and Financial Institutions Act, is the adjudicating authority for individuals and unlimited liability partnership firms.
Once the adjudicating authority admits the insolvency resolution application, it will appoint an insolvency resolution professional. This individual must submit a report to the adjudicating authority recommending the acceptance or rejection of the debtor's application. The debtor must also prepare a repayment plan containing a proposal to the creditors for the restructuring of its debts or affairs and submit it to the adjudicating authority.
Thereafter, the insolvency resolution professional will request that the creditors meet to vote on various aspects of the repayment plan. The insolvency resolution professional will then prepare and submit a report on the meeting to the adjudicating authority, on the basis of which the adjudicating authority will implement the repayment plan as approved by the creditors. On the basis of the repayment plan, the adjudicating authority may choose to pass an order for early discharge of the debtor from the proceedings or for discharge on complete implementation of the repayment plan.
'Fresh start' option
As part of the insolvency resolution process, individuals can also apply to be discharged from liability to repay debts. The key criteria for successfully applying for a 'fresh start'(4) is that the debtor's gross annual income not exceed Rs60,000 and the aggregate value of the debtor's qualifying debts not exceed Rs35,000.
Once the adjudicating authority admits an application for a fresh start, it will appoint an insolvency resolution professional. This individual must submit a report to the adjudicating authority recommending the acceptance or rejection of the application.
The adjudicating authority will then pass an order on the basis of the insolvency professional's report. Should the adjudicating authority decide that the debtor's case is worthy of a fresh start, it will discharge the debtor from all liability in respect of the relevant debts.
In the event that the adjudicating authority does not accept an insolvency resolution process or fresh start proposal, or if the debtor fails to adhere to its repayment schedule, the debtor or creditor may jointly or individually apply to have the debtor declared bankrupt before the adjudicating authority.
In this case, a bankruptcy nominee will be appointed (who may also be the insolvency resolution professional), after which the adjudicating authority will pass a bankruptcy order. A public notice inviting claims from creditors will follow and a list of creditors and claims is prepared. Once the bankruptcy order is passed, the bankrupt's estate will be vested in the bankruptcy nominee, administered and distributed to the creditors in accordance with Chapter V of the code. Thereafter, the bankruptcy trustee may apply to the adjudicating authority for a discharge order. However, the discharge order will not affect the rights of secured creditors to enforce their securities, nor will it release sureties of the bankrupt from liability.
The Insolvency and Bankruptcy Code 2015 is a welcome initiative for creditors, investors and debtors alike. The streamlining of procedures, simplification of the insolvency process and fast-tracking of recovery are hallmarks of the code which, if passed, will have a palpably positive affect on India's lending climate.
The code allows investors to exit from failing projects and initiatives in a time-bound manner and without locking up funds in endless legal battles. Although the code was not passed in the Lok Sabha's winter session, it has been well received. Industry experts are thus eagerly awaiting the Lok Sabha's next budget session (February 2016 to May 2016).
For further information on this topic please contact Jyoti Singh at Phoenix Legal by telephone (+91 22 4340 8500) or email (email@example.com). The Phoenix Legal website can be accessed at www.phoenixlegal.in.
(1) Available at www.finmin.nic.in/reports/BLRCReportVol1_04112015.pdf.
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