INSOLVENCY AND BANKRUPTCY CODE

An effective and efficient insolvency regime is the foundation of a strong economy. Though there are several laws and forums in India deals with financial breakdown and insolvency of companies, it failed to find effective solutions and timely recovery of defaulted payments and credits. To improve Business environment in India and to gain confidence of domestic and foreign investors the GOI specially constituted ‘Bankruptcy Law Reforms Committee’ (BLRC) under Ministry of Finance. The Committee introduced the Insolvency and Bankruptcy Code Bill in November 2015, replacing the existing framework of insolvency proceedings and focusing creditor driven insolvency resolution. The IBC offers a standardized, comprehensive financial condition legislation encompassing all corporations, partnerships and Sole Proprietorship. One in every of the elemental options of the Code is that it permits creditors to assess the viability of the debtors and encourage reconciliation for its revival or a speedy liquidation. The IBC creates a brand new institutional framework, consisting of insolvency professional, regulator professionals, and adjudication forum to facilitate a proper and time bound insolvency resolution process and liquidation.

INSOLVENCY AND BANKRUPTCY

Definition of Insolvency:

The condition of one who is unable to pay his debts as they fall due and his insufficiency to discharge all debts he owned in the usual course of trade and business is termed as insolvent. In a nutshell, Insolvency is the condition of having more debts than assets.

Signs of Insolvency

There are two main test for insolvency, the first test is that the company is unable to its debts as and when they need to do, the second test would be that the Company’s assets are less than its liability. One of the warning signs of insolvency would be the Company not being able to pay their debts to creditors including non-compliance with payment within the deadline. The other sign would be the creditor threatening legal action or they have commenced steps to try to liquidate the company to compensate the dues.

However, there is no single point to determine at what point a person or a company became insolvent as there are several indicators of is detected during the investigation  by insolvency professionals. A detailed analysis of the financial information would establish the exact date upon which the Company or person became insolvent.

During the investigation, the liquidator will identify the indicators of insolvency such as whether the company or a person;

• suffering recurrent losses every quarter/financial year
• failed to pay taxes and other obligations required under law
• issued dishonoured or post dated cheques
• had set-off or arrangements for his loans
• exceeding his due date of payment to creditors
• availing multiple loans intending to stabilize the business and etc.,

 

Bankruptcy :
Bankruptcy is a legal method of discharging individual or company’s debts and obligations to pay back money that was loaned to them. It allows people who have found themselves in deep financial trouble to be able to discharge their debts and have a fresh start.  Part III of IBC deals with insolvency resolution process and bankruptcy process relating to individuals and partnership firms. It aimed to provide an opportunity to individual debtors having assets and income lower than a specified amount and offers them a fresh start by discharging them from the qualified debts.

In earlier, the laws deals with bankruptcy of individuals was divided geographically under two different legislations being (i) The Presidency Town Insolvency Act 1909, which dealt with Calcutta, Bombay and Madras and; (ii) The Provincial Insolvency Act, 1920 for rest of India. The above acts are now repealed by the Code.

Definition of Bankruptcy

The debtor creditor can initiate the insolvency resolution and bankruptcy proceedings under Section 78(1) of the IBC. The minimum debt to initiate the process may vary upto Rs. 1 Lakh.

Section 79(3) defines bankrupt as,

  • An Individual debtor who has been adjudged as bankrupt by a bankruptcy order passed by the DRT under Sec 126 of the Code. [Sec 79(3)(a)]
  • In case of partnership firm, each of the partners of a firm, where a bankruptcy order under section 126 has been made by the DRT against the said firm. [Sec 79(3)(b)]
  • Any person adjudged as an undischarged insolvent [Sec 79(3)(c)]

STRUCTURE OF CODE

Four different forums—High Courts, Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and Debt Recovery Tribunal (DRT)—have overlapping jurisdiction, which gives rise to systemic delays and complexities in the process. The code overcomes these challenges and would reduce the burden on the courts as all litigation will be filed under the code before the National Company Law Tribunal (NCLT) for corporate insolvency and insolvency of LLPs, and before DRT for individual insolvency and insolvency of unlimited partnership firms.

IMPORTANCE OF THE CODE

IBC Considered as second most important piece of legislature, next only to the goods and services tax (GST) bill. Even though the impact of the new rules may not be visible immediately, they will have long-term implications. There was a systematic vacuum in the entrepreneurial and business eco-system that needed to be plugged. The move will also deepen the bond market in the country besides giving confidence to the creditors and investors in India and abroad.

Conclusion

Bankruptcy and Liquidation are the worst scenario which could happen to any company or Individual. However, the IBC aims to offer an alternate and timely solution is for both the debtors and creditors. It envisages a complete shift of existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.  Overall, the IBC 2016 is a commendable step aimed to promote ease of doing business in India and it would definitely boost the confidence of lenders, creditors, foreign companies and at large.