During bankruptcy and insolvency proceedings, the fate of the assets of the debtor (the insolvent company or individual) depends on the specific stage of the process and the decisions made by the relevant authorities. The treatment of assets can vary, but generally, there are two primary outcomes: asset preservation and distribution to creditors. Asset Preservation: Moratorium Period: When insolvency proceedings are initiated, a moratorium period is usually imposed to protect the assets of the debtor from being liquidated or transferred during this period. This gives the debtor and the insolvency resolution professional (IRP) or the resolution professional (RP) time to assess the financial situation and formulate a resolution plan. Management by Insolvency Professional: The insolvency professional (IP) or resolution professional (RP) appointed by the National Company Law Tribunal (NCLT) takes control of the debtor's assets and manages its affairs during the corporate insolvency resolution process (CIRP). Their primary objective is to continue business operations if possible and preserve the value of assets. Restrictions on Asset Disposal: During the moratorium period, the debtor typically cannot sell, transfer, or dispose of its assets without the approval of the NCLT or the IP/RP. Distribution to Creditors: Resolution Plan: In the case of a successful resolution plan, the assets may be used to implement the plan. The plan often involves restructuring the debtor's business and settling the debts to creditors, which may include partial repayment, equity transfer, or a combination of these. Creditors receive their share of the proceeds according to the hierarchy established under the Insolvency and Bankruptcy Code (IBC). Liquidation: If a resolution plan is not approved or fails, the debtor's assets are typically liquidated. The liquidation process involves selling the assets and distributing the proceeds to creditors according to the priority set by the IBC. Secured creditors have a higher priority in the distribution hierarchy compared to unsecured creditors. Sale of Assets: The liquidation process involves selling the assets through a transparent and competitive bidding process to maximize their value. The proceeds from the sale are used to pay off the debts owed to creditors, starting with secured creditors and moving down the priority ladder. Distribution to Equity Holders: After satisfying the claims of creditors, any remaining funds, if available, may be distributed to equity holders (shareholders) of the debtor, but they typically receive their share only after all creditor claims are fully met, which often does not happen in insolvent situations. The specific details of asset treatment and distribution can vary depending on the insolvency and bankruptcy laws of the jurisdiction and the particulars of each case. The goal of bankruptcy and insolvency proceedings is to ensure a fair and orderly process for addressing financial distress, protecting the interests of creditors, and, if possible, reviving the debtor's business or maximizing creditor recovery through asset distribution.

Dear client, Why do we need a new law? Time resolve insolvency 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 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: a. 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. b. 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. c. 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. d. 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. e. 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: 1. 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. 2. 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. 3. 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? a. 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. b. 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. Should you have any queries, please feel free to contact us!