Cracking the Code – Part I – Introduction

The Insolvency and Bankruptcy Code, 2016 (“Code”), has attracted attention since its inception and it is being closely watched since the day it has come into effect, as it brings along with itself a promise to change the face of corporate insolvency process in India. The Code is a result of years of grappling with the Insolvency laws of India and an attempt to overhaul them. In this Article we seek to highlight the journey towards the Code and the preceding laws that eventually had to make way for the Code.

History of Insolvency Laws in India

In India, the necessity of insolvency laws was first felt in the Presidency towns of Bombay, Calcutta and Madras as they were the towns where trade was primarily conducted during the time of the British reign in India. Section 23 and Section 24 of the Government of India Act, 1800 which conferred jurisdiction to decide on matters pertaining to insolvency on the Supreme Court of Fort William and Madras and the Recorders Court at Bombay. These courts were empowered to make rules and orders for granting relief to insolvent debtors.

Subsequently in 1828, Statute 9 was passed pursuant to which insolvency courts for relief of insolvent debtors was established in the Presidency towns. In 1848, the Indian Insolvency Act, 1848 was promulgated. However, in the subsequent years, to ensure that the insolvency laws were in sync with the changing times, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 were promulgated to ensure that the Presidency towns and the non-Presidency towns were both covered under the purview of insolvency laws in India.

Insolvency Resolution under the Companies Act, 1956

The Companies Act, 1956 (“Old Act”) governed all aspects of functioning of companies, including their winding up. The Old Act had no definition of the terms insolvency or bankruptcy and dealt only with the ’inability to pay debts’. However, for all practical purposes, it was the only law available for dealing with corporate insolvency. High Courts, depending on the jurisdiction of incorporation were the adjudicating authority for winding up related matters under this law. Creditors with unpaid dues above a defined threshold could petition the court for winding up a company. Winding up was preceded by liquidation, a process managed by an Official Liquidator (“OL”), appointed by the High Court. The OL was responsible for collecting the assets of the company, and managing the sale and the distribution of the proceeds in accordance with the priority defined in the Old Act. This Old Act, passed in the early periods of India’s policy of industrialization, prioritized workmen dues and dues to the government over secured creditors’ dues.

In line with the continuing economic policy of the Government of India (“GOI”) with respect to providing impetus to the ease of doing business in India, the Code was promulgated on May 28, 2016. The Code will be a giant step towards resolving the insolvency issues marring business in India, wherein currently as per the World Bank Report, India is ranked 136th out of 189 countries on the parameters of resolving insolvency issues. Further as per the World Bank Report currently on an average it takes four years for resolving an insolvency issue in India which is way higher than countries like United Kingdom or United States of America where it takes an average of only one year to resolve insolvency related issues for businesses. In light of the above, the Code shall go a long way in structurally strengthening the process of identification and resolution of insolvencies in India.

Overview of the Code

The Code will encompass many existing laws, including the Sick Industrial Companies (Special Provisions) Act, 1985, Presidency Towns Insolvency Act, 1909, Provincial Insolvency Act, 1920 and will become the overarching law to address insolvency in India. The Code provides for requisite institution building (the National Company Law Tribunal (“NCLT”) in the main) and creation of a pool of insolvency professionals. The Insolvency and Bankruptcy Board of India will be set up, which will act as a regulator for these professionals.

Constitution of a Regulator

The Code envisages the constitution of the Insolvency and Bankruptcy of India (“Board”). The Ministry of Corporate Affairs (“MCA”) vide a notification dated August 5, 2016 notified Section 188 to Section 194 which deal with constitution of the Board. Further, on November 1, 2016, the MCA notified Section 196 of the Code which provides for the powers and functions of the Board. The Board shall have broad powers in respect of all matters governed by the Code including registration and governing of the insolvency professionals and the insolvency institutions, framing and implementation of various regulations pertaining to the insolvency and bankruptcy related laws etc. Thus, the Board shall have a broad range of administrative, legislative and quasi-judicial functions. The objective appears to bring the Board on par with market regulators like the Insurance Regulatory and Development Authority which shall help a great deal in streamlining the process related to insolvency and bankruptcy related laws and processes.

As per the Report of the Bankruptcy Law Reform Committee, the objective of the Board is “to utilize all legislative, executive and quasi-judicial functions so as to achieve a well-functioning bankruptcy process in India. This would include features of:

  1. high recovery rates in a net present value (“NPV”) sense;
  2. low delays from start to end;
  3. sound coverage of the widest possible class of claims e.g. bank loans, corporate bonds, etc.; and
  4. a perception in the minds of persons in the economy that India has a swift and competent bankruptcy process.

Insolvency Adjudicating Authority

With respect to the provisions relating to the adjudicating authority, the Code provides for a clear demarcation between the adjudicating authorities who shall exercise judicial control in matters arising out of the Code. Hence, in case of corporate bodies like a company or a limited liability partnership, the matters would be heard by the NCLT and the appellate body shall be the National Company Law Appellate Tribunal (“NCLAT”), whereas in case of individuals and partnerships the adjudicating bodies shall be the Debt Recovery Tribunal (“DRT”) and the appellate body shall be the Debt Recovery Appellate Tribunal (“DRAT”).

Hence one significant change is that all corporate insolvency matters will now fall within the sole jurisdiction of the NCLT. Establishing a single adjudicating authority, similar to the Chancery Division in the UK’s High Courts, this shall enable insolvency processes to be conducted more efficiently and reduce the risk of challenge. It also addresses previous issues whereby debtors could frustrate the restructuring process through manipulating the differences and complexities of various laws.

The next post will deal with the Insolvency Resolution Process and the important principles to be kept in mind while pursuing the same.

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