– Vivek Murarka –
India:
According to Eminent Lawyer Vivek Murarka, the Insolvency and Bankruptcy Code passed by the Parliament overhauls the existing framework dealing with insolvency of corporates, individuals, partnerships and other entities.
The current legal and institutional framework was not good enough to provide comfort to lenders with effective and timely recovery of stressed assets which in turn slowed down credit growth. The Government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially constituted ‘Bankruptcy Law Reforms Committee’ (BLRC) under the Ministry of Finance to address complex issues pertaining to bad debts and the recovery mechanisms to restore investor confidence in our banking and financial services sector.
After a public consultation process and recommendations from a joint committee of Parliament, both houses of Parliament have now passed the Insolvency and Bankruptcy Code, 2016 (Code)
What does the Code bring to the table?
The Code offers a comprehensive insolvency legislation covering all companies, partnerships and individuals (other than financial firms). The Government intends to create a separate framework for bankruptcy resolution in failing banks and financial sector entities.
The Code allows creditors to assess the viability of a debtor as a business decision and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and tribunals that will facilitate adjudication of insolvency cases either through satisfactory resolution of dues or liquidation of companies in extreme cases.
What are the highlights of the Code?
To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 ($1495) (which limit may be increased up to INR 10,000,000 ($ 149,500) by the Government). The Code proposes two independent stages:
Insolvency Resolution Process, during which financial creditors assess whether the debtor’s business is viable to continue and the options for its rescue and revival; and
Liquidation, if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.
What is the insolvency resolution process (IRP)?
The (IRP) brings all lenders under one umbrella to deal with a defaulting corporate.
A creditor can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT).The defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings.
The NCLT orders a moratorium on the debtor’s operations for the period of the IRP. This operates as a ‘calm period’ during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor. The NCLT appoints an insolvency professional or ‘Resolution Professional’ to administer the IRP. The Resolution Professional’s primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors. The Resolution Professional identifies the financial creditors and constitutes a creditors committee. Operational creditors above a certain threshold are allowed to attend meetings of the committee but do not have voting power. Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors.
The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days). Anyone can submit a revival proposal, but it must necessarily provide for payment of operational debts to the extent of the liquidation waterfall.
When can a corporate debtor be put under liquidation?
Under the Code, a corporate debtor may be put into liquidation if:
(i) A 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the insolvency resolution process;
(ii) The creditor’s committee does not approve a resolution plan within 180 days (or within the extended 90 days);
(iii) The NCLT rejects the resolution plan submitted to it on technical grounds; or
(iv) The debtor contravenes the agreed resolution plan and an affected person makes an application to the NCLT to liquidate the corporate debtor.
Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor, and the assets of the debtor (including the proceeds of liquidation) vest in the liquidation estate.
How will claims be settled?
Priority of Claims
The Code significantly changes the sequence for distribution of liquidation proceeds.
After the costs of insolvency resolution (including any interim finance), secured debt together with workmen dues for the preceding 24 months rank highest in priority. Central and state Government dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors. Under the earlier regime, Government dues were immediately below the claims of secured creditors and workmen in order of priority.
Upon liquidation, a secured creditor may choose to realise his security and receive proceeds from the sale of the secured assets in first priority. If the secured creditor enforces his claims outside the liquidation, he must contribute any excess proceeds to the liquidation trust. Further, in case of any shortfall in recovery, the secured creditors will be junior to the unsecured creditors to the extent of the shortfall.
What can one expect from the Code in times to come?
The Code is expected to bring about early identification of financial failure and retrieving maximum asset value of insolvent firms. The Code also seeks to tackle cross border insolvency through bilateral agreements and reciprocal arrangements with other countries.
It is expected significantly improve debt recovery rates and give a fillip to the sagging Indian corporate bond markets
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About the Author
Vivek Murarka
Author & Renowned Kolkata based lawyer
About the AuthorVivek Murarka is a partner at Saha & Ray, Advocates, well known transaction law firm, based in Kolkata. His area of expertise are Property Laws, Corporate Laws and matters relating to Real Estate Documentations -Transactions.
Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of INVC NEWS.
