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What is the Insolvency and Bankruptcy Bill?

The Insolvency and Bankruptcy Bill is the new code through which wilful defaulters can announce their state of being insolvent or unable to pay financial dues. The law applies to both individuals and corporate firms.

What is insolvency?

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
It may be resolved by changing the repayment plan of the loans, or writing off part of the debt.
If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay the outstanding debt.

Why do we need a new law?

Insolvency resolution in India took 4.3 years on an average, as of 2015.
This is higher when compared to other countries such as United Kingdom (1 year) and United States of America (1.5 years). These delays are caused due to pendency of resolution cases in courts and confusion due to lack of clarity in the current bankruptcy framework.

What does the current Bill aim to do?

The Bill provides for a time-bound process to resolve insolvency. Upon occurrence of a default, creditors have control over debtor’s assets and decisions to solve insolvency should be taken within a 180-day period by the creditors.
To ensure uninterrupted resolution process, the Bill also provides immunity for debtors from the claims and court cases of creditors during this time period.
The Bill also consolidates provisions of the current legislative framework, to form a common forum for debtors and creditors of all classes to resolve insolvency. The Bill has provisions applicable to companies and individuals.
The Bill creates various institutions to facilitate a time-bound resolution process. These include licensed professionals who administer the insolvency resolution process, and utilities that will act as depositories of financial information of the debtor

Who facilitates the insolvency resolution under the Bill?

The Bill creates various institutions to facilitate resolution of insolvency. These are:

Insolvency professionals:

A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making

Insolvency professional agencies:

The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examination to certify the insolvency professionals and enforce a code of conduct for their performance

Information utilities:

Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults

Adjudicating authorities:

The proceedings of the resolution process will be adjudicated by National Companies Law Tribunal, for companies; and Debt Recovery Tribunal, for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors

Insolvency and Bankruptcy Board:

The Board will regulate the insolvency professionals, insolvency professional agencies and information utilities set up under the Bill. The Board will consist of representatives from RBI, and Ministries of Finance, Corporate Affairs and Law

What is the procedure to resolve insolvency?

Initiation:

When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.

Decision to resolve insolvency:

A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional.
The creditors committee will take a decision regarding the future of the outstanding debt owed to them.
They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them.
If a decision is not taken in 180 days, the debtor’s assets go to liquidation.

Advantages

Will help address the Chakravyuha Challenge (firms’ ability to enter but not exit) as per economic survey.
Speedy closure will help firms on the brink to be either restructured or sold off with limited pain for all involved.
In some cases, if this is done swiftly, assets can be put to good use and the firm can be revived.
For banks or lenders, the money recovered can be lent again, promoting efficient allocation of resources.
Make it easy for the budding entrepreneurs.
will help deepening of bond market via increased investor confidence.

Liquidation:

If the debtor goes to liquidation, an insolvency professional administers the liquidation process.
Proceeds from the sale of debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.

Civil Service India