The Insolvency and Bankruptcy Code, 2016 was passed in Lok Sabha on May 5, 2016 and is currently pending in Rajya Sabha. The Code was recommended by the Joint Committee of Parliament on April 28, 2016. The Committee was setup to examine the Insolvency and Bankruptcy Code, 2015, which was introduced in Lok Sabha on December 21, 2015. The successful implementation of the Code will depend on establishment and smooth functioning of new entities proposed to be setup under the Code:
- Insolvency and Bankruptcy Board of India
The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.
- Insolvency professionals
A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
- Insolvency professional agencies
The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
- Information utilities.
Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
It also requires adjudication by two agencies, i.e. National Company Law Tribunal under Companies Act, 2013, which has not yet been set up, and Debt Recovery Tribunals (DRT) which are overloaded with pending cases. (As of December 2014, there were 62,000 cases pending with DRT and the disposal rate is about 10,000 cases per year.) The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
Procedure to resolve insolvency in the Code
The Code proposes the following steps to resolve insolvency:
Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.
Issues in the Code that require consideration
The Bankruptcy Board (regulator) will regulate insolvency professional agencies (IPAs), which will further regulate insolvency professionals (IPs). The rationale behind multiple IPAs overseeing the functioning of their member IPs, instead of a single regulator is unclear. The presence of multiple IPAs operating simultaneously could enable competition in the sector. However, this may also lead to a conflict of interest between the regulatory and competitive goals of the IPAs. This structure of regulation varies from the current practice where the regulator directly regulates its registered professionals. For example, the Institute of Chartered Accountants of India (which regulates chartered accountants) is directly responsible for regulating its registered members.
The Code provides an order of priority to distribute assets during liquidation. It is unclear why:
- Secured creditors will receive their entire outstanding amount, rather than up to their collateral value,
- Unsecured creditors have priority over trade creditors, and
- Government dues will be repaid after unsecured creditors.
The smooth functioning of the Code depends on the functioning of new entities such as insolvency professionals, insolvency professional agencies and information utilities. These entities will have to evolve over time for the proper functioning of the system. In addition, the NCLT, which will adjudicate corporate insolvency, has not been constituted as yet, and the DRTs are overloaded with pending cases.
India currently ranks 136 out of 189 countries in the World Bank’s index on the ease of resolving insolvencies. India’s weak insolvency regime, its significant inefficiencies and systematic abuse are some of the reasons for the distressed state of credit markets in India today. The Code promises to bring about far-reaching reforms with a thrust on creditor driven insolvency resolution. It aims at early identification of financial failure and maximising the asset value of insolvent firms. The Code also has provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries.
The unified regime envisages a structured and time-bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalise the ailing Indian corporate bond markets.