Insolvency and bankruptcy code is nothing but a mechanism of settling failed or bankrupt entities without causing damage to any players of the economy. The code was passed by the parliament as a welcome gesture that overhauls the existing framework dealing with insolvency of corporations, individuals and partnerships. It paves way for the much-needed reforms while focusing on creditor driven insolvency resolution.
Measures were taken by the government of India-
Recognising that reforms in bankruptcy and insolvency regime are critical for improving and improvising the business ambience, the government took up the onus of introducing this bill. The bill was introduced in November 2015, drafted by specially constituted bankruptcy law reforms Committee (BLRC) under the ministry of finance. After being drafted, it was recognised by the joint committee of parliament. Both houses of parliament finally allowed the bill to come into effect on 2016.
Applicability of the code-
The provision of the code shall apply for insolvency along with liquidation, voluntary liquidation and bankruptcy of the following.
- 🗸Any organisation incorporated under the companies act, 2013 or under any previous laws.
- 🗸Any limited liability partnership under LLP act 2008
- 🗸Partnership firms and individuals
The objective of the code-
The objective is very simple. It complies for a sound legal framework of bankruptcy law that is required for achieving transparent targets. It allows for improving and improvising the handling of conflicts between creditors and debtors. What it does is, it provides certainty about the process of negotiation, in such a way to decrease problem amongst common property and decrease the information asymmetry.
It also controls the macroeconomic downturns and makes things simple and approachable. It will help you to consolidate and amend laws relating to reorganisation and insolvency, partnership firms and individuals.
The pivotal characteristics of the code-
Resolution of the insolvency-
The insolvency and bankruptcy code 2016 lay down separate insolvency resolving methodologies for organisations, individuals along with partner organisations. It is possible to initiate the procedure either through the creditors or the debtors.
What the code does is, it lays down a maximum time frame for completion of insolvency resolution. The entire modus operandi needs to be completed within the time frame of one hundred of eighty days. It can later be stressed to ninety days only. It can be done only when the large percentage of creditors permit or agree.
Regulator of insolvency-
The code lays down that the insolvency and bankruptcy board of India shall oversee the proceedings relating to insolvency in the nation. They regulate all organisations that are registered by the board. The insolvency and bankruptcy board shall consist of a ten-member team. It includes a representative of law and finance ministries as well as the RBI.
Insolvency and bankruptcy adjudicator-
The code has introduced a couple of district tribunals for overseeing the approaches for resolving insolvency. These are (1) National company law tribunal for organisations and limited liability partnership. (2) Debt recovery tribunal for overseeing insolvency resolution.
An insolvency plea is given to the authority that adjudicates by operation or financial creditors or the corporate debtor. The plea can be accepted or rejected in a maximum time frame of fourteen days. In any case, if the plea gets acceptance then the tribunal will have to appoint an IRP for drafting a plan of resolution within 180 days. Further, the court would initiate the entire process of resolving corporate insolvency.
During this time frame, the top honchos of the company shall remain suspended, whereas the promoters shall have no further say in the management. The IRP can seek the help of the management of a particular company. In case the CIRP is unable to receive the organisation, then a process of liquation shall be a remaining constraint.
Quite a few individuals are obstructed from providing any plan of resolution in case there are any defaulters. Hence the wilful defaulters, management or promoters of the company in case there is any non-performing outstanding debt.
The smooth functioning of the code-
The smooth functioning of the code depends on the functioning of the latest entities such as insolvency professionals. These entities will have to evolve for the proper functioning of the system. Besides, the NCLT will adjudicate corporate insolvency has not been constituted and the DRT’s are overloaded with pending cases.
Bring about far-reaching reforms-
The code promises to bring about far-reaching reforms with a thrust a creditor drove insolvency resolution. It aims to identify financial failure and maximising the asset value of insolvency firms. The code does have a special provision to address cross border insolvency. It can be done through bilateral agreements and reciprocal arrangements with some other countries.
The intention of the code is doing away with antiquated existing laws covering aspects of insolvency and bankruptcy. Though the code sets out certain provisions to amend and override the existing laws to avoid litigation the days to come, clear provisions are needed. It explicitly states the existing laws being repealed by the introduction of this legislation. Apart from this, the bill also restricts the selling of defaulter’s property to any such individual right at the time of liquidation.
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