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The Insolvency and Bankruptcy Code, 2015
May 09, 2016

The Finance Minister moved the Insolvency and Bankruptcy Bill 2015, known commonly as the Bankruptcy Code, in the Lok Sabha and the house gave its accent in the Monsoon session.

Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt obligations. India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.

  • Today, bankruptcy proceedings in India are governed by multiple laws—the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on.

  • The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.

  • The new Code streamlines and consolidates all these laws to make the process simpler.

  • The passage of this bill will enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the recovery amount.

  • The creditors will not be stymied by red-tape and promoters will directly become accountable for any financial lapses.

  • The bill can ensure quicker resolution of the bad loan problems dogging PSU banks.

  • Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to get a fresh start.

  • The new code will matter to private sector employees too. The Bill, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market too.

Salient Feature

  • New Bankruptcy Bill attempts to create a formal Insolvency Resolution Process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation.

  • A business or debtor who has defaulted on dues can initiate the IRP.

  • Lenders and creditors to a firm, including employees—either secured or unsecured—can do it too.

  • When the IRP is on, creditors’ claims are frozen for 180 days, during which they will hear proposals for revival and decide on their future course of action.

  • Within those 180 days, 75 per cent of the creditors must agree to a revival plan.

  • If this minimum threshold is not met, the firm automatically goes into liquidation.

  • If three-fourths of the creditors decide that the case is complex and cannot be addressed within 180 days, the adjudicator can grant a one-time extension of up to 90 days on the process.

  • The Bill vests the insolvency professionals tasked with the job, with substantial powers. Criminal charges will apply if they notice any asset stripping by the promoters or responsible parties.

  • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

  • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.

  • The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.

  • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

  • The Code provides an order of priority to distribute assets during liquidation.

  • The Code creates an Insolvency and Bankruptcy Fund.


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