What does Insolvency and Bankruptcy Code 2016 do?

The Insolvency and Bankruptcy Code passed by the Parliament is a welcome overhaul of the existing framework dealing with insolvency of corporates, individuals, partnerships and other entities. It paves the way for much needed reforms while focussing on creditor driven insolvency resolution.

The Code seeks to achieve certainty for recovery and enforcement proceedings and to this extent, it will specifically be a useful tool for creditors and investors. It would be of specific interest to international creditors and investors, who are generally looking at Indian opportunities.

Executive Summary

Global institutions are continuing to grow their investments in India and in this context they are increasing their exposure to Indian entities. Over the years, many concerns have been existing and/or raised amongst international investors on the regulatory and country risks while providing financing to and/or investing in India. The time taken for resolution has been a major point of debate. This Code in the specific will, when implemented in letter and spirit, provide a major boost to the India economy, especially on account of timely resolution and certainty in recovery.

BankruptcyPicture Courtesy-cfoindia

In contrast to the current regulatory landscape, the Code does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. Specific attention is to be drawn to the rights of unsecured and secured creditors in the priority of their claims and therefore the level playing field for their access to an effective insolvency resolution.

“The strict timelines for resolution of insolvency and liquidation proceedings would definitely be an incentive and provide the requisite impetus for economic growth.”

“The Code as a new law, replacing over a dozen laws, when implemented post the infrastructure being put in place, will prove to be the most important step in changing the legislative landscape of India by removing the negativity attached to litigation time and ease of recovery.”


As per the World Bank's Ease of Doing Business report, it takes over four years on a normal to determine bankruptcy in India. A man on the ground would affirm that it requires substantially more investment than that. The proposed indebtedness and insolvency law looks to chop down the opportunity to not exactly a year. This won't just enhance the simplicity of working together in India, additionally encourage a superior and quicker obligation recuperation system in the nation. It is generally trusted that this enactment will change the negative impression of recuperation and suit connected with India.

The Government has defined an arrangement to restore the common chapter 11 laws and supplant them with one that will encourage sans stress and time-bound conclusion of organizations. The draft enactment, since the report issued in November 2015 by a board headed by previous law secretary Mr. T.K. Viswanathan, has experienced different changes, including changes suggested by the Joint Parliamentary Committee on April 2016. The Insolvency and Bankruptcy Code, 2016 ("Code") has now been gone by the Lok Sabha and the Rajya Sabha.

The proposed liquidation enactment tries to address the issues confronted at present with regards to indebtedness and twisting up. The procurements of the Code are pertinent to organizations, restricted obligation substances, firms and people (i.e. all elements other than money related administration suppliers).

This note sets out certain key changes presented by the Code, which is outlined beneath:-

Indebtedness and Bankruptcy Board of India ("Board")

The Board will be set up as the controller under the Code.

  1. Indebtedness Professionals: The Bill proposes to direct bankruptcy experts and bankruptcy proficient organizations. Under the oversight of the Board, these organizations will create proficient guidelines, codes of morals and activity a disciplinary part. Three arrangements of Resolution Professionals are tried to be named – Interim Resolution Professional, Final Resolution Professional, and Liquidator.
  2. Bankruptcy Information Utilities: The Code proposes for data utilities which would gather, order, confirm and scatter budgetary data from recorded organizations and additional monetary and operational lenders of organizations. An individual indebtedness database is additionally proposed to be set up with the end goal of giving data on the bankruptcy status of people. It is not clear whether this will dovetail into the current Central Registry of Securitisation Asset Reconstruction and Security Interest of India ("CERSAI") and/or Central Repository of Information on Large Credits ("CRILC") or wind up adding to the plenty of registries in India.
  3. Insolvency Adjudicating Authority: The setting power will practice locale over bodies of evidence by or against the account holder.
  • The Debt Recovery Tribunal ("DRT") should be the arbitrating power ("Adjudication Authority") with ward over people and association firms other than Limited Liability Partnerships ("LLPs"). Requests from the request of the DRT will deceive the Debt Recovery Appellate Tribunal ("DRAT");
  • The National Company Law Tribunal ("NCLT") might be the Adjudicating Authority with locale over organizations, other restricted obligation elements (counting LLPs.). Advances from the request of NCLT should mislead the National Company Law Appellate Tribunal ("NCLAT"); and
  • NCLAT might be the re-appraising power to hear bids emerging out of the requests went by the Regulator in appreciation of bankruptcy experts or data utilities.

Picture Courtesy-Arihant Capital

Corporate Liquidation

The beginning of liquidation procedure happens on:

  1.  Suggestion of the determination arrangement;
  2.  Inability to present the determination arrangement inside the recommended period or contradiction of the determination  arrangement
  3.  Based on the vote of lion's share of the loan bosses.

    Liquidation Estate: To the degree resources held by the borrower have a place with it, then will frame part of the liquidation domain. Resources will be appropriated by the vendor in the way of needs laid in the law. Singular petitioners or those asserting to have any uncommon rights on resources of the indebted person will shape part of the liquidation procedure.

    Priority: The accompanying obligations will be paid in need given underneath:
  • Bankruptcy Resolution expense and liquidation cost
  • Obligations to secured bank (who have surrendered their security premium) and workers' contribution (for 24 months before beginning)
  • Compensation and unpaid levy to representatives (other than laborers) (for 12 months before beginning)
  • Monetary obligations to unsecured leasers and laborers' levy for prior period
  • Crown obligations and obligations to secured bank taking after requirement of security premium
  • Remaining obligations
  • Inclination shareholders
  • Value Shareholders or accomplices

The priority being given to secured leasers giving up security needs particular consideration, particularly by virtue of the same having the capacity to be abused, particularly if the account holder and the secured lender can impact and impede the guarantee.

Cross border bankruptcy

Given that numerous corporate exchanges and organizations include a worldwide component, the Code endeavors to address this by including procurements for cross outskirt indebtedness. The Code gives that the Central Government can go into concurrences with any nation outside India for implementing procurements of the Code and tell appropriateness of the same occasionally. Further, resources of the account holder situated outside India (in nations with whom India has corresponding courses of action) may likewise be incorporated with the end goal of the indebtedness determination process and/or liquidation before the Adjudicating Authority. It is likewise applicable to note that the meaning of "property" under the Code incorporates 'cash, products, significant cases, land and each depiction of property arranged in or outside India'.

The aim of the Code is to get rid of the out of date existing laws covering parts of indebtedness and liquidation. In spite of the fact that the Code sets out certain procurements to correct and abrogate the current laws to maintain a strategic distance from future prosecution, an unmistakable procurement should be acquainted with unequivocally express the leaving laws being canceled by the presentation of this enactment. The Code has gotten the assent of the Lok Sabha (lower place of Parliament) on fifth May 2016 and of the Rajya Sabha on eleventh May 2016. It now anticipates President's consent to come into power. The base and operational conventions to make this enactment a reality would soon be in progress.

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