How creditor can recover money using Insolvency and Bankruptcy Code 2016

By | July 4, 2016

Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016 received the Assent of President on 28.05.2016 . Read Complete Insolvency and Bankruptcy Code 2016 Notified by the Government.

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.

Adjudicating Authority

Company Law Tribunal is the Adjudicating Authority for Corporate debtors and

Debt Recovery Tribunal is the Adjudicating Authority for individuals and partnership firms.

Benefit to Creditor of using Insolvency and Bankruptcy Code 2016 

Bankruptcy Code 2016 is a big relief for creditors who have to recover their dues from individuals, proprietorship concerns or partnership firms where the amount of the default is not less than one thousand rupee. 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/judgement, 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.

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 thousand whereas it is 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.

Application under  Insolvency and Bankruptcy Code 2016 

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.

The liquidation process for individuals and partnership firms has also Two Stages i.e. Insolvency Process and Bankruptcy Process.

  1. Insolvency process

(i)             As a first step, a creditor has to give demand notice whereby giving 14 days time to the debtor to pay the dues and in case of default, the creditor may either by himself or jointly or through resolution professional files an application with Adjudicating Authority and the Authority if satisfied may pass an order whereby appointing the resolution professional to commence the proceedings. The resolution professional shall examine the application within 10 days of his appointment and submit a report recommending approval or rejection. On the request of resolution professional the Adjudicating Authority may also give instructions for conducting negotiations between the debtor and creditors and for arriving at a repayment plan within a stipulated period. [Section 99 and 100]

(ii)           Interim moratorium shall commence on the date of the application in relation to all debts and shall cease to have effect on the date of admission of such application. [Section 96]. However, final moratorium shall start when the application is admitted u/s 100, which shall commence in relation to all the debts and shall cease to have effect at the end of the period of one hundred and eighty days beginning with date of admission. During this cooling period, any legal proceedings or action in respect of any debt shall be deemed to have stayed, and no fresh legal action can be initiated except with the approval of Adjudicating Authority; During the moratorium period the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein

(iii)          Public Notice – The adjudicating Authority shall within seven days from the date of order u/s 100, issue public notice to be published in at least one English and one vernacular newspaper which is in circulation where the debtor resides whereby inviting claims from anybody; particulars of resolution professional where the claim are to be registered and the last date for submission of claim.

(iv)          Repayment Plan – This is a key feature of this process whereby debtor and creditor can initiate a repayment plan. The debtor shall prepare a plan containing a proposal to the creditors for restructuring of his debts or affairs.

(v)            Creditors committee and submission of report – The resolution professional thereafter submits said plan along with his report to the Adjudicating authority within a period of 21 days from the last date of submission of claims u/s 102 of the Act. The said report shall specify the conditions as per provisions of Section 106(2) and shall also specify the date, time and venue of creditors committee, if any. The creditors in their meeting should consider, modify, vary and approve or reject the repayment plan. It shall be approved by majority of at least three fourth in value of creditors present in person or by proxy. vi) Discharge order : On the basis of repayment plan, the resolution professional shall apply to Adjudicating Authority for a discharge order in relation to the debt mentioned in repayment plan and the Adjudicating Authority makes appropriate orders for early discharge or for discharge on completion of repayment plan.

  1. Bankruptcy of debtor

(i)             Commencement of proceedings – An application for bankruptcy of a debtor may be made by a creditor individually or jointly or by a debtor to the Adjudicating Authority in the following circumstances

(a)            Where the application is rejected by the Adjudicating Authority on the basis of report of resolution professional to the effect that the application was made with the intention to defraud his creditors or the resolution professional, the order shall record that the creditor is entitled to file application for bankruptcy [Section 100(4)]

(b)            Where the Adjudicating Authority rejects the repayment plan under section 114, the debtor and creditor shall be entitled to file application for bankruptcy [Section 115(2)]

(c)            Where the debtor or the creditor, whose claims under repayment plan have not been fully satisfied, shall be entitled to apply for a bankruptcy [Section 118(3)]

                 The application of bankruptcy shall be filed within a period of three months of the date of order                     passed by the Adjudicating Authority as referred to above.

The Adjudicating Authority shall pass order u/s 126 of the Code within 14 days of receiving the                     confirmation or nomination of the bankruptcy trustee and the Resolution professional or                            insolvency professional is appointed as bankruptcy trustee.

(ii)           Vesting of estate: On passing of bankruptcy order, the estate of the bankrupt shall vest in the bankruptcy trustee and same shall be divided among the creditors as per the manner provided in the Code. The bankruptcy order shall not effect the right of secured creditor to realize or otherwise deal with his security interest.

(iii)          Submission of statement of affair and financial statement; On passing of orders the debtor/bankrupt is required to submit statement of affair and financial position within 7 days from the bankruptcy commencement date in the manner as may be prescribed.

(iv)          Notice to the creditors and public notice: The Adjudicating Authority within 10 days of bankruptcy commencement date, send notice to creditors and issue a public notice to be published in leading newspapers, one in English and another in vernacular language in such manner as may be prescribed [u/s 130] whereby inviting claims from public.

(v)            Creditors’ meeting: On expiry of period as prescribed in the public notice, the bankruptcy trustee convenes a meeting of creditors. The creditors whose names do not appear in the list of creditors [as per Section 132] and who are associates of the bankrupt are not entitled to attend the meeting.

(vi)          Distribution of estate: The bankruptcy trustee shall conduct the administration and distribution of the estate of the bankrupt in accordance with provisions of Chapter V.

(vii)         Report of bankruptcy trustee: On completion of administration and distribution, the trustee shall convene a meeting of committee of creditors who will approve the report of trustee within 7 days of the report and determine whether the debtor should be released or not.

(viii)        Discharge order: The bankruptcy trustee shall apply to the Adjudicating Authority for a discharge order (a) on the expiry of one year from the bankruptcy commencement date or (b) within seven days of the approval of the committee of creditors of the completion of administration of the estate of the bankrupt. [Section 138]. The discharge order shall release the bankrupt from all the bankruptcy debt subject to certain conditions as provided in Section 139. ix) Disqualification of bankrupt: On becoming bankrupt, he is being disqualified from (a) being appointed or acting as a trustee or representative in respect of any trust, estate or settlement; (b) being appointed or acting as a public servant: (c) being elected or sitting to any public office where the appointment of such office is by election (d) being elected or sitting or voting as a member of any local authority; (e) shall not act as a director or any company directly or indirectly take part in formation, promotion or management of a company; (f) prohibited from creating any charge on his estate or taking any further debt: (g) required to inform his business partners and to all concerned before entering into financial or commercial transaction of such value as may be prescribed; (h) incompetent to maintain any legal action or proceedings in relation to the bankruptcy debt; and (i) not permitted to travel overseas without the permission of the Adjudicating Authority.

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