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Formation of Insolvency and Bankruptcy Code, 2016

After the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha on 21st December 2015, it was referred to the Joint Committee. On such a referral the Committee had presented its recommendations and a modified Bill based on its suggestions.

In May 2016 both the Houses of Parliament passed the Insolvency and Bankruptcy Code, 2016. The major objective of this economic reforms is to focus on creditor drove insolvency resolution.

Shifting existing regime ‘Debtor in possession’ to a ‘ Creditor in control’

In India, the Insolvency and Bankruptcy Code, 2016 is one matured step towards settling the legal position with respect to financial failures and insolvency. To provide easy exit with a painless mechanism in cases of insolvency of individuals as well as companies, the code has significant value for all stakeholders including various Government Regulators. Introduction of this Code has done away with overlapping provisions contained in various laws –

Before the enactment of this Code, there were multiple agencies dealing with the matters relating to debt, defaults, and insolvency which generally leads to delays, complexities and higher costs in the process of Insolvency resolution.

The ‘Board for Industrial and Financial Reconstruction (BIFR)’, one of the Insolvency Regulators, has been a phantasm for sick industrial companies. It is expected that the Insolvency and Bankruptcy Code, 2016 will expedite the cases pending for a long time and resolve them within 180 days with a further period of 90 days.

Applicability of the Code

The provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities:-

  1. Any company incorporated under the Companies Act, 2013 or under any previous law.
  2. Any other company governed by any special act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such Special Act.
  3. Any Limited Liability Partnership under the LLP Act 2008.
  4. Any other body being incorporated under any other law for the time being in force, as specified by the Central Government in this regard
  5. Partnership firms and individuals

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Moreover, this code shall apply only if minimum amount of the default is Rs. 1 lakh. However, by placing the notification in Official Gazette, Central Government may specify the minimum amount of default of higher value which shall not be more than Rs. 1 crore. 

Exceptions: There is an exception to the applicability of the Code that it shall not apply to corporate persons who are regulated financial service providers like-

  • Banks;
  • Financial Institutions; and
  • Insurance companies.

Objectives of the Code

A sound legal framework of bankruptcy law is required for achieving the following objectives:-

  • Improved handling of conflicts between creditors and the debtor

It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.

  • Set a limit between malfeasance and business failure

It can also provide flexibility for parties to arrive at the most efficient solution to maximize value during negotiations. The bankruptcy law will create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.

  • Macroeconomic downturns losses to be allocated

An infirm insolvency regime leads to the stereotype of “rich promoters of defaulting entities” generating theories such as:

  1. misconduct is the reason for all the defaults made
  2. ultimately it is the promoters who should personally and financially be held responsible for defaults of the firms which are under their control.
  • Macroeconomic downturns losses to be allocated

Clear allocation of these losses is a result of a well-defined bankruptcy framework. Taxes, inflation, currency depreciation, expropriation, or wage or consumption suppression are the common practices of loss allocation. These could affect foreign creditors, small business owners, savers, workers, owners of financial and non-financial assets, importers, exporters.

Key Objectives of the Code

The sole intention of the Insolvency and Bankruptcy Code, 2016 is to provide a justified balance between-

  • an interest of all the stakeholders of the company, so that they enjoy the availability of credit
  • the loss that a creditor might have to bear on account of default

The objective behind Insolvency and Bankruptcy Code, 2016 are listed below-

  1. To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals.
  2. To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e. 180 days).
  3. To maximize the value of assets of interested persons.
  4. To promote entrepreneurship
  5. To increase the availability of credit.
  6. To balance all stakeholder’s interest (including alteration). Balance to be done in the order of priority of payment of Government dues.
  7. To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.
  8. To establish higher levels of debt financing across a wide variety of debt instruments.
  9. To provide painless revival mechanism for entities.
  10. To deal with cross-border insolvency.
  11. To resolve India’s bad debt problem by creating a database of defaulters.
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