Insolvency and Bankruptcy Code 2016 (IBC 2016)- A ray of hope for distressed SMEs in India.

Recently implemented globally comparable Insolvency and Bankruptcy code will make turnaround or liquidation of distressed firms more humane and quick for SMEs in India

Responding to clamour of industrial sector for decades, Govt has finally brought in a law to deal with instances of insolvency and bankruptcy in a more humanely and within stipulated time. Govt has recently set up Insolvency and Bankruptcy Board of India (IBBI) for implementation of the new legal mechanism to deal with stressed businesses.

Prior to this, there are many laws dealing with the stressed debtor-creditor relationship. However, they are not comprehensive and treat various interested parties differently (for instance, the priority of statutory dues during the liquidation of the firm).

IBC 2016  is quite comprehensive and has defined the time frame for approving the resolution package. Quasi-legal nature of engagement style makes resolution an uninterrupted process (unlike court proceedings) and can bring all the creditors on board (They are obliged to respond to notice from IP).

New law specifies that the stipulated time to approve the resolution package is 180 days and in exceptional cases, it will be 270 days. This is a key hallmark of new law since the existing laws are not stipulating any time frame.

Please read: Insolvency and Bankruptcy Code – Is it beneficial to SMEs?

Insolvency and Bankruptcy among SMEs in India:

SMEs play a very important role in India’s economy in terms of job creation and expanding manufacturing base. Recent advancement in internet and information technology has accelerated adoption of outsourced manufacturing ecosystem in the country.

It is very unlikely to find any product without most of its constituent parts not outsourced by the mother unit or brand owner. Corporates are using this outsourced model since it is an opportunity to transfer risk and stay nimble-footed.

When a mother unit faces distress in the market-place, it is going to affect the business of SMEs almost directly. Distressed mother units delay the payment to these SMEs and make these SMEs vulnerable to cash flow crisis.

This triggers a cycle of distress events at the level of subject supplier-SME. SMEs start delaying payment to creditors and elongate the working capital cycle, followed by delaying payment of wages and salaries. Further, they will delay payment of statutory dues and lastly the bank loans.

Since different creditors have to seek remedies in different courts (Labours in labour court, Banks in DRT, etc.), the whole process will become messy. Entrepreneurs will have to fight cases in multiple courts one hand and deal with business on the other.

It is very likely that they will get demoralised. Non-availability of common platform for resolving the issue is a real constraint.

IBC 2016- Mechanism to hand-hold troubled companies to transition from distress:

Ups and downs are obvious in any business. However, the absence of legal support to overcome the challenges of distress is putting many well-run companies into severe trouble. It is not out-of-place to mention that many successful entrepreneurs are avoiding scaling up the business fearing the risk of distress.

Today distressed entities will have to face the spectre of liquidation. Distress not necessarily should end in liquidation. It gives an opportunity to introspect and fix the gaps.

IBC 2016 compels all the creditors to take a fresh look at the viability of business of the firm and assess the sustainable level of debt. It will enable the stakeholders to agree on a realistic revival package. If liquidation is inevitable, IBC 2016 facilitates humane and quick liquidation.

Insolvency and Bankruptcy Code – Gist of Procedures to Seek Remedies:

1. The application for Corporate Insolvency Resolution Process (CIRP) to National Company Law Tribunal (NCLT) can be submitted by the financial creditor, operational creditor or the Corporate Debtor, upon happening of a default.
2. The NCLT will accept or reject the application in 14 days. If accepted, it will nominate/confirm the name of Interim IP. The IP will make the public announcement within three days and invite claims from all creditors as prescribed under Rules. The IP will prepare a full list of creditors.
3. The IP will form a committee of creditors consisting of financial creditors. The committee may appoint a new IP or confirm the Interim IP.
4. The IP will prepare Information Memorandum. The Information memorandum will contain all details about the corporate debtor (Company).
5. The Corporate Debtor or creditor or any other person can submit a Resolution Proposal based on the Information Memorandum. The resolution plan will be discussed at the meeting of the committee of creditors. The plan should provide for the settlement of claims for various creditors. The corporate debtor can negotiate with various creditors and find an acceptable solution to all creditors.
6. If the plan is approved by 75% creditors (represented by value) in the meeting of the committee of creditors, the resolution plan will become effective upon the approval by NCLT.
7. The entire process is to be completed in 180 days (Plus additional time of 90 days in exceptional cases).
8. If the resolution plan is not accepted by the committee of creditors or if no resolution has been arrived at within stipulated time period, the NCLT will order for the liquidation of the company.
9. The order for liquidation will also provide for the appointment of a liquidator. The Resolution professional who has conducted the CIRP process may be appointed as the liquidator or any other Insolvency professional may also act as liquidator.
10. The Liquidator will invite claims from all creditors through public notification. Creditors like lenders, unsecured creditors, suppliers of raw materials, statutory creditors, employees etc may make their claim in the manner as prescribed under Rules.
11. The Liquidator will administer the assets of the corporate debtor and distribute the proceeds in the hierarchy as prescribed in Code.
12. The Adjudicating Authority for cases under IBC 2016 is NCLT/DRT and the local courts have no jurisdiction to try the cases. The appeal against the order of NCLT/DRT may be challenged in NCLAT/DRAT. Thereafter, an appeal can be made before High Court Court/ Supreme Court on certain limited grounds.

Note: According to the Code, the insolvency and bankruptcy matter relating to Limited companies and LLPs are adjudicated by NCLT. For individuals and partnership firms and other constituents, it will be dealt with by DRTs. Presently Govt has notified the Sections and Rules applicable to Limited companies and LLPs. With regard to personal and partnership related insolvency process, the notification still to come.

Insolvency Professionals (IPs): A new breed of professionals regulated by IBBI:

IBC 2016 has a proposed of creating Insolvency resolution professionals (IP) to engage in the resolution process, whose conduct is regulated by IBBI. This is expected to boost the effectiveness of new law and many experts have opined that it may act as a catalyst for quick conclusion of the process. These quasi-judicial professionals facilitate negotiations and this supplement the efforts of NCLT/DRTs in bringing on board the creditors for resolution through amicable settlement.

Conclusion:

For a troubled company, the IBC 2016 provides legally approved time bound exit rout or turnaround package. SMEs in India should make use of new legal avenue to tide over the distress situation if exists. This avenue will provide cover to transition from distress with fresh assessment of sustainable debt or liquidation of the firm in humane and respectable manner.

Acknowledgement:

We thankfully acknowledge the contribution of Sri K V Subramanyam, Practicing Company Secretary and Financial Advisor for businesses. He is based in Udupi, Karnataka. He can be reached at [email protected].