Tuesday, July 5, 2016

Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016 is welcome step and need of hour being part of ease of doing business in India. This Code has been passed by both Houses and got President assent on 28-05-2016 whereby Sick Industries Companies Act, 1985 (SICA), Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 have been repealed, winding up provisions of Companies Act, 2013 have been restructured and laws relating to winding up has been consolidated in single code. This Code offers a uniform, comprehensive insolvency legislation encompassing all Companies, LLPs, partnerships and individuals. This code will facilitate a formal and time bound insolvency resolution process and liquidation. This code is a special Act and its provisions have overriding effect over other laws. This Code has two parts i.e. Part II for Corporate Debtors (applicable for Companies and LLPs) and Part III, IV and V applicable to individuals and partnership firms. Company Law Tribunal is the Adjudicating Authority for Corporate debtors and whereas Debt Recovery Tribunal is the Authority for individuals and partnership firms. The Author would like to discuss provisions applicable to Individuals and partnership firms in this Article.

Bankruptcy Code 2016 is a big relief for creditors who have to recover their dues from individuals, proprietorship concerns or partnership firms. Presently there is no law which compels the debtors to pay the dues out of disposing off his properties and assets and to declare the debtor as bankrupt in case he is unable to pay his dues. The only remedy available with the creditor is to approach civil court and also to pay ad-valorem duty depending upon amount of recovery. Even after passing of orders/judgment, sometimes the creditor is unable to recover the money as no liquid money is available with the debtor or there are circumstances that the debtor has closed down his business activities and unable to pay. In such circumstances, it is very difficult for the creditor to recover the amount or to execute the decree. The introduction of this Code gives big relief to the creditors who wants to recover their dues even if the debtor has closed his proprietorship or partnership firm. In case liquidation process is initiated against the debtor, he is bound to disclose his assets and in case he is unable to pay of his liquid assets, he may be required to sell his assets and pay the same.
Further, in case the debtor has no assets to pay the debts, he has also option to approach Adjudicating Authority to adjudge him as bankrupt. In United States this practice is prevalent and the individual prefers to invoke the provisions of Bankruptcy law for being adjudged as bankrupt so that he is discharged from all his liabilities. In US this practice also prevalent because in US there are heavy penalties and penal provisions in case of default including the provisions for imprisonment. In order to save himself from imprisonment and penal provisions, he prefers to become bankrupt.
Part III of the Code deals with fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than Rs.one thousand whereas it is Rs.one lac in case of Corporate debtor. In case the individual or partnership firms, is unable to pay its debts bankruptcy orders can be passed u/s 126/138 of the Code whereas the corporate debtor cannot be adjudged bankrupt.
The provisions of bankruptcy law can be invoked by a debtor himself or by the creditor. A debtor who is unable to pay his debt and fulfills the conditions specified in Section 80(2) entitles to make an application for a fresh start for discharge of his debt. The initiation of fresh start process can be done by debtor in individual capacity only. A person should fulfill the following criteria as specified in Section 80(2) of the Code, the extracts of which are as under:
80(2) A debtor may apply, either personally or through a resolution professional, for a fresh start under this Chapter in respect of his qualifying debts to the Adjudicating Authority if —
(a)

the gross annual income of the debtor does not exceed sixty thousand rupees;
(b)

the aggregate value of the assets of the debtor does not exceed twenty thousand rupees ;
(c)

the aggregate value of the qualifying debts does not exceed thirty-five thousand rupees ;
(d)

he is not an undischarged bankrupt;
(e)

he does not own a dwelling unit, irrespective of whether it is encumbered or not;
(f)

a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
(g)

no previous fresh start order under this Chapter has been made in relation to him in the preceding twelve months of the date of the application for fresh start.

Earlier Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 were applicable and by now the provisions of which have become obsolete, hence same is repealed by above Code 2016. The author is of the view that the limits as specified in Section 80(2) mentioned hereinabove, looks to be on lower side and not according to the present scenario as the person who fulfills the criteria mentioned hereinabove has no need to go for insolvency as he is already living under poverty line and in the circumstances no creditor would like to pursue liquidation proceedings. The Government should review this limit or criteria of bankruptcy.
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