Effect of Insolvency and Bankruptcy Code on Companies Act, 2013

Insolvency and Bankruptcy Code, 2016­ _ Succinctly

The Insolvency and Bankruptcy Bill passed by the Lok Sabha on May 6, 2016 and Rajya Sabha by May 11, 2016. After passing the Bill by Rajya Sabha the president has given its assent on 28^th May, 2016 and published for general information.

The objective of the Insolvency and Bankruptcy Code is to promote entrepreneurship, availability of credit and balance interests of all stake holders by amending law relating to reorganisation and insolvency resolution of corporate person partnership firm, and individuals in a time bound manner.

Maximize the value of assets of such person, empower the government and its prosecutions agency to take massive action against corporate defaulters.

Help to Bank for recovery of Loan of Rs. 8 Lakh Crore approx.

Need and Importance – Number of cases were pending before the DRT (Debt Recovery Tribunal) and DRAT (Debt Recovery Appellate Tribunal) and it’s increasing by cats and dogs.

Finance Minister Arun Jaitely had said that the almost 586 corporate litigation cases were pending for over 20 years with the Company Law Board, BIFR (Board for Industrial and Financial Reconstruction) and OL (Official Liquidator) adding that efforts to speedup resolution of such cases.

Definition of Insolvency

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt. It may be resolved by changing the repayment plan of the loans, or writing off part of the debt. If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay to outstanding debts.

Key Highlights of the Code:

·         Adjudicating authority for Individuals and Unlimited Liability Partnership Firms – Debt Recovery Tribunal

·         Adjudicating authority for Companies and Limited Liability Entities – National Company Law Tribunal

·         Information utilities will be setup to collect and collate financial information from listed companies and their creditors.

·         A time bound process to resolve the insolvency. If default happen, creditors have control over debtors assets and decisions to solve insolvency should be taken within 180 Days period by creditors.

·         Debtor could be send behind bars for up to 5 years for concealing property or defaulting creditors. Bankrupt individuals would be barred from contesting election as well.

·         Empower creditors to decide whether a defaulter is declaring insolvent or not.

Before the Bankruptcy Code, recovering money from a defaulted corporate borrower is a nightmare for bankers, Since it taken long years for the DRT to finish the litigation, But Bankruptcy Code enable bank to push for recovery of the money from troubled Company with in a period of 180 days, with a grace period of another 90 days if 2/3^rd of creditors agrees. If the recovery doesn’t happen even then the company will be liquidated automatically. 

Applicability of Code:

2. The provisions of this Code shall apply to—

(a)   Any company incorporated under the Companies Act, 2013 or under any previous company law;

(b)   Any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c)    Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;

(d)    Such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e)    Partnership firms and individuals,

Institutions to facilitate Resolution of Insolvency

Insolvency Professional agencies: “Clause 20 of section 3 of Bankruptcy Code” means any person registered with the Board under section 201 as an insolvency professional agency. The agency conducts examination to certify the insolvency professional and enforce a code of conduct for their performance.

Insolvency Professionals: “Clause 19 of section 3 of Bankruptcy Code” means a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207. It’s a specialised cadre of licensed professionals. These professional will administer the resolution process, manage the assets of the debtors, and provide information for creditors to assists them in decision making.

Information utility: “Clause 21 of section 3 of Bankruptcy Code” means a person who is registered with the Board as an information utility under section 210. Creditor will report financial information of the debt owed to them by the debtor. Such information will include records of the debt, liabilities and defaults.

Adjudicating authority: “Clause 1 of section 5 of Bankruptcy Code”, the proceedings of the resolution process will be adjudicated by National Company law Tribunal for Companies and Debt Recovery Tribunal for Individuals. The duties of the authority will include approval to intimate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Code: “Clause 1 of section 3 of Bankruptcy Code”, means the Board who regulate the insolvency professionals, insolvency professional agency and information utilities setup under the Bill. The Board will consist of representative from RBI, and Ministries of Finance, MCA and Law.

Procedure

Step to resolve the Insolvency

Initiation: when any default occurs, the resolution process may be initiated by the creditor and debtor. The insolvency professional will administer the process. The process ends in 180 days and any legal action is prohibited against the debtor during this period.

Decision to resolve insolvency: A committee of the financial creditors who lent money to the debtors will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. If decision is not taken in 180 days, the assets of debtor’s go to liquidation.

Liquidation: If the debtor goes to liquidation, an insolvency professional administer the liquidation process.

Distribution of the assets of the debtors:

1.      Insolvency resolution cost and remuneration to insolvency professional

2.      Secured creditor

3.      Unsecured creditor

4.      Government dues

5.      Preferential shareholders

6.      Equity Shareholders

Effect on Companies Act, 2013

Sr. No.	Section	Amendments To The Companies Act, 2013
1	2(23)	Company Liquidator means a person appointed by the Tribunal as the Company Liquidator in accordance with the provisions of section 275 for the winding up of a company under this Act.
2	2(94A)	Winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.
3	8(9)	For the words "the Rehabilitation and Insolvency Fund formed under section 269", the words "Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016" shall be substituted.
4	66(8)	For the words, brackets and figures is unable, within the meaning of sub-section (2) of section 271, to pay the amount of his debt or claim, the words and figures "commits a default, within the meaning of section 6 of the Insolvency and Bankruptcy Code, 2016, in respect of the amount of his debt or claim," shall be substituted
5	77(3)	In sections 77, in sub-section (3), after the words "the liquidator", the words and figures "appointed under this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be," shall be inserted.
6	117(3)(f)	In section 117 in sub-section (3), in clause (f), for the word and figures "section 304", the words and figures "section 59 of the Insolvency and Bankruptcy Code, 2016" shall be substituted.
7	224(2)	After the words "wound up under this Act", the words and figures "or under the Insolvency and Bankruptcy Code, 2016" shall be inserted.
8	230(1)	After the word "liquidator", the words "appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be," shall be inserted;
	230(6)	After the word "on the liquidator", the words "appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be," shall be inserted;
Chapter XIX, Containing Section 253-269 shall be omitted by the Insolvency and Bankruptcy Code, 2016 (Not yet enforced)
9	271	For section 271, the following section shall be substituted, namely:— "271. A company may, on a petition under section 272, be wound up by the Tribunal,— (a)     if the company has, by special resolution, resolved that the company be wound up by the Tribunal; (b)     if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (c)      if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up; (d)     if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or (e)      If the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
10	272	For section 272, the following section shall be substituted, namely:— "272. (1) Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by— (a) the company; (b) any contributory or contributories; (c) all or any of the persons specified in clauses (a) and (b); (d) the Registrar; (e) any person authorised by the Central Government in that behalf; or (f) in a case falling under clause (b) of section 271, by the Central Government or a State Government. (2) A contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder. (3) The Registrar shall be entitled to present a petition for winding up under section 271, except on the grounds specified in clause (a) or clause (e) of that sub-section: Provided that the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition: Provided further that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity of making representations. (4) A petition presented by the company for winding up before the Tribunal shall be admitted only if accompanied by a statement of affairs in such form and in such manner as may be prescribed. (5) A copy of the petition made under this section shall also be filed with the Registrar and the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within sixty days of receipt of such petition."
11	275(2)	The provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016.
12	280	For section 280, the following section shall be substituted, namely:— "280. The Tribunal shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of,— (a)    any suit or proceeding by or against the company;     (b) any claim made by or against the company, including claims by or against any of its branches in India; (c)    any application made under section 233; (d)   any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter arising out of, or in relation to winding up of the company, Whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made or such scheme has been submitted, or is submitted, before or after the order for the winding up of the company is made.".
13	326	For section 326, the following section shall be substituted, namely:— "326. (1) In the winding up of a company under this Act, the following debts shall be paid in priority to all other debts:— (a) workmen's dues; and (b) where a secured creditor has realised a secured asset, so much of the debts due to such secured creditor as could not be realised by him or the amount of the workmen's portion in his security (if payable under the law), whichever is less, pari passu with the workmen's dues: Provided that in case of the winding up of a company, the sums referred to in sub-clauses (i) and (ii) of clause (b) of the Explanation, which are payable for a period of two years preceding the winding up order or such other period as may be prescribed, shall be paid in priority to all other debts (including debts due to secured creditors), within a period of thirty days of sale of assets and shall be subject to such charge over the security of secured creditors as may be prescribed. (2) The debts payable under the proviso to sub-section (1) shall be paid in full before any payment is made to secured creditors and thereafter debts payable under that subsection shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. Explanation.—For the purposes of this section, and section 327— (a)   "workmen'', in relation to a company, means the employees of the company, being workmen within the meaning of clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947); (b)   "workmen's dues'', in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:— (i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947 (14 of 1947); (ii) all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to any other person in his right on the termination of his employment before or by the effect of the winding up order or resolution; (iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's Compensation Act, 1923 (19 of 1923), rights capable of being transferred to and vested in the workmen, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company; (iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company; (c)    "workmen's portion'', in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of the amount of workmen's dues and the amount of the debts due to the secured creditors. Illustration The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs.3,00,000. The aggregate of the amount of workmen's dues and the amount of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000."
14	329	Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrance in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal under this Act shall be void against the Company Liquidator."
15	334	In the case of a winding up by the Tribunal, any disposition of the property including actionable claims, of the company and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up shall, unless the Tribunal otherwise orders, be void.
16	429(1)	In section 429, for sub-section (1), the following sub-section shall be substituted, namely:— "(1) The Tribunal may, in any proceedings for winding up of a company under this Act or in any proceedings under the Insolvency and Bankruptcy Code, 2016, in order to take into custody or under its control all property, books of account or other documents, request, in writing, the Chief Metropolitan Magistrate, Chief Judicial Magistrate or the District Collector within whose jurisdiction any such property, books of account or other documents of such company under this Act or of corporate persons under the said Code, are situated or found, to take possession thereof, and the Chief Metropolitan Magistrate, Chief Judicial Magistrate or the District Collector, as the case may be, shall, on such request being made to him,— (a)     take possession of such property, books of account or other documents; and (b)     Cause the same to be entrusted to the Tribunal or other persons authorised by it.
17	434(1)	For section 434, the following section shall be substituted, namely:— "434. (1) On such date as may be notified by the Central Government in this behalf,— (a)    all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this section referred to as the Company Law Board) constituted under sub-section (1) of section 10E of the Companies Act, 1956 (1 of 1956), immediately before such date shall stand transferred to the Tribunal and the Tribunal shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act; (b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order: Provided that the High Court may if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and (b)    all proceedings under the Companies Act, 1956 (1 of 1956), including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the Tribunal and the Tribunal may proceed to deal with such proceedings from the stage before their transfer: Provided that only such proceedings relating to the winding up of companies shall be transferred to the Tribunal that are at a stage as may be prescribed by the Central Government. (2) The Central Government may make rules consistent with the provisions of this Act to ensure timely transfer of all matters, proceedings or cases pending before the Company Law Board or the courts, to the Tribunal under this section.
18	SCH V	In Schedule V, in Part II, in section III, for clause (b), the following clause shall be substituted, namely:— "(b) where the company— (i)                 is a newly incorporated company, for a period of seven years from the date of its incorporation, or (ii)               is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction for a period of five years from the date of sanction of scheme of revival, or (iii)             is a company in relation to which a resolution plan has been approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 for a period of five years from the date of such approval, it may pay remuneration up to two times the amount permissible under section II.

Disclaimer: The entire contents of above document have been prepared on the basis of Insolvency and Bankruptcy Code, 2016­.  Whereas deep care has been taken by author to ensure the correctness and completeness of the information provided.

This is nothing but a knowledge sharing initiative by author and author do not    intend to accost any business or professio