The Insolvency and Bankruptcy Code, enacted by Parliament, is a welcome update to the existing framework for dealing with corporate, individual, partnership, and other entity insolvency. It clears the path for much-needed changes while concentrating on creditor-driven bankruptcy resolution.
BACKGROUND
In India, there are now several overlapping laws and adjudicating forums dealing with financial failure and insolvency of organisations and people. The existing legal and institutional framework hinders lenders' ability to collect or restructure defaulted assets in a timely and effective manner, putting unnecessary burden on the Indian credit system. Recognizing the importance of bankruptcy and insolvency reforms in improving the business environment and alleviating distressed credit markets, the government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially formed 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry of Finance. Trilegal collaborated with the BLRC on the bill's formulation.

Both chambers of Parliament have now ratified the Insolvency and Bankruptcy Code, 2016 following a public consultation process and recommendations from a joint committee of Parliament (Code). While the Code's legislation is a historical event for India's economic reforms, its impact would be evident in due course when the institutional architecture and implementing regulations as anticipated by the Code are developed.
KEY HIGHLIGHTS
1. Corporate Debtors: Two-Stage Process
To commence an insolvency action for corporate debtors, the default should be at least INR 100,000 (USD 1495) (this ceiling may be adjusted by the Government up to INR 10,000,000 (USD 149,500). The Code proposes two independent stages: the Insolvency Resolution Process, during which financial creditors assess whether the debtor's business is viable to continue and the options for its rescue and revival; and Liquidation, which occurs if the insolvency resolution process fails or financial creditors decide to wind down and distribute the debtor's assets.
The Insolvency Resolution Process (IRP)
The IRP offers lenders with a collective tool to deal with a corporate debtor's overall distressed condition. This is a substantial shift from the current legal system, in which the debtor has the primary responsibility for initiating a reorganisation procedure, and lenders may pursue separate proceedings for recovery, security enforcement, and debt restructuring.
In the IRP, the Code anticipates the following steps:
(i) Commencement of the IRP
An IRP can be initiated against a corporate debtor by a financial creditor (for a defaulted financial obligation) or an operational creditor (for an unpaid operational debt) before the National Company Law Tribunal (NCLT).
The failing corporate debtor, its owners, or its workers may also file for voluntary insolvency.
(ii) Moratorium
For the duration of the IRP, the NCLT imposes a moratorium on the debtor's operations. This serves as a "quiet time" during which no judicial procedures for recovery, enforcement of security interests, sale or transfer of assets, or cancellation of key contracts against the debtor are permitted.
(iii) Appointment of Resolution Professional
The NCLT chooses an insolvency expert, sometimes known as a "Resolution Professional," to oversee the IRP. The primary job of the Resolution Professional is to take over the management of the corporate borrower and run its business as a continuing concern under the broad guidance of a committee of creditors. This is similar to the approach under the UK insolvency laws, but distinct from the "debtor in possession" approach under Chapter 11 of the US bankruptcy code. The debtor's management retains control under the US bankruptcy legislation, while the bankruptcy professional simply supervises the firm to avoid asset stripping on the side of the promoters.
As a result, the Code's purpose is to facilitate a transfer of control from the failing debtor's management to its creditors, with the creditors driving the debtor's company and the Resolution Professional serving as their representative.
(iv) Creditors Committee and Revival Plan
The Resolution Professional identifies the financial creditors and a creditors committee is formed. Operational creditors who exceed a particular level are permitted to attend committee meetings but do not have voting rights. Each decision made by the creditors committee requires a 75% majority vote. The creditors committee's decisions are binding on the corporate debtor and all of its creditors.
The creditors committee reviews debtor revival ideas and must determine whether to proceed with a revival plan or liquidation within 180 days (subject to a one-time extension by 90 days). Anyone can make a revival plan, but it must include payment of operating debts up to the amount of the liquidation waterfall.
The Code does not go into detail on the many sorts of revival plans that may be implemented, such as new financing, asset sales, haircuts, management changes, and so on.

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