The Upper House of Parliament passed the Insolvency and Bankruptcy Code, 2016 on 11 May, 2016. This code now just awaits the Presidents assent. The need for such code arose due to domestic banks struggling to cope up with the amount of bad loans. This act aims to encourage cross border finance and unsecured lending to local borrowers and reducing pressure on credit institutions.

Following are some of the key highlights of the code-

1. Insolvency Resolution Process

Financial creditors assess whether debtor’s business is viable to continue and consider options for its rescue and survival. This involves the following steps-

a) Creditors approach NCLT (National Company Law Tribunal).
b) NCLT provides a moratorium, i.e. time during which no proceeding can be initiated against debtor.
c) NCLT appoints an insolvency professional whose 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.
d) The Resolution Professional identifies the financial creditors and constitutes a creditors committee. The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days)

2. Liquidation

Liquidation takes place due to the following grounds-
(i) A 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the insolvency resolution process;
(ii) The creditor’s committee does not approve a resolution plan within 180 days (or within the extended 90 days);
(iii) The NCLT rejects the resolution plan submitted to it on technical grounds; or
(iv) The debtor contravenes the agreed resolution plan and an affected person makes an application to the NCLT to liquidate the corporate debtor.

After the costs of insolvency resolution (including any interim finance), secured debt together with workmen dues for the preceding 24 months rank highest in priority. Central and state Government dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors.

Insolvency Resolution for individuals/ unlimited partnerships
For individuals and unlimited partnerships, the Code applies in all cases where the minimum default amount is INR 1000 (USD 15) and above. The Code envisages two distinct processes in case of insolvencies: automatic fresh start and insolvency resolution.

Under the automatic fresh start process, eligible debtors (basis gross income) can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh.
The insolvency resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order.

The Code aims at early identification of financial failure and maximizing the asset value of insolvent firms. The Code also has provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries.

The unified regime envisages a structured and time-bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalize the ailing Indian corporate bond markets.