Insolvency and Bankruptcy Code in a Nutshell

“Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It’s a trap for the rest of your life because the laws are designed so that you can’t get out of it. If a business, say, gets in too much debt, it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy”                                                                                                                                        —-Noam Chomsky

Introduction

Banking Regulation (Amendment) Ordinance 2017 which the Insolvency Bankruptcy Code 2016 (“IBC”) follows gives powers to the Reserve Bank of India to issue directions to regulate Indian banks to initiate an insolvency process under the IBC whenever there is a defaulted borrower.

Insolvency Bankruptcy Code 2016 makes all the financial creditors be regulated by the Reserve Bank of India whereby they have to follow the laws and provisions that are given under Insolvency Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Information Utility) Regulations, 2017.

IBC is a recent law that is passed by the government for the big companies and defaulters to drag them to NCLT for conducting the insolvency process. This act gives a helping hand to the lenders to make the process of recovering a huge amount of money from the borrowers in a limited time period.

Under the provision, financial creditor has to submit all the financial information to which any security interest has been made to an information utility as per the provisions of the act/regulation [Insolvency and Bankruptcy Board of India (Information Utility) Regulations, 2017][1].

Parties that are most affected under IBC are as follows:

1. Indian Corporates, stakeholders and creditors in relation to both domestic and offshore assets and subsidiaries.

2. Banks working in India, including off-shores assets and subsidiaries of their domestic borrowers.

3. Potential buyers of assets sold pursuant to an IBC process.

4. Foreign creditors of Indian borrowers and guarantors.

5. Lenders are interested in providing funding.[2]

What is an Insolvency Regulatory Professional?

Insolvency Professional(“IP”) is a person who is enrolled with an insolvency professional agency (IPA) as its member and registered with Insolvency and Bankruptcy Board of India as an Insolvency Professional.

An individual should be eligible to become an Insolvency Professional. The eligibility for the same is given below:

1. A person should be a citizen of India;

2. Should not be a minor;

3. Should be solvent;

4. Should be of sound mind;

5. Should be qualified and experience as prescribed by the Board;

6. Should not be convicted by any court, for an offense which exceeds the punishable offense by six months;

7. Should be fit and proper[3].

How is IP appointed under IBC?

Any person should be eligible in the first place to become an Insolvency Professional. The steps to become one is given below:

1. For Professionals (Chartered Accountant, Company Secretary, Cost Accountant or an Advocate) having 10 years of experience, or graduates having 15 years of managerial experience:

1. Stage 1: Pass the limited insolvency examination

2. Stage-2: Enroll as a professional member with an insolvency professional agency (IPA)

3. Stage-3: Complete a pre-registration educational course by the IPA.

4. Stage-4: Apply to the Board for registration as an ‘insolvency professional (IP), within a period of 12 months of clearing the Limited Insolvency Examination.

2. The Graduate Insolvency Programme and the National Insolvency Programme will be notified by the Board in due time.

Roles and Duties of IP:

The roles and duties of RP are quite burdensome. The first and foremost duty of the IP, when appointed, is to announce the commencement of the insolvency process which coincides with the admission of the application by the Adjudicating authority.

The other duties of the IP are the management of the affairs of the corporate debtor including the powers of the corporate Board which stands suspended[4].

The IP also has the duty of the collection of all the information relating to the assets, finances, and operations of the corporate debtor for determining the financial position in relation to business operation. IP also manage the operation of the debtor[5].

For determining the financial position of the corporate debtor, the IP collects all the claims from the creditor[6].

IP also constitute a Committee of Creditors comprising of all financial creditor except the parties that are related to it[7].

Punishment under IBC:

1. When any officer of the corporate debtor within 12 months immediately preceding the insolvency does any of the following:

1. Willfully concealed any property or any debt more than Rs. 10,000

2. Fraudulently removed any part of the property of the corporate debtor of the same value mentioned above.

3. Destroys, mutilates or falsify any book or paper related to the property of the

Corporate debtor.

4. Willfully made any false entry in any books of the corporate debtor.

5. Fraudulently parted or altered or make omission in any documents affecting to

The property of the corporate debtor.

6. Willfully created any security interest over, transferred or disposed of any

property of the corporate debtor which has been obtained on credit.

Such officer shall be punishable with imprisonment of more than 3 years but may extend to 5 years. Or fine of more than 1 lakh rupees and may extend to 1 crore rupees or both[8].

1. If any officer of the corporate debtor or corporate debtor has made any gift or transfer or has connived in the execution of a decree or order against the property of the corporate debtor or has concealed or removed any part of the property of the corporate debtor within two months before the date of any unsatisfied judgment, decree or order for payment of money, shall be punishable with imprisonment of more than one year and not exceeding 5 years and fine more than 1 lakh rupees and may extend to 1 crore rupees or both[9].

1. If any officer of the corporate debtor misconducts in course of corporate insolvency resolution process under section 70 of the code then he shall be punishable with imprisonment for a term more than 3 years and should not exceed 5 years, or fine of 1 lakh rupees and should not exceed 1 crore rupees[10].

1. Any officer mutilates, destroys, falsify or alters with any property, books, papers or securities or is having any knowledge of making of any fraudulent entry in the accounts with the intention to defraud any person will be punishable of 3 years of imprisonment which can extend to 5 years and fine of 1 lakh rupees which may extend to 1 crore rupees[11].

1. Any officer makes any material and willful omission in any statement relating to the affairs of the corporate debtor will be punishable of 3 years of imprisonment which can extend to 5 years and fine of 1 lakh rupees which may extend to 1 crore rupees[12].

The punishment given under this code is mostly similar for every offense. This code gives a harsher punishment unlike other provisions in Indian Law.

1. Punishment for Offences by any person on whom the resolution plan is binding is imprisonment for One year which may extend to 5 years and fine of 1 lakh rupees which may extend to 1 crore, when any person destroys, mutilates, alters or falsifies any books, papers or securities, or makes or is in the knowledge of making of any false or fraudulent entry in the accounts with the intention to defraud any person.

1. Punishment for offenses by creditors or operational creditor is imprisonment for One year which may extend to 5 years and fine of 1 lakh rupees which may extend to 1 crore, if any creditor violates the provisions of the moratorium, any person who knowingly or willfully authorized or permitted such contravention by a creditor and where an operational creditor has willfully or knowingly concealed in an application made by him under section 9 the fact that the corporate debtor had notified him of a dispute.

1. Punishment for offenses by bankrupt is imprisonment which is maximum for 6 months and fine of 5 lakh rupees in the case where the bankrupt knowingly makes a false representation or willfully omits or conceals any material information while making an application for bankruptcy by a debtor [13] or has contravened the restrictions under section 140 or the provisions of section 141[14] or has failed to deliver the possession of any property comprised in the estate of the bankrupt under his possession or control, which he is required to deliver under section 156[15].

1. However if any bankruptcy trustee has fraudulently misapplied, retained or accounted for any money or property comprised in the estate of the bankrupt; or has willfully acted in a manner that the estate of the bankrupt has suffered any loss in consequence of the breach of any duty of the bankruptcy trustee in carrying out his functions under section 149, then the imprisonment would rise to a maximum of 3 years and fine would be the three times of the loss caused or likely to have been caused, to persons concerned on account of such contravention[16].

Conclusion

IBC is a new act implemented by the parliament to put a stay on any person trying to defraud creditors. IBC provides the basic legal framework to facilitates resolution of companies, creditors, and banks. The Insolvency Professionals, Bankruptcy Board makes the code effective[17].

By Karan Singh

M. No.- 8586858467/9999641617

[1]https://economictimes.indiatimes.com/industry/banking/finance/banking/ibc-rbi-asks-banks-to-share-info-with-information-utilities/articleshow/62139329.cms

[2]http://restructuring.bakermckenzie.com/2018/05/15/india-the-indian-insolvency-and-bankruptcy-code-2016-ibc/

[3]https://ibbi.gov.in/FAQ_IPs.pdf

[4]Section 17, Insolvency and Bankruptcy Code, 2016

[5]Section 20, Insolvency and Bankruptcy Code, 2016

[6]Section 21, Insolvency and Bankruptcy Code, 2016

[7]http://icsiiip.com/Portals/0/Articles%20%28Sep%2C%202016%29.pdf

[8]Section 68, Insolvency and Bankruptcy Code,2016

[9]Section 69, Insolvency and Bankruptcy Code, 2016

[10]Section 70, Insolvency and Bankruptcy Code, 2016

[11]Section 71, Insolvency and Bankruptcy Code, 2016

[12]Section 72, Insolvency and Bankruptcy Code, 2016

[13]Section 186(a), Insolvency and Bankruptcy Code, 2016

[14]Section 186 (c), Insolvency and Bankruptcy Code, 2016

[15]Section 186(d), Insolvency and Bankruptcy Code, 2016

[16]Section 187 of the Insolvency and Bankruptcy Code, 2016

[17]https://www.indianeconomy.net/splclassroom/what-is-insolvency-and-bankruptcy-board-of-india-ibbi/