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.

On June 13, 2022, the West Bengal government passed a Bill to replace the Governor with the Chief Minister, as the Chancellor of 31 state public universities (such as Calcutta University, Jadavpur University).  As per the All India Survey on Higher Education (2019-20), state public universities provide higher education to almost 85% of all students enrolled in higher education in India.  In this blog, we discuss the role of the Governor in state public universities.  

What is the role of the Chancellor in public universities? 

State public universities are established through laws passed by state legislatures.  In most laws the Governor has been designated as the Chancellor of these universities.  The Chancellor functions as the head of public universities, and appoints the Vice-Chancellor of the university.  Further, the Chancellor can declare invalid, any university proceeding which is not as per existing laws.  In some states (such as BiharGujarat, and Jharkhand), the Chancellor has the power to conduct inspections in the university.  The Chancellor also presides over the convocation of the university, and confirms proposals for conferring honorary degrees.   This is different in Telangana, where the Chancellor is appointed by the state government. 

The Chancellor presides over the meetings of various university bodies (such as the Court/Senate of the university).  The Court/Senate decides on matters of general policy related to the development of the university, such as: (i) establishing new university departments, (ii) conferring and withdrawing degrees and titles, and (iii) instituting fellowships.  

The West Bengal University Laws (Amendment) Bill, 2022 designates the Chief Minister of West Bengal as the Chancellor of the 31 public universities in the state.  Further, the Chief Minister (instead of the Governor) will be the head of these universities, and preside over the meetings of university bodies (such as Court/Senate).   

Does the Governor have discretion in his capacity as Chancellor?

In 1997, the Supreme Court held that the Governor was not bound by the aid and advice of the Council of Ministers, while discharging duties of a separate statutory office (such as the Chancellor).   

The Sarkaria and Puunchi Commission also dealt with the role of the Governor in educational institutions.   Both Commissions concurred that while discharging statutory functions, the Governor is not legally bound by the aid and advice of the Council of Ministers.  However, it may be advantageous for the Governor to consult the concerned Minister.  The Sarkaria Commission recommended that state legislatures should avoid conferring statutory powers on the Governor, which were not envisaged by the Constitution.   The Puunchi Commission observed that the role of Governor as the Chancellor may expose the office to controversies or public criticism.  Hence, the role of the Governor should be restricted to constitutional provisions only.  The Statement of Objects and Reasons of the West Bengal University Laws (Amendment) Bill, 2022 also mentions this recommendation given by the Puunchi Commission.

Recent developments  

Recently, some states have taken steps to reduce the oversight of the Governor in state public universities.  In April 2022, the Tamil Nadu Legislative Assembly passed two Bills, to transfer the power of appointing the Vice-Chancellor (in public universities) from the Governor, to the state government.   As of June 8, 2022, these Bills have not received the Governor’s assent. 

In 2021, Maharashtra amended the process to appoint the Vice Chancellor of state public universities.  Prior to the amendment, a Search Committee forwarded a panel of at least five names to the Chancellor (who is the Governor).  The Chancellor could then appoint one of the persons from the suggested panel as Vice-Chancellor, or ask for a fresh panel of names to be recommended.  The 2021 amendment mandated the Search Committee to first forward the panel of names to the state government, which would recommend a panel of two names (from the original panel) to the Chancellor.  The Chancellor must appoint one of the two names from the panel as Vice-Chancellor within thirty days.  As per the amendment, the Chancellor has no option of asking for a fresh panel of names to be recommended.