INSOLVENCY AND
BANKRUPTCY LAWS
CS [Link]
PRACTICING COMPANY SECRETARY
OVERVIEW OF THE
REGIME
• Why do we need a separate legislation?
• What were the laws before?
• Whom is this Code applicable to?
• Journey of IBC
KEY CHARACTERISTIC FEATURE OF
A COMPANY
• Perpetual Existence
• People may come and people may go, but Company goes on forever
• Directors may change, shareholders may change but company
continues to exist
• Going concern concept
• Companies are incorporated with the objective of longevity
• No company would want to shut down soon
• Only in adverse situations, Company might need to close down
WHY WIND UP?
• Financial Failure – can it be revived
• Business Failure – in most of the cases, revival does not
seem a viable option
• Laws governing these provisions
EVOLUTION
• Our laws have their origin in the English Law
• English Insolvency system was followed
• Earliest provisions can be traced back to the Government of India Act,
1800
• The jurisdiction rested with the Supreme Court
• The Act of 1828 marked the onset of a special insolvency legislation in
India
• Insolvency Courts were established
• The Presidency Towns Insolvency Act, 1909 and Provincial Insolvency
Act, 1920 are the two major enactments that dealt with the subject
• The Presidency Towns Insolvency Act
• Provincial Insolvency Act
• Indian Partnership Act, 1932
• Companies Act
• SICA
• RDDBFI Act, 1993
• SARFESAI Act, 2002
INSOLVENCY AND
BANKRUPTCY
• Schedules of the Constitution – VII
• Distribution of Powers between the Union and the states
• Insolvency and Bankruptcy come under the Concurrent List
• Both the Centre and States can make laws on these subjects
PRESENT ERA
• There has been a revamping shift in the global regulatory framework
towards corporate insolvency.
• The principal focus of modern legislation is not to eliminate or close
down the entities but to remodel the organisational structure so as to
permit the rehabilitation and continuation of business
IBC
• IBC Law was enacted in the year 2016
• There was no single law to deal with Insolvency and Bankruptcy
• IBC consolidates the existing framework by creating a single law
INSOVENCY vs BANKRUPTCY
• Insolvency expresses the inability of a person/ party to pay the debts
• The assets are not sufficient to pay off the liabilities
• If insolvency is not resolved, it will ultimately lead to bankruptcy
• This term is used for individuals as well as organisations/corporates.
BANKRUPTCY
• Derived from the Italian word bancarotta
• Bench; rotta means broken
• Bankruptcy is the condition of Insolvency
• It denotes the legal status of a person or an entity who cannot repay debts to creditors.
• In other words, it is a formal declaration of Insolvency
• Bankruptcy process begins with filing of an application in a Court
• The debtor’s assets are then paid off
• Various Committees were constituted to review and oversee the
existing laws pertaining to Insolvency and Bankruptcy
• Third Law Commission – 1964 – proposed amendments to the
Provincial Insolvency Act, 1920
• Tiwari Committee in 1981 – Following the recommendations, SICA
was enacted in 1985 (Sick Industrial Companies Act)
• Narsimham Committee in 1998 – SARFAESI Act of 2002 was enacted
• In 1999, Eradi Committee recommended setting up of NCLT
Not only the regulatory framework/ mechanism, even authorities and
organisations were revamped
• The Ministry of Finance constituted a Committee named Bankruptcy
Law Reform Committee
• This Committee drafted the Insolvency and Bankruptcy Code in 2016
PURPOSE OF IBC
• Create a platform between creditors and other financiers
• It’s a platform for negotiation
• It should be evaluated whether it is a financial failure or a business
failure
• The liquidation of Companies was being handled under various
legislations and different authorities such as High Courts and DRTs
• There was overlapping jurisdiction and it was affecting the debt
recovery process as well
• Insolvency Resolution was taking 4.3 years on an average in INDIA
• The law was inadequate to address the problems faced by individuals
and Companies due to bankruptcy issues
• Not only inadequate, the procedures were not conducted in a timely
manner
• Hence, it proved to be ineffective
• One of the parameters to measure Ease of Doing Business is ‘Insolvency’
• There was no common ground regarding the legislation
• No single law was there in the country – drawback
FEATURES/ ADVANTAGES
• Time bound insolvency resolution mechanism
• To balance interest of all the stakeholders
• To increase the availability of credit
• To encourage/promote entrepreneurship
• To deal with cross border insolvency
• The Code was drafted by a specially constituted Bankruptcy Law Reforms
Committee
• It was done under the Ministry of Finance
• IBC was introduced in the Lok Sabha on 21 st December, 2015 and was
subsequently referred to a Joint Committee of Parliament.
• The Code was passed by the Rajya Sabha on 22 nd May, 2016 and received the
Presidential assent on 28th May, 2016
• This has been one of the biggest economic reforms in the country
• A uniform and comprehensive insolvency legislation has been
provided covering corporates, partnerships and individuals
• It has helped INDIA jump up the ranks in the Ease of Doing Business
Report.
NEW INSTITUTIONAL FRAMEWORK
• IBBI (Insolvency and Bankruptcy Board of INDIA)
• Adjudicating Authorities
• Insolvency Professionals
• Information Utilities
• The Code provides for Insolvency Professionals (IPs) – a class of
regulated professionals – they act as intermediary in the Insolvency
Resolution Process
• IBBI has been constituted as a new Insolvency regulator
• It oversees the functioning of the intermediaries as well as the process
• NCLT – in case of insolvency of Companies and LLPs
• DRT – in case of individuals and partnership firms