Indian Parliament passes the Insolvency and Bankruptcy Code 2016-a Vital Reform

The Indian Parliament on Wednesday May 11, 2016 finally passed the Insolvency and Bankruptcy Code 2016, a vital reform that will make it much easier to do business in India.

Once the President signs the legislation, India will have a new bankruptcy law that will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.

Along with the proposed changes in India’s two debt recovery and enforcement laws, it will be critical in resolving India’s bad debt problem, which has crippled bank lending.
 

The new code will replace existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms. It will amend laws including the Companies Act to become the overarching legislation to deal with corporate insolvency. It will also help creditors recover loans faster.

The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.

It also proposes to use the existing infrastructure of National Company Law tribunals and debt recovery tribunals to address corporate insolvency and individual insolvency, respectively.

 “The code has set the framework for bringing in changes in the debt recovery tribunals,” he said adding that India has many professionals who can easily step into the role of insolvency professionals.

The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National Company Law Tribunals and courts.

Bankruptcy applications will now have to be filed within three months; earlier, it was six months.

To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.

There are also provisions that disqualify  anyone  declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.

The code seeks to protect interest of workers who are the most vulnerable. “It enables workmen to initiate the insolvency process and they will be first in line to get the proceeds of liquidation,”