Insolvency and Bankruptcy

Legal Framework of the Insolvency and Bankruptcy Laws in India

• The Insolvency and Bankruptcy Code, 2016 (IBC), is the primary legislation in India that governs insolvency and bankruptcy proceedings.
• The IBC consolidates and amends laws relating to the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner, thereby maximizing asset value and balancing the interests of all stakeholders.

What is Insolvency and Bankruptcy?

• Insolvency is a critical financial condition in which an individual, business, or organization is unable to meet its financial commitments and repay its debts as they become due due to economic distress. It's a distressing state marked by a misalignment between financial obligations and available resources. This situation can result from a multitude of factors, including poor financial planning, excessive debt accumulation, economic recessions, or unexpected crises, including legal disputes, natural disasters, and health emergencies. In a nutshell, insolvency is a situation where incomes are too low to pay the debts and liabilities exceed the assets.
• Bankruptcy is a legal process adopted when the individual, business, or organization becomes insolvent, and is designed to provide financial relief to those struggling with overwhelming debt who have become insolvent. It operates under the jurisdiction of the Tribunals, i.e., DRT, NCLT, and NCLAT. It is designed to help debtors regain their economic footing, providing a fair resolution for creditors. Bankruptcy gives debtors several crucial advantages. First and foremost, it grants an automatic stay, halting creditors' collection efforts, such as harassment and foreclosure. It enables the insolvents to eliminate or reduce debt by adopting the liquidation process. However, bankruptcy has its drawbacks, including the potential loss of assets, a negative impact on credit scores, and the requirement to meet specific eligibility criteria. In summary, bankruptcy serves as a legal lifeline for those burdened by insurmountable debt, offering a chance to restructure their finances or liquidate assets while ensuring that creditors receive their fair share of repayment. It's a complex process with both pros and cons. 
• Section 3, 5, and 79 of the Act provide essential definitions, including definitions for 'default', 'financial debt', 'secured creditor', 'debtor', 'bankrupt', 'bankruptcy process', 'excluded debt', etc..

The Significance of the Insolvency and Bankruptcy Code

• Debt Resolution: One of the primary functions of insolvency and bankruptcy processes is debt resolution. When individuals or businesses find themselves in financial distress, they may be overwhelmed by the burden of their debts. The Insolvency and Bankruptcy Code provides structured and legal frameworks to help these entities address their debts systematically. The Code provides for the process of insolvency resolution and liquidation for individuals, partnership firms, and corporations, outlining the effective resolution of overwhelming debts. 
• Creditor Protection: While the insolvency and bankruptcy processes are designed to provide relief to debtors, they also serve to protect the rights of creditors. Without these processes, creditors might resort to aggressive and potentially harmful tactics to recover their debts, which could lead to a destabilized financial environment and an increased risk of debtor exploitation. Through insolvency and bankruptcy procedures, creditors are provided with a structured and equitable means of seeking repayment. In many cases, financial creditors have the opportunity to participate in negotiations and settlements that can maximize their recovery. This balanced approach prevents the creditors from pursuing aggressive, individual actions that may harm the debtor's ability to recover and thrive in the future.
• Economic Stability: Insolvency and bankruptcy mechanisms play a significant role in contributing to overall economic stability. In times of financial crisis or economic downturns, the prevalence of insolvency and bankruptcy procedures becomes even more critical. By providing a framework for distressed entities to restructure or wind down their operations, these processes help prevent systemic financial instability. Additionally, the efficient resolution of financial distress through bankruptcy can free up resources and capital for more productive uses. When businesses are no longer burdened by unmanageable debt, they can redirect their efforts towards innovation, investment, and job creation, ultimately contributing to economic growth. 

Key Features of the IBC

• Corporate Insolvency Resolution Process (CIRP): The Insolvency and Bankruptcy Code (IBC) provides a detailed procedure for the insolvency resolution of corporate debtors, including the appointment of an insolvency professional, the formation of a committee of creditors, and the approval of a resolution plan. Chapter II of Part II of the Code outlines the entire procedure for CIRP. 
• Insolvency Resolution of Individuals and Partnership Firms: Part III of the Insolvency and Bankruptcy Code outlines procedures for the insolvency resolution of individuals and partnership firms. However, it is currently only applicable to personal guarantors of corporate debt.
• Adjudicating Authorities: The National Company Law Tribunal (NCLT) is the adjudicating authority for corporate persons, as outlined under Section 60 of the Code, while the Debt Recovery Tribunal (DRT) handles cases related to individuals and partnership firms, as outlined under Section 179 of the Code. Provisions for appeals in both cases are also provided in the Code. 
• Insolvency and Bankruptcy Board of India (IBBI): Part IV, Chapter I of the Code provides for the establishment of the Insolvency and Bankruptcy Board of India (IBBI), and Chapter II outlines the power and functions of the IBBI to regulate insolvency professionals, insolvency professional agencies, and information utilities.
• Fast-Track Corporate Insolvency Resolution Process: Chapter IV of Part II of the Insolvency and Bankruptcy Code provides a fast-track insolvency resolution process for specific categories of corporate debtors, ensuring a quicker resolution of their insolvency cases.

International Framework

• UNCITRAL Model Law on Cross-Border Insolvency: Although India has not adopted the UNCITRAL Model Law, the IBC incorporates certain principles to deal with cross-border insolvency issues.
• World Bank's Principles for Effective Insolvency and Creditor/Debtor Regimes: The IBC aligns with the World Bank's principles to improve the effectiveness of insolvency and creditor/debtor regimes.
• Insolvency Laws of Other Jurisdictions: The IBC draws on the insolvency laws of jurisdictions such as the US Bankruptcy Code and the UK Insolvency Act to incorporate best practices.

Significant Amendments

• Insolvency and Bankruptcy Code (Amendment) Act, 2018: This amendment aimed at providing clarity on various provisions, including the definition of resolution applicants and eligibility criteria. More definitions were added under Section 5, including corporate guarantor and related party. Section 12A, 25A, 238A, and 240A were introduced, and a few more amendments were made. 
• Insolvency and Bankruptcy Code (Amendment) Act, 2019: This amendment focused on streamlining the CIRP, providing and setting deadlines for the completion of the insolvency resolution process. A proviso was added under Section 7(4) and 12(3). Section 3A was added under Section 25A. A few explanations were also added, along with a few more amendments made.  
• Insolvency and Bankruptcy Code (First and Second Amendment) Act, 2020: Section 32A was introduced in the first amendment of 2020. This amendment focused on protecting successful bidders from criminal proceedings. The second amendment introduced a new Section, i.e., 10A, which suspends the initiation of insolvency proceedings for defaults occurring on or after 25 March 2020 for a period of one year, in response to the COVID-19 pandemic. (The aim was to protect businesses affected by the crisis from insolvency risks.)
• Insolvency and Bankruptcy Code (Amendment) Act, 2021: The amendment introduced a new Chapter III-A in Part II, which is  'Pre-Packaged Insolvency Resolution Process. The amendment focused on the restrictions on the 'minimum amount of default of higher value'. Section 11A was introduced, which deals with the disposal of an application under Section 54C and Section 7, 9, or 10 of the Code. 

Penalties for Violating the Insolvency and Bankruptcy Laws

• Penalty: Chapter VII, Part II of the Code outlines the offenses and penalties for the concealment of property, transaction fraud, and misconduct in the course of the corporate insolvency resolution process, as well as falsification of books and misrepresentation, which can result in significant financial fines and imprisonment, as applicable. Section 68 to 77A outline the penalty for such offenses. 
• Disqualification: Insolvency professionals and other stakeholders may face disqualification for misconduct or non-compliance with the provisions of the Insolvency and Bankruptcy Code (IBC).
• Attachment and Sale of Property: The assets of individuals or entities involved in fraudulent activities can be seized and sold to recover outstanding debts. Under the IBC, the Resolution Professional or Liquidator can take custody/control of assets under Section 18 or 35, but this is part of the resolution or liquidation process, not a punitive seizure.

How to Report an Insolvency and Bankruptcy Law Violation?

• Complaint with IBBI: Complaints regarding misconduct by insolvency professionals or agencies can be filed with the Insolvency and Bankruptcy Board of India.
• Adjudicating Authorities: Complaints and petitions related to insolvency proceedings can be filed with the National Company Law Tribunal (NCLT) for corporate debtors and the Debt Recovery Tribunal (DRT) for individuals and partnership firms.
• Police Authorities: In cases involving criminal activities, such as fraud or misrepresentation, complaints can be filed with the local police authorities.
• Online Portals: Certain violations and grievances can be reported through online portals provided by the IBBI and other relevant authorities.

How Can Seasoned Advocates Help You?

• Legal Advice: Offering expert legal counsel on insolvency and bankruptcy matters, including the initiation of insolvency proceedings, the preparation of resolution plans, and compliance with statutory requirements.
• Representation: Representing clients in insolvency proceedings before adjudicating authorities, including the NCLT, DRT, and appellate tribunals.
• Drafting and Reviewing Documents: Assisting in the drafting and review of necessary documents, such as insolvency applications, resolution plans, and settlement agreements.
• Negotiation and Mediation: Facilitating negotiation and mediation between creditors and debtors to achieve amicable resolutions and avoid litigation.
• Compliance Audits: Conduct compliance audits to ensure adherence to the provisions of the IBC and mitigate legal risks.
• Training and Awareness: Providing training and awareness programs on insolvency and bankruptcy laws, best practices, and compliance requirements.

Conclusion

The significance of insolvency and bankruptcy cannot be overstated. IBC provides provisions for safeguarding the interests of stakeholders and achieving effective resolutions to financial distress. The processes involved are pivotal in debt resolution, creditor protection, economic stability, and providing a fresh start. Experts serve as essential pillars of a well-functioning financial system, enabling individuals and businesses to navigate financial challenges, recover from setbacks, and contribute to economic growth. To know more, contact us.