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Looking back, 2016 was a watershed year for restructuring and insolvency laws in India. The passing of the Insolvency and Bankruptcy Code 2016 (IBC)1 by the Indian Parliament in May 2016 and bringing into effect the provisions relating to the resolution and liquidation of Indian companies and limited liability partnerships (corporate debtors) in December 2016 brought about a welcome change to an otherwise dismal state of affairs for corporate insolvency in India. The IBC, which is designed to be a consolidated legislation for restructuring and insolvency in India, proposes to also govern the resolution and bankruptcy of individuals and partnership firms.
However, the provisions relating to individuals and partnerships firms are not in effect as yet, and this article does not deal with that regime. Insolvency resolution of financial institutions is outside the purview of the IBC and therefore is not dealt with in this article.
Erstwhile Regime for Corporate Insolvency in India
Before the passing of the IBC, the law relating to the insolvency of companies in India was fragmented and prone to massive delays on account of overlapping legislations and ineffective and insufficient infrastructure dealing with the regime. The regime contained in the companies law provided only for liquidation, whereas the infamous rescue regime under the Sick Industrial Companies (Special Provisions) Act of 1985, applicable to companies with industrial businesses and without a definitive timeline for resolution, provided a cover to the debtors (and their guarantors) against creditor actions for long periods of time. With these ailments, the average time taken for insolvency resolution in India has been 4.3 years, compared to one year in the U.K. and U.S., and two years in South Africa.2
Beginning in 1981, the Indian government set up multiple committees to look into the difficulties faced by creditors in recovering their money and resolving financially distressed debtors, all of which underscored the challenges of the erstwhile regime and an urgent need for a solution to deal with the growing pile of nonperforming loans of Indian banks. These led to the enactment of new laws for recovery and security enforcement, but insolvency laws had largely been untouched. The latest of such attempts was the Bankruptcy Law Reforms Committee set up in 2014, which presented a report to the government,...