INSOLVENCY & BANKRUPTCY CODE:
With the objective of providing a certain degree of assurance to the creditors and the investors, the Bankruptcy and Insolvency Code, 2015 was passed by the NDA government which became an act on 28th of May 2016 with the purpose of helping investors and creditors in recovering investments.
Objectives and Salient Features of the Act:
As mentioned above, the major objective behind the prospective law is to ensure that, the creditors or investors have a suitable mechanism so as to enable them to recover any investments made in the form of money or tangible assets from the creditors. It essentially aims to facilitate the ease of doing business in India, where India currently ranks at 130 as per a recent report of the World Bank.
In order to do away with the legal complexities of starting up, the following provisions have been incorporated in order to attract budding entrepreneurs from entering into the business arena in India:
Considering the fact that the start-ups use innovation to expand business and are in their nascent stage, they are vulnerable to losses as due to market fluctuations or competitive pressure they may not be able to sustain themselves for a longer period of time. A variety of reasons, such as lack of availability of capital for market investments, not getting the desired angel investors for making an investment in the start-ups and lack of resources to keep up with the requirements of a faster-growing economy are some of the innumerable factors which make it difficult for start-up entities to survive the cut-throat competition in the market. To start-up a new business, a certain amount of capital is invested and in case the investments do not reap the desired benefits, problems arise, as the money invested is stuck up in the market, thereby causing hardships to the start-up entities and the angel investors who have invested their money in the markets.
The process of winding-up and liquidation under the Companies Act, for example is in itself a cumbersome process which takes a lot of time irrespective of the fact as to whether it is compulsory or voluntarily done. Even if a company was to go for a voluntary winding-up, it would require a resolution of board members in a board meeting, payment of fees to liquidator, filing of registration with the registrar of companies which in itself is a tedious process, which complicates the process of company exiting the market. Furthermore, if a company is to undergo the process of liquidation, even then there is the requirement of the process of appointment of liquidator, who after his/her appointment is supposed to submit a report to the central government, and afterwards the liquidation process is to take place. Start-Up entities, under the prevalent laws can either register themselves as a Limited Liability Partnerships (LLP) under the Limited Liability Partnership Act, 2008 or as a Company under the Companies Act 2013.
The new Insolvency and Bankruptcy Act (2016) provides for fast-track winding-up proceedings of start-up entities within a period of 90 days pursuant to an application for the winding-up of the company and appointment of the Insolvency professional. The Insolvency professional can make an application to the adjudicating authority to further extend the proceedings by 45 days, if the need arises in order to ensure efficient winding-up of the start-ups. It will be the responsibility of the Insolvency Professional, to ensure that the winding-up proceedings and the payment made to the creditors and investors in the form of assets are done within a period of six months.
Inadequacies in The Insolvency Law and Potential Problems For Start-Up Entities:
The biggest issue in the new laws on insolvency is the fact that, though there has an attempt which has been made herein for the unification of legal procedures associated with insolvency through a single law, yet, the existing laws, have not been repealed, which may lead to a confusion with regards to the fact as to whether the pre-existing laws could still have any effect upon the insolvency regime in the country. In addition to that, as a matter of general parlance, the insolvency process is to take place within a span of 180 days, and is to be further extended 270 days, which further complicates the process as start-up entities which do not have enough money or financial security, could be forced to stay inside the market, which could be inconvenient for them, considering the fact that they would aim always for an early exit from the market.
In addition to that, this act relies upon the professional conduct of the insolvency professionals or the insolvency boards, but the question that arises here is, how a regulatory mechanism can be imposed on them so as to ensure strict compliance with the provisions, as the insolvency laws are deemed to function as per the professional conduct of the individuals.
Therefore considering the ambiguities in the present laws, it can be stated that the laws in question aren't favorable for start-up entities, as the clearly do not talk about the insolvency resolution time period and also considering the fact that unnecessary financial burden is imposed upon the start-up entities, owing to the fact that there is lack of financial power vested with the start-up entities which makes them vulnerable to market changes, and the lacunas in the insolvency process further expose them to crisis considering the lack of financial resources available with them.
