INSOLVENCY AND BANKRUPTCY CODE, 2016

INSOLVENCY AND BANKRUPTCY CODE, 2016

 

Introduction

Insolvency and Bankruptcy Code, 2016 the much awaited and debated code was passed by the Upper House of the Parliament (Rajya Sabha) on 11 May 2016, after being passed by the Lower House (Lok Sabha) on 5 May 2016. The Government of India introduced the bill in 2015, the bill was drafted by the specially constituted committee under the ministry of finance known as ‘Bankruptcy Law Reforms Committee’ (BLRC).

It focuses on creditor driven insolvency resolution, by covering much needed reforms in the existing framework. The main objectives of the code were to shift the existing regime from ‘Debtor in Possession’ to a “Creditor in Control”, To merge and amend the law relating to the insolvency resolution and reorganisation of the partnership, individuals, corporates and other entities. To establish a regulatory body for insolvency and bankruptcy law, which is known as “Insolvency and Bankruptcy Board of India”.

Why was Insolvency and Bankruptcy code introduced in India?

India needed it because of several reasons, when the Code was legislated by the parliament Indian economy was facing a critical time because the domestic banking industry was struggling to manage with the bad loans and eagerly wanting a strong legal framework which can manage stress situation in a time bound and efficacious manner. Before the insolvency and bankruptcy code, there were multiple overlapping laws and adjudicating forums facing problems with financial failure and insolvency of corporates, partnership and individuals which leads to delay, complexities, and involves higher costs in the process of insolvency resolution.

By enacting Insolvency and Bankruptcy code, The Government of India has taken one matured step towards settling the legal position in financial failures and insolvency. Creditors can assess the viability of a debtor as a business decision, and agrees upon the plan of revival or speedy liquidation it can be said as one of the fundamental features of the code. This code is a landmark piece of legislation creating a strong legal framework which is going to bring more overdue reform that is aimed at creating necessary procedures for swift resolution of insolvency and bankruptcy in India.

Insolvency and Bankruptcy code aims to bring Indian statutory regime at par some of the most legally advanced jurisdiction in the world. The code creates the new institutional framework which consists of insolvency professionals, information utilities, adjudicatory procedures, regulatory body that will ease a formal and time bound insolvency resolution process.

Applicability of the insolvency and bankruptcy code

The insolvency and bankruptcy code shall apply on any company which is incorporated under companies law 2013, Any limited liability partnership under the LLP Act, 2008 or partnership firms or individuals or Any other company governed by any special legislative  act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such special legislative act. But there are certain exceptions like corporate persons who are regulated financial service providers (Banks, Financial institutions and Insurance company) where the applicability of the code shall not apply.

What are the objectives of the code?

The primary objective of the code is to combine or merge the laws relating to insolvency, reorganisation and bankruptcy of all entities which includes companies, individuals, partnership firms and LLPs (Limited Liability Partnerships) and bring them under one statutory body and amending relevant laws; to encourage resolution as means of first resort for recovery; time bound resolution of defaults and seamless implementation of liquidation/ bankruptcy and to maximize the assets value;

Introducing NCLT (National Company Law Tribunal), IPAs (Insolvency Resolution Professional Agencies), IPs (Insolvency Professionals, IUs (Information Utilities) and creating new infrastructure which can eradicate the inefficiencies involved in bankruptcy process. To create fix time periods for execution of the law in a time-bound settlement of insolvency i.e. 180 days. To deal with the cross-border insolvency and to encourage cross border financing.

Is Insolvency and Bankruptcy Code constitutionally valid?

There were certain issues were raised by the various stakeholder time and again. It has been alleged that the code violates article 14 of the Constitution of India, 1950 and code is discriminatory in nature. After a period of time another claim was raised pertaining to the inequitable nature of section 29A.

Responding to a series of petitions which challenges the constitutional validity of the various provisions of the Insolvency and Bankruptcy Code, 2016, Supreme Court of India in the case of ‘Swiss Ribbons Private Limited and Anr v. Union of India and Ors’ under the bench of Hon’ble Mr. Justice Rohinton F Nariman and Hon’ble Mr. Justice Navin Sinha upheld the constitutional validity of the code by taking the inspiration from the verdict in ‘Bhavesh D. Parry v. Union of India’.

The Court made several observations in response to the arguments raised by the petitioners. The judgement proscribed significant issues regarding the admission process, lack of participation of operational creditors within the Committee of Creditors (‘CoC’) and therefore the bar placed on the defaulting promoters and their relatives from participating within the resolution plan, all of which significantly changed the way the insolvency law operated in our country.

Supreme court of India has supported the constitutional validity of the various provisions of the Insolvency and Bankruptcy code, 2016 and the court also noted that the code is a beneficial legislation because not being a mere recovery legislation for creditors, it helps corporate debtor to come back on its feet. while peening the decision Justice Nariman stated that, ‘the experiment contained within the Code passes the constitutional muster’.

The judgment reiterates the contribution of the Code in increasing the flow of monetary resource to the commercial sector in India as a result of repayment of monetary debts. It also promotes ethical practices and is taken into account as a landmark step towards a far better economy enhancing the speed of recovery of debts within the country

Conclusion

Before the enactment of the code in 2015 India ranked 136 out of 190 countries in the World Bank’s index because at that time Indian credit markets were in distressed state due to weak insolvency regime, its significant inefficiencies and systematic abuse. But today India currently ranks 63 out of 190 countries in the World Bank’s index on the ease of resolving insolvencies because the code promises to induce far reaching reforms and focuses on creditor driven insolvency resolution.

Insolvency and Bankruptcy code also assist to identify the early financial failure and to maximize the asset value of the insolvent firms. With help of the provisions in the code the regulatory authority can address cross border insolvency through bilateral agreements and reciprocal arrangements with other nations. The unified regime foresees a structured and time-bound process for insolvency resolution and liquidation, which significantly improve debt recovery rates and provide strength to weak Indian corporate bond markets.

 

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Author:AYUSH CHOUBEY ,

Intern at Lawportal,

Email: ayushchoubey999@gmail.com

 

Author: AYUSH CHOUBEY,
School of Law, Jagran Lakecity University 1st Year