Module I
Introduction to Insolvency & Bankruptcy Regime in India
When an individual, company, or other organization cannot meet its financial
obligations for paying debts as they become due, Insolvency occurs. Bankruptcy is
not distinct from insolvency as Bankruptcy is a determination of insolvency made
by a court of law with resulting legal orders intended to resolve the insolvency.
Where the debtor is unable to meet his/her obligations, Bankruptcy occurs. It is a
legal scheme in which an insolvent debtor seeks relief.
The Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 includes
provision for application for revival, determination of sickness, appointment of
interim/Company administrator, time bound revival process and if revival not
possible, liquidation process through single regulator that is ‘National Company
Law Tribunal’. Corporate Debtor and Operational Creditor are two essential
characters to take part in Insolvency Resolution Mechanism.
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Section 270-272 of The Companies Act, 2013 provides for regulation of
insolvency, winding-up and liquidation of companies in time bound manner,
including revival. It incorporates global best practices relied on models suggested
by UNCITRAL. The jurisdiction and powers of Company Law Board, Board of
Industrial and Financial Reconstruction and High Court in this regard, is being
exercised by National Company Law Tribunal and National Company Law
Appellate Tribunal. The objective of establishment of the Tribunal is to avoid
multiplicity of litigation before various courts or quasi-judicial bodies or forums
with respect to revival or rehabilitation or merger and amalgamation, and winding
up of companies ipso facto.
There was no single law in India to deal with insolvency and bankruptcy before the
enactment of the Insolvency and Bankruptcy Code 2016. The framework for
insolvency and bankruptcy was being dealt with multiple laws and adjudicating
forums which were inadequate, ineffective and resulted in undue delays in
resolution.
The primary objective of the Insolvency and Bankruptcy Code 2016 is to
consolidate and amend the laws relating to reorganization and insolvency
resolution of partnership firms, corporate persons and individuals in a time bound
manner. An effective legal framework for time bound resolution of insolvency and
bankruptcy will not only promote and encourage entrepreneurship but will also
improve Ease of Doing Business (a paradigm Programme by Government of
India), and to facilitate more investments leading to higher economic growth and
development of the nation at a glance.
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The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interests Act, 2002 empowered financial institutions or banks with a
presence in the country or which have been notified by the Government of India to
recover non-performing assets (NPAs) without the intervention of court. As we
know that an asset is classified as non-performing if interest or installments of
principal due remain unpaid for more than 180 days. SARFAESI Act provides
three alternative methods for recovery of NPAs including taking possession,
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selling and leasing the assets underlying the security interests such as movable
property and immovable property without the intervention of the courts.
The Ministry of Corporate Affairs constituted The Insolvency Law Committee that
submitted second part of its Report in October 2018 after deliberating on the
existing provisions of cross-border insolvency in the Insolvency and Bankruptcy
Code, 2016 (sections 234 and 235) and the UNCITRAL Model Law on Cross
Border Insolvency. The Committee noted that the existing provisions in the Code
do not provide a comprehensive framework for cross-border insolvency matters
and that is quintessential. The Committee propounded a comprehensive framework
for this object based on the UNCITRAL Model Law on Cross-Border Insolvency,
1997. It also has proposed a draft part for this purpose on Cross Border Insolvency
which could be made a part of the Code by inserting a separate part.