Applications for the LAMP Fellowship 2025-26 will open on December 1, 2024. Sign up here to be notified when applications open.

The Insolvency and Bankruptcy Code, 2016 is listed for passage in Rajya Sabha today.  Last week, Lok Sabha passed the Code with changes recommended by the Joint Parliamentary Committee that examined the Code.[1],[2]  We present answers to some of the frequently asked questions in relation to the Insolvency and Bankruptcy Code, 2016. Why do we need a new law?Time resolve insolvency1 As of 2015, insolvency resolution in India took 4.3 years on an average.  This is higher when compared to other countries such as United Kingdom (1 year) and United States of America (1.5 years).  Figure 1 provides a comparison of the time to resolve insolvency for various countries.  These delays are caused due to time taken to resolve cases in courts, and confusion due to a lack of clarity about the current bankruptcy framework. What does the current Code aim to do? The 2016 Code applies to companies and individuals.  It provides for a time-bound process to resolve insolvency.  When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period.  To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency. Who facilitates the insolvency resolution under the Code? The Code creates various institutions to facilitate resolution of insolvency.  These are as follows:

  • Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
  • Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
  • Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
  • Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
  • Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.  The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

What is the procedure to resolve insolvency in the Code? The Code proposes the following steps to resolve insolvency:

  • Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process.  The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets.  This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
  • Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them.  They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them.  If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
  • Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.

What are some issues in the Code that require consideration?

  • The Bankruptcy Board (regulator) will regulate insolvency professional agencies (IPAs), which will further regulate insolvency professionals (IPs).  The rationale behind multiple IPAs overseeing the functioning of their member IPs, instead of a single regulator is unclear. The presence of multiple IPAs  operating simultaneously could enable competition in the sector. However, this may also lead to a conflict of interest between the regulatory and competitive goals of the IPAs.  This structure of regulation varies from the current practice where the regulator directly regulates its registered professionals.  For example, the Institute of Chartered Accountants of India (which regulates chartered accountants) is directly responsible for regulating its registered members.
  • The Code provides an order of priority to distribute assets during liquidation. It is unclear why: (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.
  • The smooth functioning of the Code depends on the functioning of new entities such as insolvency professionals, insolvency professional agencies and information utilities.  These entities will have to evolve over time for the proper functioning of the system.  In addition, the NCLT, which will adjudicate corporate insolvency has not been constituted as yet, and the DRTs are overloaded with pending cases.

 


 

  1. The Insolvency and Bankruptcy Code, 2016, http://www.prsindia.org/administrator/uploads/media/Bankruptcy/Bankruptcy%20Code%20as%20passed%20by%20LS.pdf.
  2. Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, April 28, 2016, http://164.100.47.134/lsscommittee/Joint%20Committee%20on%20Insolvency%20and%20Bankruptcy%20Code,%202015/16_Joint_Committee_o n_Insolvency_and_Bankruptcy_Code_2015_1.pdf

A version of this blog appeared in the Business Standard on May 7, 2016.

In a landmark judgment on April 12, 2012, the Supreme Court upheld the constitutional validity of the provision in the Right to Education Act, 2009 that makes it mandatory for all schools (government and private) except private, unaided minority schools to reserve 25% of their seats for children belonging to “weaker section and disadvantaged group”.  The verdict was given by a three-judge bench namely Justice S.H. Kapadia (CJI), Justice Swatanter Kumar and Justice K.S. Radhakrishnan.  However, the judgment was not unanimous.  Justice Radhakrishnan gave a dissenting view to the majority judgment. According to news reports (here and here), some school associations are planning to file review petitions against the Supreme Court order (under Article 137 of the Constitution, the Supreme Court may review any judgment or order made by it.  A review petition may be filed if there is (a) discovery of new evidence, (b) an error apparent on the face of the record, or (c) any other sufficient reason). In this post, we summarise the views of the judges. Background of the petition The 86th (Constitutional Amendment) Act, 2002 added Article 21A to the Constitution which makes it mandatory for the State to provide free and compulsory education to all children from the age of six to 14 years (fundamental right).  The Parliament enacted the Right of Children to Free and Compulsory Education Act, 2009 to give effect to this amendment. The Act provides that children between the ages of six and 14 years have the right to free and compulsory education in a neighbourhood school.  It also lays down the minimum norms that each school has to follow in order to get legal recognition.  The Act required government schools to provide free and compulsory education to all admitted children. Similarly, aided schools have to provide free and compulsory education proportionate to the funding received, subject to a minimum of 25%. However, controversy erupted over Section 12(1)(c) and (2) of the Act, which required private, unaided schools to admit at least 25% of students from SCs, STs, low-income and other disadvantaged or weaker groups.  The Act stated that these schools shall be reimbursed for either their tuition charge or the per-student expenditure in government schools, whichever is lower.  After the Act was notified on April 1, 2010, the Society for Unaided Private Schools of Rajasthan filed a writ petition challenging the constitutional validity of this provision on the ground that it impinged on their right to run educational institutions without government interference. Summary of the judgment Majority The Act is constitutionally valid and shall apply to (a) government controlled schools, (b) aided schools (including minority administered schools), and (c) unaided, non-minority schools.  The reasons are given below: First, Article 21A makes it obligatory on the State to provide free and compulsory education to all children between 6 and 14 years of age.  However, the manner in which the obligation shall be discharged is left to the State to determine by law.  Therefore, the State has the freedom to decide whether it shall fulfill its obligation through its own schools, aided schools or unaided schools.  The 2009 Act is “child centric” and not “institution centric”.  The main question was whether the Act violates Article 19(1)(g) which gives every citizen the right to practice a profession or carry out any occupation, trade or business.  However, the Constitution provides that Article 19(1)(g) may be circumscribed by Article 19(6), which allow reasonable restriction over this right in the interest of the general public.  The Court stated that since “education” is recognized as a charitable activity [see TMA Pai Foundation vs State of Karnataka (2002) 8 SCC 481] reasonable restriction may apply. Second, the Act places a burden on the State as well as parents/guardians to ensure that every child has the right to education.  Thus, the right to education “envisages a reciprocal agreement between the State and the parents and it places an affirmative burden on all stakeholders in our civil society.”  The private, unaided schools supplement the primary obligation of the State to provide for free and compulsory education to the specified category of students. Third, TMA Pai and P.A. Inamdar judgments hold that the right to establish and administer educational institutions fall within Article 19(1)(g).  It includes right to admit students and set up reasonable fee structure.  However, these principles were applied in the context of professional/higher education where merit and excellence have to be given due weightage.  This does not apply to a child seeking admission in Class I.  Also, Section 12(1)(c) of the Act seeks to remove financial obstacle.  Therefore, the 2009 Act should be read with Article 19(6) which provides for reasonable restriction on Article 19(1)(g).  However, the government should clarify the position with regard to boarding schools and orphanages. The Court also ruled that the 2009 Act shall not apply to unaided, minority schools since they are protected by Article 30(1) (all minorities have the right to establish and administer educational institutions of their choice).  This right of the minorities is not circumscribed by reasonable restriction as is the case under Article 19(1)(g). Dissenting judgment Article 21A casts an obligation on the State to provide free and compulsory education to children of the age of 6 to 14 years.  The obligation is not on unaided non-minority and minority educational institutions.  Section 12(1)(c) of the RTE Act can be operationalised only on the principles of voluntariness, autonomy and consensus for unaided schools and not on compulsion or threat of non-recognition.  The reasons for such a judgment are given below: First, Article 21A says that the “State shall provide” not “provide for”.  Therefore, the constitutional obligation is on the State and not on non-state actors to provide free and compulsory education to a specified category of children.  Also, under Article 51A(k) of the Constitution, parents or guardians have a duty to provide opportunities for education to their children but not a constitutional obligation. Second, each citizen has the fundamental right to establish and run an educational institution “investing his own capital” under Article 19(1)(g).  This right can be curtailed in the interest of the general public by imposing reasonable restrictions.  Citizens do not have any constitutional obligation to start an educational institution.  Therefore, according to judgments of TMA Pai and PA Inamdar, they do not have any constitutional obligation to share seats with the State or adhere to a fee structure determined by the State.  Compelling them to do so would amount to nationalization of seats and would constitute serious infringement on the autonomy of the institutions. Rights guaranteed to the unaided non-minority and minority educational institutions under Article 19(1)(g) and Article 30(1) can only be curtailed through a constitutional amendment (for example, insertion of Article 15(5) that allows reservation of seats in private educational institutions). Third, no distinction can be drawn between unaided minority and non-minority schools with regard to appropriation of quota by the State. Other issues related to the 2009 Act Apart from the issue of reservation, the RTE Act raises other issues such as lack of accountability of government schools and lack of focus on learning outcomes even though a number of studies have pointed to low levels of learning among school children.  (For a detailed analysis, please see PRS Brief on the Bill).