Insolvency and Bankruptcy Law in India
Insolvency and Bankruptcy Code 2016 short description. The Code deals with Insolvency Resolution Process and Liquidation. It came into force on 1st December, 2016. The National Company Law Tribunal established to handle and decide cases of insolvency and liquidation across the country.
IBC deals with law relating to:
- insolvency and winding-up/dissolution of companies;
- partnership firms and individuals
IBC provides the detailed legal framework for
- winding up and dissolution of companies
- bankruptcy of firms and individuals in all cases where the persons are not solvent.
IBC is divided into five parts consisting of seven chapters, 255 sections and 11 schedule. It is extensively covering insolvency, liquidation of corporate and bankruptcy of individuals
Entire process of insolvency and liquidation will be managed by professionals known as Insolvency Resolution Professional (IRP). IRPS are licensed by Insolvency and Bankruptcy Board of India (IBBI), a government regulatory body set up under IBC. IRPs are subject to supervision of NCLT and NCLAT with respect to specific cases of insolvency and liquidation. Further, they work under the guidance of code of conduct prescribed by IBBI.
An overview of IBC System
- IBC provide for a two step system for recovery of dues from the companies. First step is Insolvency Resolution Process and final step is liquidation of the company.
- If corporate borrower commits default in making payment of Rs. 1 Lakh or above
- The bank can file an application before NCLT for insolvency resolution process.
- Insolvency Resolution Process under IBC involves restructuring of entire debts of the company. The majority of creditors approve the resolution plan.
- Resolution Plan is prepared and approved by the creditors within 180 days from the date of admission of petition.
- Banks and other creditors cannot initiate legal action against companies for recovery of dues during those 180 days. The period of 180 days can be extended by another 90 days
- If creditors do not agree and approve Restructuring/Resolution process of debts of the company within 270 days. Then NCLT will order liquidation of the company
- Liquidation of company involves sale of assets of the company and distribution of sale proceeds to all creditors. IBC provides for priority of payment
Process flow in Insolvency Resolution Process:
- Firstly, Bank will have to file an application before NCLT for initiating Insolvency Process
- At the time of filing an application, the Bank will have to furnish details of default by the company. Bank should recommend the name of a licensed Insolvency Resolution Professional to act as IRP. IRPs are licensed by IBBI and the website contains the name and address of licensed IRPs.
- If NCLT is satisfied that default has occurred and the application of bank is complete in all respect it will admit the application
- Simultaneously, NCLT will make a public announcement declaring moratorium for period of 180 days extendable by another 90 days
Immediately after appointment Insolvency Resolution (IRP) will assume charge and;
- Will take control of management of affairs of the company and is required to preserve and protect the value of property and manage the company;
- Collect all the information related to assets, finances and operations of the corporate debtor for determining financial position of the company;
- Appoint the committee of creditors. Decision of the committee of creditors will be based on majority of 75% by value;
- Will act as per the directions of committee of creditors in all matters of running the company;
- Will seek Resolution Plan from the Bank and other creditor who had filed the application before NCLT for insolvency resolution plan
Resolution Plan involves strategy/plan for running the company, repayment of dues of creditors and other matters. Such that if plan succeeds then bank will get back its dues and company will be revived and becomes solvent
- Total 75% of both secured and unsecured creditors approves the resolution plan
- Committee of creditors approves the resolution plan. Then it is placed before NCLT
- Resolution Plan once approved by NCLT becomes binding on all creditors, employees, shareholders and other stakeholders of the company
- If the Resolution Plan is unsuccessful or the company contravenes the provision of resolution plan then NCLT will pass orders liquidating the company
- NCLT appoints the liquidator after passing liquidation order. Liquidator will take control of the company and sell the assets and distribute the sale proceed to the creditors
Powers and duties of liquidators
- Receive and verify claims of all creditors
- Take control and custody of all the assets, property, effects and actionable claims of the corporate debtor
- Evaluate the assets and property of the company in liquidation in the manner specified in IBBI and prepare a report
- Protect the assets and run the business before selling all the assets
- Distribute the sale proceeds of assets amongst the creditors to satisfy the claims of the creditors against the company
Distribution of amount realized by Liquidator
- Cost and fee of Insolvency Professional and the liquidator will be first paid out of sale proceeds of the assets;
- Secondly, equal payment of workmen dues for period of 2 years and debt payable to secured creditors;
- Thirdly, wages and dues of employee (other than workmen) unpaid for preceding 1 year;
- Fourthly, debts paid to unsecured creditors;
- Fifthly, government and tax dues in equal proportion with dues of unpaid secured creditors;
- Sixthly, preference shareholders, if any;
- Lastly equity shareholders;
Insolvency and Bankruptcy Board of India
- IBBI provide license and regulate professional desirous of practicing as Insolvency Resolution Professional/Liquidators of companies
- It maintains list of professionals license to practice as Insolvency Resolution Professionals/Liquidator
- While making application before NCLT for insolvency resolution process, Bank may seek anybody license by IBBI to practice as Insolvency Resolution Professional/Liquidator
That’s all for Insolvency and Bankruptcy Code 2016. Hope you have understood better. Thanks for visiting us !