Bankruptcy Code, 2016 – Can it overhaul corporate insolvency?
AN effective and fast insolvency procedure will allow business to be sold/wound up/revive while there is value remaining in the business, allowing for maximized recovery and better involvement of various stakeholders on equity basis.
The complexity of the erstwhile corporate insolvency law and the laws dealing with the individual insolvency required adjudication before multiple authorities. The basic defect of over involvement of judicial machinery at various steps leads to unreasonable delays and inadequate recovery of money by the creditors and other stakeholders. Ultimately the delay caused in disposing the cases caused erosion of intrinsic value of the assets.
With the view to offer time bound insolvency resolution and to unify the insolvency framework for both the corporate and individuals, the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) was passed by the Parliament on 11 May, 2016 which got the President’s assent on 28 May, 2016 and it was notified in the official gazette on the same day.
This article attempts to highlight the significant changes in the insolvency mechanism for the Corporate as follows:
I. The Code categorize the creditors into Financial Creditors and Operational Creditors
The term Creditor under the code includes financial creditor, operational creditor, secured creditor, unsecured creditor and decree-holder, though the erstwhile law did not have such categorization of Creditors.
In general, a financial creditor is a creditor to whom a financial debt is owed by the corporate debtor such as banks &financial institutions.
An operational creditor is one which is on account of an operational transaction with the corporate debtor. In other words, who has provided goods or services to the corporate debtor, including employees, central or state governments.
Under the Code, a financial creditor or any operational creditor or the corporate debtor itself may initiate the corporate insolvency resolution process.
II. Change in the trigger point for initiating the Corporate Insolvency Resolution
Mere commission of a default can lead to corporate insolvency resolution under the code, wherein inability to pay its debts was one of the cases to trigger the winding up process by the Court.
In other words, unlike the previous law, a financial creditor need not serve any demand notice to the corporate debtor and wait for a period of three weeks. The Code empowers a financial creditor either by itself or jointly with other financial creditors to file an application for initiating corporate insolvency resolution process against the corporate debtor before the NCLT.
Basis the interpretation of the relevant provisions of the Code, it apparently over empower a financial creditor who could initiate the application for corporate insolvency proceedings of a Company, maliciously, in case of genuine omission to pay the financial creditors during business of a Company. The Rules of the code (presently open for public comments) are expected to clarify these severe provisions of the law.
III. The code attempts to provide enough for revival of the entity first, before liquidation
The Corporate insolvency resolution process may be initiated by the Creditor or Corporate debtor itself as per the provisions under the Code and broadly the code provides a two stage process for every Corporate debtor as follows:
a) Corporate Insolvency Resolution Process , i.e. Revival:
It’s the first stage wherein the Creditors have been empowered to judge whether the debtor’s business is viable to continue and the options for its timely rescue and revival. The Creditors committee consisting of the financial creditors are required to approve the resolution plan by not less than 75% of the voting share of the financial creditors. The Code does not prescribe the types of revival plans, which may include debt-equity management, sale of assets, financing etc.
Under the Code, the entire resolution and revival process is controlled by a regulated professional known as Insolvency Resolution Professional. The Resolution Professional’s primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors.
In case, the resolution plan is not passed as per the prescribed majority of the creditors or if the insolvency resolution plan is not completed within 180 days from the date of admission of the Application, the Adjudicating authority may order to wind up and distribute the assets of the debtor.
IV. Concept of Fast Track Corporate Insolvency Resolution Process
The Code provides the fast track resolution for certain corporates with less complex structure and having the assets and income less than the limit prescribed, which intends to be completed within 90 days instead of 180 days in other cases. The said limits are yet to be prescribed in the rules.
V. New waterfall-change in the order of priority for payments at the time of Liquidation
The Code prescribes the significant changes in the priority order of payments at the time of liquidation of the Corporate debtor, wherein the government dues have been downgraded below the unsecured lenders, whereas under the previous legislation, the Government dues were immediately below the claims of secured creditors and workmen in order of priority.
Further, in case of liquidation, a secured creditor may opt to enforce his security outside liquidation process and could receive the proceeds from the sale of the secured assets in first priority, he must contribute any excess proceeds to the liquidation estate, though, in case of any shortfall in recovery, the secured creditors will be at a lower priority below the unsecured creditors, to the extent of the shortfall.
VI. Added advantages of Insolvency Resolution Professionals and Information Utilities
a) Insolvency Resolution Professionals
The Code has come with a new class of professionals as Insolvency Resolution Professionals (IRP’s). The code empowers the IRP’s to take over the management of the corporate debtor. The IRP’s are required to identify the assets of the distressed Company, to conduct the meetings of the financial creditors, drafting and initiation of the resolution proposal, to maintain confidentiality of information acquired as a result of professional relationships.
The role of the IRP’s has been carefully laid out so as to minimize the burden on the adjudicating authority while simultaneously ensuring fairness and efficiency of the insolvency resolution process.
b) Information Utilities
With the intent to speed up the insolvency resolution process, the Code has come up with the creation of Information Utilities (IU), which will collate, store and authenticate financial data. The availability of correct and accurate financial information would facilitate and fast track the entire process of insolvency resolution.
In comparison with the earlier legislation for Corporate Insolvency resolution, the Code provides for early identification of distress and a limited time period for parties to reach a decision whether to go ahead with a resolution plan or to go ahead with the liquidation of the Company.
This time bound insolvency resolution law makes it crucial for the Insolvency Professionals and the Adjudicating Authorities to play their respective roles in a time efficient manner.
(The author is Deputy Manager-Legal, International Business Advisors, New Delhi.)