Insolvency and bankrupt code, 2016

By Grishma Shetty at Lexcliq


Employees forms the major part of the workforce of the company, as they are the ones performing all the ground work in the company and salary of the employees forms the major  expenditure of the company. In order to curb those malpractices by the companies and safeguard the interest of the employees, legislature brought insolvency and bankruptcy code, 2016. The major objective of this economic reforms is to focus on creditor drove insolvency resolution.

In India, the insolvency and bankruptcy code, 2016 is one matured step towards settling the legal position with respect to financial failures and insolvency. Before the enactment of this code, there were multiple agencies dealing with the matters relating to debt, defaults, and insolvency which generally leads to delays, complexities and higher costs in the process of insolvency resolution. The board for industrial and financial reconstruction, one of the insolvency regulators, has been a phantasm for sick industrial companies.

Applicability of the code:

The provision of the code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities-

  1. Any company incorporated under the companies act, 2013 or under any previous law.
  2. Any other company governed by any special act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such special act.
  3. Any limited liability partnership under the LLP act, 2008.
  4. Any other body being incorporated under any other law for the time being in force, as specified by the central government in this regard.
  5. Partnership firms and individuals.

Objectives of the code:

A sound legal framework of bankruptcy law is required for achieving the following objectives-

  1. Improves handling of conflicts between creditors and debtor = it can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.
  2. Set a limit between malfeasance and business failure = it can also provide to arrive at the most efficient solution to maximize value during negotiations. The bankruptcy law will create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.
  3. Marco economic downturns losses to be allocated = clear allocation of these losses is a result of a well – defined bankruptcy framework. Taxes, inflation, currency depreciation, expropriation, wages or consumption suppression are the common practices of loss allocation. These could affect foreign creditors, small business owners, savers, workers, owners of financial and non-financial assets, importers and exporters.

The objective behind insolvency and bankruptcy code, 2016 are –

  1. To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals.
  2. To fix time period for execution of the law in a time bound settlement of insolvency which is 180 days.
  3. To maximize the value of assets of interested persons.
  4. To promote entrepreneurship
  5. To increase the availability of credit.
  6. To balance all stakeholder’s interest. Balance to be done in the order of priority of payment of government dues.
  7. To establish an insolvency and bankruptcy board of India as a regulatory body for insolvency and bankruptcy law.
  8. To establish higher levels of debt financing across a wide variety of debt instruments.
  9. To provide painless revival mechanism for entities.

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