Published on: August 03,2021 11:45 IST
By Samriddhi Thakar
Introduction
Recently, Insolvency Bankruptcy Code (Amendment) Bill, 2021 was passed by the Lok Sabha and currently it is pending in Rajya Sabha. The Bill introduced by Finance Minister Nirmala Sitharaman will replace the ordinance that was promulgated on 4th April to provide relief for micro, small, medium enterprises (MSMEs) adversely impacted by the pandemic.
The new Bill seeks to amend the Code of 2016. The Bill proposes a pre-packaged resolution process for stressed micro, small, medium enterprises (MSMEs).
Further, the Bill also provides a penalty for fraudulent or malicious initiation of the pre-packaged insolvency resolution process. It also provides punishment for the same.
Thus, this article tries to explain the new amendments put forth in the bill.
What are Insolvency and Bankruptcy?
Insolvency is a situation where an individual or a company can no longer meet their financial obligations i.e., unable to pay debts. It can be also called a state of financial distress where a person is not able to pay his debts or in a simpler way his liabilities are more than his assets.
Bankruptcy is the legal declaration of one’s inability to pay debts. There are two types of bankruptcy-
- Reorganization: In this case, the debtors make a plan of payment structure to make paying off debts easier.
- Liquidation: It is a case where debtors have to sell certain assets to repay their debts.
Therefore, insolvency means not being in a position to pay off debts. Whereas bankruptcy means paying off debts by selling assets. Hence, a bankrupt can become insolvent but all insolvencies will not lead to bankruptcy.
What is the history of the Insolvency and Bankruptcy Code?
Prior to the passing of this Act, India did not have a single law that dealt with all aspects of the company in financial distress. There were multiple laws such as:
- SARFAESI (Securitization and reconstruction of financial assets and enforcement of security interest),
- RDDBFI (Recovery of debt due to banks and financial institutions) for debt recovery by banks and financial institutions,
- Companies Act for liquidation and winding up of the company, that were applied depending on the type of company, group of creditors, etc.
This created huge confusion, delay in work, delay in the legal process, etc.
There was no ease in doing business as the process was tedious and very time-consuming. India ranked 137 out of 189 countries in the World Bank’s Ease of Doing Business Index 2015. Hence, the need was felt to have a single law that deals with the insolvency and winding up of the company procedure.
Therefore, to create an easy process, efforts were started to reform insolvency law in 2014. The Bankruptcy Law Reform Committee was set up by the Ministry of Finance under the chairmanship of Mr. T.K. Viswanathan.
The new insolvency reforms were made a key priority. Further, the committee submitted its report including the Insolvency and Bankruptcy Bill, 2015. Subsequently, it was introduced in Lok Sabha. Later, the Bill was also referred to a Joint Parliamentary Committee.
The committee after inspection submitted a detailed report along with the revised draft of the bill. Hence, the Insolvency and Bankruptcy Code was passed and it came into force on 28th May 2016.
- Insolvency and Bankruptcy Code, 2016
Many business ventures will fail but they can be handled rapidly with the help of this Code. The Code seeks to help the entrepreneurs to move on, instead of being bogged down by the decisions of the past.
The law was enacted with a view of providing easy, less tedious insolvency and bankruptcy proceedings for the companies.
The main aim of the code is to promote entrepreneurship and innovation. It seeks to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. It also seeks to complete the insolvency proceedings in 180 days.
It establishes an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law. And mainly it tries to provide a painless revival mechanism for entities.
What are the key amendments to the new bill?
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 amends the previous Code. The Covid-19 pandemic has impacted businesses, financial markets, and economies worldwide, including India. To mitigate the distress caused by the pandemic, the Government is taking many measures.
The key features of the Bill are as follows.
- Minimum amount of default
The proposed Bill states that the Central Government may increase the minimum amount of default up to one crore rupees for matters relating to the pre-packaged insolvency resolution process (PIRP).
- Persons not entitled to make an application
The Bill has also made provisions in respect of those people who cannot make an application to initiate the corporate insolvency resolution process (CIRP).
Such people are a financial creditor or an operational creditor of a corporate debtor undergoing a pre-packaged insolvency resolution process and a corporate debtor in respect of whom a resolution plan has been approved twelve months preceding the date of making of the application.
- Corporate debtors eligible for pre-packaged insolvency resolution process
A new chapter III-A has been inserted for initiating the pre-packaged insolvency resolution process in respect of corporate debtors classified as micro, small, and medium enterprises.
- Time limit for completion
Unlike the existing provisions, the new provision will provide quicker and efficient insolvency resolution. The time limit for completion of the pre-packaged insolvency resolution process is 120 days from the commencement date. Within this period, the resolution professional will have to submit the resolution plan within 90 days with the Adjudicating Authority.
- Declaration of moratorium
Moratorium refers to a temporary suspension of a law to allow a legal challenge to be carried out. All suits and legal proceedings against the corporate debtor are held in abeyance to allow the resolution professional to carry out his or her task smoothly.
- Duties and Powers of resolution professional
Duties of resolution professional shall include confirmation of the list of claims, the constitution of a committee of creditors, monitor management of affairs of corporate debtors, etc.
He shall have powers such as accessing books of accounts, appointing legal or other professionals, attending meetings of members, Board of Directors, etc.
The fees of the resolution professional shall be subject to the approval of the committee of creditors.
- List of claims and preliminary information memorandum
The corporate debtor shall submit to the resolution professional list of claims of creditors and preliminary information memorandum containing information related to the resolution plan.
- Management of affairs of corporate debtors
Management of affairs of corporate debtors shall continue to vest in the Board of Directors, unlike ordinary process. The promoters, members, personnel, and partners of the corporate debtor shall exercise and discharge their contractual or statutory rights and obligations in relation to the corporate debtor.
- Committee of creditors
The Committee of Creditors shall be constituted within seven days of the insolvency commencement date.
- Vesting management of corporate debtor with resolution professional
Through a vote of sixty-six percent of the committee of creditors management of corporate debtor shall be vested with the resolution professional.
- Consideration and approval of resolution plan
The base resolution plan shall be submitted to the resolution professional by the corporate debtor. The committee of creditors will vote on the same by at least 66% of the voting share.
- Termination of insolvency resolution process
Termination shall be effective with a vote of not less than 66% of the voting share of the committee of creditors.
- Initiation of corporate insolvency resolution process
The committee of creditors after the pre-packaged insolvency commencement date but before the approval of resolution plan, may resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, by a vote of not less than 66% of the voting shares.
- Appeals
An appeal can be filed against a liquidation order and an order for initiation of corporate insolvency resolution process passed during the pre-packaged insolvency resolution process.
- Fraudulent or malicious initiation of proceedings
The Bill makes provision for a penalty against a person who fraudulently or maliciously tries to initiate the proceedings.
It states that if any person initiates the pre-packaged insolvency resolution process-fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or with the intent to defraud any person, the Adjudicating Authority may impose a penalty on such person which shall not be less than one lakh rupees but may extend to one crore rupees.
- Fraudulent management of corporate debtor
The Bill also adds a penalty against an officer of the corporate debtor who on or after the commencement of the pre-packaged insolvency resolution process manages its affairs with an intention to defraud creditors of the corporate debtor or for any fraudulent purpose.
The Adjudicating Authority may, on an application by the resolution professional, impose a penalty against the officer which shall not be less than one lakh rupees but may extend to one crore rupees.
- Punishment for offenses
Where a corporate debtor provides any information in the application which is false in material particulars and provides any information in the list of claims or the preliminary information memorandum which is false in material particulars, shall be punished with imprisonment for a term which shall not be less than three years, but which may extend to five years or with fine which shall not be less than one lakh rupees, but which may extend to one crore rupees, or with both.
Further, if a director or partner of the corporate debtor deliberately contravenes the provisions, such person shall be punished with imprisonment for not less than three years, but which may extend to five years, or with fine which shall not be less than one lakh rupees, but which may extend to one crore rupees, or with both.
Conclusion
Thus, we can say that efforts have been taken to provide relief for micro, small, medium enterprises (MSMEs) adversely impacted by the pandemic. The amendment to some extent has made the process speedy and cost-effective.
Further, the punishments have been imposed to keep a check on the corporate debtor. The Bill in all will prove to be effective for the micro, small, medium enterprises (MSMEs).
References