Introduction to Insolvency and Bankruptcy Code, 2016

When a person, a firm, an institution or a Company fails to pay its debts  and the realizable value of all of their  assets fall short of the total liabilities, this is a situation of insolvency.

The word 'Bankruptcy' is derived from the Latin world, 'Bancus' which means 'Bench' or 'Desk' which the merchants used when trading their merchandise, and the  'ruptus' means 'broken'.   When a Greek merchant fails, he breaks his bench, to publish the fact that he is no longer able to conduct the business.

Insolvency occurs when a court determines insolvency and orders for its resolution. Thus, insolvency is a situation where bankruptcy is under a legal scheme and where the insolvent seeks relief with the orders of the court.

History of Insolvency legislations in India:

The Government of India Act, 1800, conferred insolvency jurisdiction to the Supreme Court.  The Statute 9 of 1828 can be traced to be the first insolvency legislation of India, wherein the Insolvency Courts were established in the presidency Towns to apply in the cities of Bombay, Calcutta and Madras.  Then, under Indian Insolvency Act, 1848, was brought by the British followed by Presidency Towns Insolvency Act of 1909.  The Provincial Insolvency Act was enacted in 1920, that covered all of the provinces in India.  Presently, all these Acts have been repealed.

Now, the following Acts, either directly or Indirectly deals with the insolvency or individuals, firms, organizations and Companies:

1.   The Recovery of  Debt due to the Banks and Financial Institutions  Act, 1993 (RDBFI Act)

2.   The  Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)

3.   The Companies Act, 2013

4.   The Insolvency & Bankruptcy Code, 2016*(IBC)

*(To overcome the complexities  arising from multiplicity of litigation under  various acts, the IBC, 2016 contained provisions and the other laws dealing with Insolvency have also been amended accordingly.  The Insolvency and Bankruptcy Board of India is established to administer the Act and National Company Law Tribunal is established to adjudicate the matters under the Insolvency & Bankruptcy Code, 2016.  The IBC  has been incorporated on the recommendations of Mr. T. K. Viswanathan Committee also known as Bankruptcy Law Reforms Committee (BLRC), which was set up on 22nd Aug. 2014 to work under the Ministry of Finance.

Objects of the Insolvency and Bankruptcy Code, 2016:

To consolidate and amend the laws relating to:

·         Reorganization and insolvency resolution of corporate, partnerships    and individuals in a time bound manner;

·      To promote entrepreneurship, availability of credit including alteration in the order of priority of payment of Government dues; and

·    To establish an Insolvency and Bankruptcy Board of India for regulation of this Act.

List  of previous Acts amended by 

the Insolvency and Bankruptcy Code, 2016:

Institutions for Resolution of Insolvency:

The following institutions are provided for resolution of the insolvency under the Insolvency and Bankruptcy Code, 2016:

(i)     Insolvency Regulator- Insolvency and Bankruptcy Board of India (IBBI)

        (ii)    Insolvency Adjudication Authority-

                (a)    National Company Law Tribunal (NCLT) and

                        National Company Law Appellate Tribunal (NCLAT)                           for Limited liability entities like Companies & LLP's

                (b)    Debt Recovery Tribunal (DRT) and Debt Recovery                            Appellate Tribunal (DRAT) for individuals and                                   Partnership firms

                (c)    Supreme Court is the Appellate Authority after                                         NCLAT or DRAT

        (iii)    Insolvency Professional Agencies

        (iv)   Insolvency Professionals

        (v)    Information Utilities

Important Terms used under the Insolvency and Bankruptcy Code, 2016:

Claim:

Section 3(6).  Claim means-

(a)    a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b)    a right to remedy for breach of a contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgement- fixed, matured, un-matured, disputed, secured or unsecured.

Creditor:

Section 3(10).  Creditor means-

any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.

Debt:

Section 3(11).  Debt means-

a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Default:

Section 3(12).  Default means-

non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor.

Financial Information:

Section 3(13).  Financial information, in relation to a person, means once or more of the following categories of information-

(a)    records of the debt of a person;

(b)    records of liabilities when the person is solvent;

(c)    records of assets of a person over which security interest has been created;

(d)    records, if any, of instances of default by the person against any debt;

(e)    records of the balance sheet and cash flow statements of the person; and

(f)     such other information as may be specified.

Financial Product:

Section 3(15). Financial product means-

Securities, contracts of insurance, deposits, credit arrangements including loans and advances by banks and financial institutions, retirement benefit plans, small savings instruments, foreign currency contracts other than contracts to exchange one currency (whether Indian or not) for another which are to be settled immediately, or any other instrument as may be prescribed.