For several years, India has had various overlapping laws and adjudicating authorities for dealing with financial distress and insolvency, which has often resulted in multiple proceedings being initiated before different forums in situations of distress. This in turn has resulted in ineffective and delayed recovery or restructuring and placed excessive strain on lenders.
As the volume of cross-border business has increased over the years, the need for a comprehensive insolvency law that facilitates a time-bound resolution has become apparent. Following a public consultation process and recommendations from a joint committee of Parliament, both houses of the Indian Parliament passed the Insolvency and Bankruptcy Code, 2016 (the “Code”) earlier this year.
The Code has far-reaching implications for restructuring and formal insolvency in India, in that it:
- offers a uniform, comprehensive insolvency legislation encompassing all companies, limited liability partnerships, partnerships and individuals (other than financial institutions);
- allows creditors to adopt an “insolvency resolution process” to assess the viability of a debtor’s business, and agree upon a plan for its rescue and revival or move to a speedy liquidation; and
- creates a new framework – consisting of insolvency resolution professionals and a new insolvency regulator, the Insolvency and Bankruptcy Board of India – intended to facilitate an efficient insolvency resolution process or liquidation.
Most importantly, the Code has brought in a time period of 180 days, within which an insolvency resolution process must be completed. It also provides that at most a single extension of 90 days is permitted, beyond the 180 days, if the committee of creditors agrees to such an extension. This is a significant development towards putting in place a time-bound and efficient process.
While the Code is now law, many steps need to be taken before it can be fully effective. A number of these relate to the establishment of the infrastructure needed to use the Code. For example, the Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals, is in the process of being constituted (with the chairperson having just been appointed). Information utilities that will collect, collate and disseminate financial information to facilitate insolvency resolution are also yet to be created. That being said, the Code is still a game-changer for insolvency resolution in India.