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The Bankruptcy Code ("Code") has revamped the bankruptcy and insolvency laws in India, and most importantly, done away with the scattered legislations that existed earlier and consolidated all laws under one umbrella. It is an overhaul of the existing law dealing with insolvency &paves a smooth passage for much needed reforms. The Code seeks to achieve certainty in recovery and enforcement proceedings and moreover it is a useful tool for creditors and investors specifically for international creditors and investors, who are generally looking at opportunities in the Indian Economy.
Global institutions are continuing to grow their investments in India and in this context they are increasing their exposure to Indian entities and laws. Over the years, many concerns have been existing and / or raised amongst international investors on the regulatory and country specific risk while transacting or doing business in India. That considering such a scenario, this code is set to provide a major boost to the India economy, especially on account of timely resolution and certainty in recovery.
The Bankruptcy Code is a unified and comprehensive piece of legislation for the resolution of insolvency in respect of companies, limited liability partnerships, partnership firms and individuals. The Code creates a new institutional framework which consists of adjudicatory bodies, a regulator, Insolvency Professionals and information utilities.
In contrast to the current regulatory landscape, the Code does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. Specific attention is drawn to the rights of unsecured and secured creditors in the priority of their claims and therefore provides level playing field for an effective insolvency resolution. The strict timelines for resolution of insolvency and liquidation proceedings are an incentive and provide the requisite impetus for the economic growth.
The code provides for the constitution of a new insolvency regulator i.e. the Insolvency and Bankruptcy Board of India ("Board"). Its role is to oversee the functions of insolvency intermediaries i.e. Insolvency Professionals, Insolvency Professional Agencies and Information Utilities for regulating the insolvency process.
As per the Code, Insolvency Professional means a person enrolled with an Insolvency Professional Agency as its member and registered with the Board as an Insolvency Professional. Insolvency Professional Agency means any person registered with the Board as Insolvency Professional Agency. As defined in section 206 of the Code no person shall render his services as Insolvency Professional without being enrolled as a member of an Insolvency Professional Agency and registered with the board.
Following individual shall not be registered as Insolvency Professional:-
Qualification and experience required for insolvency professionals
An individual shall be eligible for registration, if he:-
An individual enrolled with an Insolvency Professional Agency as a professional member may make an application to the Board in FORM A of the Second Schedule along with the non-refundable fee of Rupees Ten Thousand only to the Board. The Board shall acknowledge the application made by the Applicant within seven days of its receipt. The Board may require the applicant to submit additional documents, information or clarification that it deems fit or may require the applicant to appear before the Board in person or through its representative.
Once the Board is satisfied after inspection or inquiry as it deems necessary that the applicant is eligible, it may grant certificate of registration to the applicant to carry on the activities of an Insolvency Professional in FORM B of the Second Schedule, within 60 days of the receipt of the application excluding the time given by the board for presenting additional documents, information or clarification or appearing in person.
If after considering an application, the Board is of prima facie opinion that the registration ought not be granted, it shall communicate the reasons for forming such an opinion and give the applicant an opportunity to explain why his application should be accepted within 15 days of the receipt of the communication from the Board, to enable it to form a final opinion.
Recognition of Insolvency Professional Entities
A Limited Liability Partnership, a registered Partnership firm or a Company may be recognised as an Insolvency Professional entity when majority of partners of the Limited Liability Partnership or registered Partnership firm are registered as Insolvency Professional or a majority of the whole time director of the company are registered as Insolvency Professional.
Eligible person may make an application for recognition as an Insolvency Professional entity to the Board in FORM C. If Board is satisfied after inspection or inquiry as it deems necessary that the Applicant is eligible, it may grant a Certificate of recognition as an Insolvency Professional entity in FORM D.
Functions and obligation of Insolvency Professional
Role of Insolvency Professional in corporate insolvency resolution process:
In the corporate insolvency resolution process insolvency professional play two roles one as an INTERIM RESOLUTION PROFESSIONAL (IRP) and other as RESOLUTION PROFESSIONAL (RP).
IRP shall be appointed by Adjudicating Authority (NCLT) within 14 days from the insolvency commencement date. Where the application for Corporate Insolvency Resolution Process ("CIRP") is made by financial creditor or the corporate debtor, the RP as proposed shall be appointed as the IRP if no disciplinary proceedings are pending against him. Where application is made by the operational creditor and no proposal for IRP is made then NCLT shall make a reference to the Board for recommendation of an IRP. The committee of creditors may at its first meeting with majority vote of not less than 75 % of the voting share of the financial creditor either resolve to appoint the IRP as a RP or to replace the IRP by another RP.
IRP shall perform following functions:-
RP shall perform following functions;-
Role of insolvency professional in liquidation:-
Where NCLT passes an order for liquidation of the corporate debtor, the resolution professional appointed for the CIRP shall act as liquidator unless replaced by the NCLT.
Liquidator shall perform following functions:-
Role of Insolvency professional in Fresh start order process
IP may make application to the NCLT on behalf of the debtor, who is unable to pay debts and fulfils the conditions specified in section 80 of the Code for fresh start for discharge of his qualifying debt. IP shall examine the application made by corporate debtor for fresh start within 10 days of his appointment and submit a report to the NCLT either recommending acceptance or rejection of the application. IP shall consider and examine the objection made by the creditor to whom a qualifying debt is owned. On the basis of examination IP shall prepare a list of qualifying debts for the purpose of discharge order. IP may submit an application to the NCLT seeking revocation of its order on admission or rejection of application made for fresh start.
Role of Insolvency professionals in individual insolvency process:
Role of Bankruptcy Trustee:
Challenges for Insolvency Professional
Professionals in India have been operating in an environment that protects industrial undertakings and large commercial enterprises from closure in spite of losses and inability to pay debts, by laws such as SICA or State Relief Undertakings Act, which are still operative. From the freedom to pay the debts or other liabilities as and when you are able to do so, the law is changing to declare you insolvent, if you have no money to pay the debt when it falls due for payment. The focus of the professionals advising business enterprises has to shift to prudent cash flow forecasting and management practices.
Although the definition of IP under the Code makes no reference to chartered accountants, cost accountants, company and lawyers, it is clear, now from the regulations that only such professionals (and other eligible professionals) will have to undertake the tasks of insolvency resolution and liquidation of corporates. The task of IPs will relate to the following categories of enterprises.
IPs will have to pick the category of insolvents from among these to focus on. If individual insolvencies and fresh start cases are to be taken up, it will require different kinds of enterprise and manpower to handle such cases. The Code provides that if there is no IP suggested by the creditor, the IBBI will nominate the IP. It is presumed that a panel of IPs to be maintained by the IBBI will be different for locations and types of insolvents, otherwise the system will be difficult to operate. In any case, IPs will have to decide their respective areas of operation and indicate them in their application for registration as IPs.
In certain economics (such as the US), insolvency law has the concept of "debtor in possession" and on commencement of insolvency, a moratorium becomes operative and the debtor is allowed to remain in possession, formulate a resolution plan and obtain approval from all stakeholders. The Indian law prescribes a concept of "creditor in control", and the IP is required to take possession of all assets and take over the management of the enterprise. This is part of IPs' responsibilities is the most challenging and could be eased if the insolvency enterprise extends cooperation to the IP and facilitates the takeover of assets and management. IPs will have to decide how possession of assets will be taken; whether each and every item will be included by making an exhaustive inventory or symbolic possessions will be taken, trusting the existing personnel of the enterprise if a resolution plan is not worked out, it is expected that the company management will cooperate with the IP and ensure that all assets are accounted for, preserved and protected, that no valuable assets will be concealed or disposed of without the knowledge of the IP, and that the enterprise is allowed to be operated as a going concern.
Lastly, the IPs need to note that the Code at every stage of the appointment of an interim or final IP or approval of change of IP requires that the IBBI certify that there are no disciplinary proceedings pending against the IP and give specific approval for appointment of IP. Further, disciplinary proceedings may be initiated against the liquidator or resolution professional based on an application made by a creditor in cases where undervalued transactions are not reported by them. These provisions indicate a concern that IPs may deal with assets of the business enterprise for gaining pecuniary or other advantage for themselves or for other third parties to the detriment of other claimant and stakeholders. Professionals planning to undertake assignments as an insolvency resolution professional will have to ensure that the officials selected are independent persons with no relationship with or interest in the business enterprise and are efficient, competent and honest with good reputation and character and integrity beyond any doubt.
The code offers a time bound resolution process aimed at maximising the value of distressed businesses. This will benefit not just the creditor and debtor of the companies but also the overall economy because capital and productive resources will get redeployed relatively quickly. Further, to achieve maximum value of the distress business, the Code assigns duties and responsibilities to the Insolvency Professionals and despite the lot of challenges in their way, the Insolvency professionals are trying to achieve the same in the manner as prescribed under the Code.
However, the successful implementation of the Code depends on scrupulous planning so that the same doesn't impact the effectiveness of the code in an adverse manner and thus in pursuance of the same, the legal authorities need to have requisite planning since the same might tend to strain the nascent institutional infrastructure that is being rushed to operationalize the IBC. Hence, it of utmost importance, at this stage to look that the present IBC does not suffer from the dilemma & predicament of earlier reform attempts thereby defeating the very purpose of the IBC.
Lastly, with the present code coming in to force, it will not only ensure time bound settlement Insolvency but will also create a comprehensive insolvency legislation which will enable faster turnaround of companies & businesses and at the same time revitalise the debilitating corporate market which is much required in the present economic scenario of our country and is indeed a step forward towards the transformation in the legal era.