RBI to act against Defaulters- India’s Insolvency And Bankruptcy Code, 2016.
RBI to act against Defaulters- India’s Insolvency And Bankruptcy Code, 2016.
Insolvency & bankruptcy Code 2016, becomes quite Pertinent now on the back drop of RBI pushing Banks to initiate insolvency proceeding against 12 top defaulters. The new law gives RBI greater powers to address the INR 10 Lac Crore stressed loans currently piled on PSU Banks Balance Sheets.
Few prominent names those could be squeezed are JP Infra, Bhushan Power & Steel, Alok Industries ( textiles), Amtek Auto, ABG Shipyard, & others. RBI is yet to come with and official list. Media Sources confirms that RBI has instructed banks to initiate bankruptcy proceedings within 15 days and file petition in next 30 days.
The New Bankruptcy Code: –
The new code supersedes a set of at least 12 archaic pieces of legislation – some legacies of the colonial era. Earlier there were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India.
The New Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). NCLT ( National Company Law Tribunal) has been appointed as the nodal court for insolvency & bankruptcy proceedings. Broadly speaking, Bankruptcy filing would result in recovering funds owed initially through Debt restructuring & finally through liquidation.
To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government). The Code has 2 independent stages:
- Insolvency Resolution Process( IRP), during which financial creditors assess whether the debtor’s business is viable to continue and the options for its rescue and revival, provides a collective mechanism to lenders to deal with the overall distressed position of a corporate debtor. This is a significant departure from the earlier legal framework under which the primary onus to initiate a reorganisation process lies with the debtor.
- Liquidation, if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.
A corporate debtor may be put into liquidation in the following scenarios:
- A 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the insolvency resolution process;
- The creditor’s committee does not approve a resolution plan within 180 days (or within the extended 90 days);
- NCLT rejects the resolution plan submitted to it on technical grounds; or
- Debtors contravenes the agreed resolution plan and an affected person makes an application to the NCLT to liquidate the corporate debtor.
Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor, and the assets of the debtor (including the proceeds of liquidation) vest in the liquidation estate.
Priority of Claims:
The Code significantly changes the priority waterfall for distribution of liquidation proceeds.
After the costs of insolvency resolution (including any interim finance), Secured debt together with workmen dues for the preceding 24 months rank highest in priority. Central and state Government dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors.
The Insolvency Regulator: – The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). Its role includes:
- Overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities; and
- Regulating the insolvency process.
RBI’s push is a positive move as the Code will first help the Creditor in Debt Restructuring, will undertake means & Measure to bring business back to life and only if these efforts don’t yield desired results, will squeeze out the juice left through liquidation.
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.