What is Insolvency And Bankruptcy Code, 2016?
The Insolvency and Bankruptcy Code, 2016 (“the Code”) helps the companies to restructure themselves and make better financial plans or in certain situations, for the winding up of the company. The Code has repealed all the older acts dealing with corporate insolvency and has constituted a single and central law. Let us first understand basics of the Code:
- The Code covers Companies, individuals, Partnership firms and Limited Liability Partnership.
- The Code requires appointment of insolvency professionals who are licensed professionals and help companies get the best outcomes from their insolvency.
- National Company Law Tribunal (NCLT) is the governing body for helping insolvent companies with their reformation or liquidation.
- The code aims at resolving bankruptcy and insolvency of a company within a period of 180 days.
Who can initiate the recovery process with the NCLT ?
Under the IBC, 2016, the following can start a recovery process with the NCLT against a corporate debtor:
- Financial Creditor i.e. any person to whom a financial debt( a debt on which interest is to be paid) is owed by the debtor.
- Operational Creditor i.e. a person to whom an operational debt is owed with respect to any of the following:
- Goods or Services
- Employment (Yes. Employees are covered too)
- Repayment of dues under any law and payable to the Central Government / any State Government or any local authority.
The IBC at present can only be triggered if there is default of minimum One Lakh Rupees.
Process of Recovery Under IBC, 2016:
The first step is to send a demand notice to the debtor and wait for 10 days to receive the payment due. If no payment is received, an application can be filed with the NCLT in the form of a CIRP application i.e. Corporate Insolvency Resolution Process.
The Insolvency and Bankruptcy Code lays down the following steps for insolvency proceedings before the NCLT:
Step 1: Filing of the insolvency petition:
The company itself, creditors or investors can file an insolvency petition before the NCLT to initiate the corporate insolvency resolution process for the corporate debtor. The insolvency petition can be filed by the creditors only if the debt by the company exceeds an amount of Rs. 1 lakh. The obligation to prove the default in payment by the company lies on the creditors, whether it is a financial creditor or an operational creditor. Once the petition is filed, the NCLT gives a reply within 14 days of either accepting or denying the CIRP application.
Step 2: Appointment of an Interim Resolution Professional:
Once the company is considered insolvent by the NCLT, the tribunal gives an interim order to suspend the company’s Board of Directors and a Resolution Professional takes over the company’s management until the corporate insolvency resolution process ends. The Insolvency Professional has the powers to modify the accounting, management and transfer assets that may help the company to recover and be able to pay off its creditors. The professional works for either recovery or winding up of the company.
Step 3: Implementation of a Moratorium:
A moratorium is a temporary prohibition on certain activities of the company including filing or continuing any legal action against the corporate debtor, suspending or transferring any essential goods or services, transferring any assets, recovering any property, or enforcing any security interest. It may not be compulsorily implemented in all cases.
Step 4: Appointment of COC:
Claims are invited by the resolution professional, who also verifies and classifies the claims by the financial and operational creditors. Once the claims are verified and classified, the Committee of Creditors (COC) is formed within 30 days. The COC comprises all the financial creditors of the company. Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be consist of members as under:
(a) 18 largest operational creditors by value;
(b) one representative elected by all workmen other than those workmen included under point (a) i.e. under 18 operational creditors; and
(c) one representative elected by all employees other than those employees included under point (a) i.e. under 18 operational creditors.
Step 5: Appointment of Insolvency Professional:
Once the detailed report is made by the interim professional, the COC appoints an independent ‘Insolvency Professional’. The interim resolution professional may also be appointed as the Insolvency Professional. The company’s functions are administered by the insolvency professional during this time in accordance with the order of NCLT.
Step 6: Final Insolvency Plan:
The insolvency professional submits a final plan to the NCLT within 180 days, which may be extended up to 270 days if the tribunal deems it necessary. Once the plan is approved by the NCLT, it is binding over the company’s owners, employees and creditors. If the plan is not approved by the tribunal, NCLT passes an order for liquidation of the company i.e. the sale of company’s assets to cover its debts and loans.
The Code today:
The Code has helped resolve insolvency and bankruptcy proceedings involving more than ₹ 80,000 crore in the year passing-by and is expected to swell beyond ₹ 1 trillion in 2019 with several big-ticket default cases pending. In 2018, insolvency proceedings against some companies including Bhushan Steel, Electrosteel Steel, Binani Cement were almost completed and the new management from their successful bidders—Tata Steel, Vedanta group and Adity Birla-led UltraTech Cement Ltd, respectively—have taken over the management control of the stressed assets. Big Corporate houses—including Arcelor Mittal, Tata Steel, Reliance Industries, UltraTech Cement, UK-based Liberty Group, Vedanta group, Dalmia Bharat group—were among the leading companies which had submitted their resolution plans to acquire the debt-ridden.
How can we help?
Chartered Accountants can act as Insolvency Professionals and play a pivotal role in conducting the corporate insolvency resolution process. Chartered Accountants perform a wide range of functions, which include adhering to the procedure of the law, as well as accounting and finance-related functions. Chartered Accountants act as a guardian of the interests and rights of all the stakeholders and ensure that the debtors do not dupe or deceive the creditors to their own personal advantage.
Further, if your customers have defaulted in paying your dues exceeding Rupees 1 lakh, you may explore the possibility of sending them a notice under the Code, after taking the necessary legal advice from Chartered Accountants.
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Research & Publishing Team:
CA Raj Sheth (Partner at BCG)
Kareena Jaisinghani (Intern at BCG)