The enactment of the ‘The Insolvency and Bankruptcy Code
2016’ (IBC) on May 26, 2016 is perhaps one of the biggest reforms along with
GST undertaken by India in recent times. The Code unifies and streamlines the
laws relating to recovery of debts and insolvency for both corporate and
non-corporate persons, including individuals.
The preamble to the Act introduces the Act as
– An Act to consolidate and amend the laws
relating to reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals
– To fix time periods for execution of the law
in a time bound manner
– To maximise the value of assets of interested
persons
– To promote entrepreneurship
– To increase availability of credit
– Balance the interests of all stakeholders
including alteration in the order of priority of Government dues.
The vision of the new law is to encourage entrepreneurship
and innovation. Some business ventures will always fail but they will be
handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on
instead of being bogged down with decisions taken in the past.
The Code repeals or overrides around 11 laws and promises to
bring a sea change in how debt recovery and insolvency are handled in India,
drawing from the success of such law in other countries.
Insolvency, Bankruptcy and Liquidation
Bankruptcy and Liquidation share in common the concept of
‘Insolvency’. This means that it takes a person or a company becoming
‘Insolvent’ to trigger a Bankruptcy or Liquidation.
Having said that, not all Liquidation occurs as a result of
Insolvency (i.e., Members Voluntary Liquidations occurs when the shareholders
of a solvent company elect to liquidate the company, simply because that
company has achieved its purpose).
To address the question directly, Insolvency is the common
link to Bankruptcy and Liquidation. Let me unpack these concepts.
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 insofar 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 incorporated under any law for
the time being in force, as the Central Government may by notification specify
in this behalf
5. Partnership firms and individuals.
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.
Institutional set up under
the code
With a view to improve Ease of doing business in India, the
code provides for a time bound process for speedy disposal and also the manner
for maximisation of value of assets. It will create a win-win situation not
only for the creditor and debtor companies, but it will also benefit the
overall economy.
The IBC provides an institutional set-up comprising of the
following five pillars:
I. Insolvency Professionals (‘IP’) –To
conduct the corporate insolvency resolution process and includes an interim
resolution professional; the role of the IP encompasses a wide range of
functions, which includes adhering to procedure of the law, as well as accounting
and finance functions.
II. Insolvency Professional Agencies (‘IPA’)
–To enroll and regulate insolvency professional as its member in accordance
with the Insolvency and Bankruptcy Code 2016 and read with regulations.
III. Information Utilities – to collect,
collate and disseminate financial information to facilitate insolvency
resolution.
IV. Insolvency and Bankruptcy Board of India
(‘IBBI’) – A Regulator who will oversee these entities and to perform
legislative, executive and quasi-judicial functions with respect to the
Insolvency Professionals, Insolvency Professional Agencies and Information
Utilities.
V. Adjudicating Authority – The National
Company Law Tribunal (NCLT), established under the Companies Act, 2013 would
function as an adjudicator on insolvency matters under the Code.
The implementation of any system does not only depend on the
law, but also on the institutions involved in administration and execution of
the same. It depends on the effective functioning of all the institutions but
the Insolvency Professionals have a vital role to play in the insolvency and
bankruptcy resolution process.
Distinguishing Features of the IBC
The Code provides a comprehensive and time bound mechanism to
either put a distressed person on a firm revival path or timely liquidation of
assets. The interests of all stakeholders have been taken care of. Some of the
salient features of the code are as follows:-
1. Dedicated Adjudicating and Appellant
Authority:
The adjudicating authority for Corporates
shall be National Company Law Tribunal (NCLT) and for others shall be Debt
Recovery Tribunal (DRT).The first appeal shall lie with NCLAT and DRAT
respectively and the final appeal shall lie with the Supreme Court. No other
Court shall have any jurisdiction to grant any stay or injunction in respect of
matters within the domain of NCLT, DRT, NCLAT and DRAT. This would provide a
specialised mechanism to resolve stressed accounts problem.
Further, a separate regulator i.e. the
IBBI is set up to regulate various matters under the Code.
2. Time Bound Process: The Code provides that
the insolvency resolution shall have to be completed within 180 days (maximum
one extension of 90 days allowed) from the date of admission of application for
insolvency resolution. If no resolution is reached in the above time frame, the
Code provides for automatic liquidation. Hence, once default happens and
insolvency resolution application is filed by any stakeholder, financial
creditors would be forced to make intelligible choices so as to maximise
economic value of business or face liquidation. At the same time, promoters
should get sensitive about managing cash flows as default would straight lead
to loss of control over business.
3. Preserving Value of Business: Once the
application for insolvency resolution is admitted, there shall be complete
moratorium till completion of insolvency proceedings. Board of Directors shall
remain suspended and affairs of the company shall come under the control of the
Resolution Professional. Though the entity shall remain a going concern.
Creditors shall be precluded from taking any action against the Company
including enforcement of security under SARFAESI Act during this period. Even a
lessor cannot take possession of leased assets back during the moratorium
period. Thus it shall provide an opportunity for the creditors to discuss
sensible restructuring that can provide a better value than straight
liquidation even while business and its assets are preserved during this
period.
4. Failure to Pay is the new Trigger: Existing
mechanisms under SICA and Companies Act are tuned to provide for interjection
when the borrower’s ability to pay is demonstrably impaired. Whereas under the
Code, a creditor can trigger insolvency resolution process just on default.
Thus a defaulter can be dragged into insolvency resolution process without
waiting for its net-worth to get eroded or for the account to be classified as
NPA. This would be a big deterrent for able debtors to arm-twist small
creditors.
Therefore, the Code will have an effect
of early identification of distress. It will instill discipline among promoters
or else they will risk losing management control and also face liquidation.
5. Professionalisation of Insolvency
Management:
The Insolvency Professionals shall be
regulated and licensed professionals and will have a critical role in the
process. During the process of Insolvency Resolution, the management of the
borrower shall be taken over by the Insolvency Resolution Professional. This
will help preserve the value of business and assets of the debtor during the
insolvency resolution process. Lenders will no longer be worried about
mismanagement by promoters of distressed corporates. As of now, the only option
lenders had was to convert debt into equity and take over the management for
which they may not be having the requisite competency.
6. New Priority Order of Payment: A welcome
change brought in by the Code is that the statutory dues are relegated to the 5th
position in the priority of payment from the current 1st
position. Herein, even unsecured financial creditors shall be paid before
clearance of dues of the Central and State Governments. This provision is
likely to boost corporate bond market as well as debt funding of SMEs and
startups.
7. All Creditors empowered to trigger
Insolvency: All creditors whether domestic or foreign, whether secured or
unsecured and whether financial or operational can apply for insolvency
resolution. The defaulting debtor himself may also apply. Thus for the first
time, structured mechanism for redressal of defaults is being provided to
operational creditors such as suppliers, employees etc. Similarly, the
foreign lenders and unsecured lenders shall find a mechanism to enforce their
debts in a fair and transparent process. This no doubt will deepen the credit
markets in India.
8. Enforcement of Personal Guarantees: If any
corporate debt is secured by means of personal guarantee, then the bankruptcy
of the personal guarantor shall be dealt with by same NCLT rather than DRT.
Thus, there will be a common forum for a creditor to enforce debt from both
borrower and guarantor.
9. Information Utilities: There is an enabling
provision to facilitate creation of Information Utilities which will house
comprehensive credit data relating to debtors, their creditors and securities
created. This will improve transparency and better decision making at all
levels.
10. Fresh Start: A non-corporate debtor on finding
himself unable to pay his debts may apply for a fresh start by discharge from
certain debts, provided he satisfies the following conditions:-
– Gross annual income of the debtor is not
exceeding Rs 60,00/-
– Aggregate value of debtor is not exceeding
Rs. 20,000/-
– Aggregate value of debts is not exceeding Rs.
35,000/-
– Debtor is not undercharged bankrupt
– Debtor does not own a dwelling unit
(encumbered or not )
No Fresh Start Order in the last 12 months
prior to the date of application.
Brief Overview of Corporates Insolvency Resolution Process
In the following flowchart, we can see an overview of the
Corporate Insolvency Resolution Process.
Who can become an Insolvency Professional?
Category I – Any Chartered Accountant, Company Secretary,
Cost Accountant and Advocate who has passed the Limited Insolvency Examination
and has 10 years of experience and enrolled as a member of the respective
Institute/Bar Council; or a Graduate who has passed the Limited Insolvency
Examination and has 15 years of experience in management, after he received a
Bachelor’s degree from a University established or recognised by law.
The IBBI has notified the syllabus for the Limited Insolvency
Examination. For syllabus, enrollment process for the examination, etc.,
kindly visit: http://www.ibbi.gov.in/limited-insolvency.html or www.iiipicai.in
The ICAI has also set up a section 8 company and its website
contains an interesting E Learning platform covering the entire gamut of IBC
including mock tests. (www.iiipicai.in)
Category II – Any other individual on passing the
National Insolvency Examination.
The IBBI is yet to notify the syllabus for the National
Insolvency Examination.
The IPs are regulated by the code set out by the IBBI.
Section 208 (2) sets out code that needs to be followed by every insolvency
professional.
Further, the duties of the IP are laid out in the Model Bye
Laws [IBBI – (Model Bye-Laws and Governing Board of Insolvency Professional
Agencies) Regulations 2016, Clause VII of Schedule – Regulation 13].
Opportunities for Chartered Accountants (CAs)
The passage of the Insolvency and Bankruptcy Code, 2016 has
thrown up a tremendous set of new opportunities for CAs. On an analysis of the major responsibilities
of the IPs to the Debtors and Creditors, the IPs should be well versed with
aspects of Company Law, Taxation, Banking and Finance, Stakeholder Management,
Valuation/Sale of assets, Cash flow management and Commercial and business
acumen.
Considering the onerous responsibilities on the IP, it would
be very difficult for an individual to possess such multiple skills and hence
the IBC has brought in a concept of Insolvency Professional Entities (IPEs)
which can be registered as partnerships, limited liability partnerships and
corporate entities.
Such IPEs can be expected to have the capacity to offer the
diverse skill sets on a single platform to facilitate the Insolvency and
Bankruptcy practice.
IPE presents opportunities to CAs to team up their
counterparts, Company Secretaries, Cost Accountants and Lawyers and present a
complete solution to their clients.
Based on precedents of the last 6 months, and a view of this
author, in case of insolvency cases filed by Financial creditors, IPs can earn
between Rs. 2 lakh to Rs. 4 lakh per month and in case of cases filed by
creditors or by the corporates, IPs can earn between Rs. 50,000 to Rs. 2 lakh
per month depending upon the size of business and complexity of each case.
With the recent push by the Reserve Bank of India (‘RBI’) to
the Banks to file for Insolvency on the top 500 defaulters/NPAs under the new
IBC, banks have moved fast and started the process in the right earnest and the
process is expected to pick up speed. Further, with large scale media coverage
on the IBC, the creditors have also filed numerous cases for Insolvency on
Debtors and have received favourable closures in a short span of time. Both
these would throw up numerous and multiple opportunities for Professionals in a
short span of time and the first mover advantage will always help in quickly
building up the credentials in this space.
As on date, approximately 800-1,000 IPs have been
registered with IBBI and there is an estimate of more than 1 lakh cases of
defaulters/NPA pending only with Banks at various stages. Hence, there exists a
significant gap between the potential demand of IPs expected in the near future
versus the supply of IPs.
Problem Areas under IBC
As the Indian corporate sector and business community get
more aware of the IBC due to push by the Government to the banks to file for
insolvency and widespread media coverage, financial creditors (primarily
unsecured lenders) and operational creditors are using the IBC as a pressure
tactic on the Corporate Debtor to pay their due sums. During the last few
months, there have been numerous cases filed by operational creditors with NCLT
under the IBC, however, many such cases filed by operational creditors have not
been admitted by NCLT due to various reasons. However, at the same time, under
the fear of IBC, many cases of operational creditors have been settled by the
Corporate Debtor to avoid being referred to NCLT under the IBC. Hence, as we
get more judicial precedence of cases not being admitted by NCLT, sense should
prevail and only genuine cases would be filed under IBC. Further, business
practices amongst the Indian corporate sector and business community especially
with respect to operational creditors should definitely see a significant
improvement in the years to come.
Conclusion
This Code is currently in early stages of
implementation and is focused on revival of business and putting idle resources
of the economy to use, this can bring a huge change in lives, livelihoods and
prospects of both creditors, debtors and professionals. It is one of the most
challenging and equally rewarding career options. In this era of major reforms
in uncharted territories, it throws up a big opportunity to work as an
Insolvency Professional and get an early mover advantage.
