Cracking the Code – Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code (“Code”) in India has gained importance these days to protect the rights and interest of different parties involved with a business setup. However, with each passing day government has received multiple suggestions for making amendments in the already existing Code to fit in the dynamic needs of the business environment. Consequently, the Code has experienced innumerable alterations every now and then.
Previously, we laid emphasis on the meaning, vision and facilitators of the Code. It also highlighted how the Code affects our economy in general. For information on any of the above mentioned, kindly visit Discerning Insolvency and Bankruptcy Code, 2016
Procedure for resolving insolvency
Following steps are proposed for resolving insolvency:

• InitiationIn case of default, debtor or creditor might initiate resolution process which is administered by professionals. Debtor’s financial information is provided by the professional to the creditor from the information utilities and manages the property of debtors. This process is undertaken for 180 days and no legal action can be taken against the debtor during this period.
  
• Decision to resolve insolvencyInsolvency professionals take charge and constitute a committee of financial creditors who lend money to the debtors. This committee will be responsible for taking the decision regarding the future of the outstanding debt owed to them. It is on the option of the committee to revive the debt owed to them by transforming repayment schedule or liquidating the property of the debtor te repay the debts owed to them. If the committee does not reach to a viable conclusion within 180 days then the property of debtors is sold or liquidated.
• Liquidation procedureInsolvency professional is empowered to administer the process of liquidation in case debtor willing goes into liquidation. Proceeds from the sale of property are dispensed in the following arrangement:
• Insolvency resolution cost inclusive of insolvency professional’s remuneration
• Secured creditors whose loans are backed by collateral or any dues to other employees
• Unsecured creditors
• Any outstanding amount to government
• Priority shareholders
• Equity shareholders

Concerns explicitly mentioned in the Code requiring consideration
Following concerns are clearly stated in the Code and are required to be focused for efficient and effective functioning of the Code.

• Situation of competition and conflictInsolvency professionals (“IPs”) are regulated by insolvency professional agencies (“IPAs”), which are further administered by the Bankruptcy Board (“Board”). IPs are members of multiple IPAs who monitor their functioning, instead of a single regulator which is an unsettled situation. This might stir a situation of competition in this domain and may also pose a reason of conflict between the IPAs and regulators. Such a framework is distinct from today’s practice where the regulator directly regulates its registered IPs.
  
• Ambiguous distribution hierarchyThe Code lays down a specific order for distributing property during liquidation which is misty in nature as:

1. Secured creditors will receive their entire outstanding amount rather than upto their collateral value
2. Unsecured creditors have priority over trade creditors
3. Government dues will be repaid after unsecured creditors
   

• Undefined rolesFunctioning of IPs, IPAs and information utilities is responsible for the smooth functioning of the Code. Modifications and alterations are required from time and on for proper functioning of the network. Additionally, National Company Law Tribunal (NCLT) who is responsible for adjudicating corporate insolvency issues has not been constituted yet as a result of which Debt Recovery Tribunal (DRT) is overloaded with pending cases.

To conclude situation of the Code, it seems to be in the elementary stage, backed by a strong structure and framework. The government is working on constantly modifying the provisions of the Code. Supreme Court has also amended it from time and on. This changes if introduced successfully, will enable banks to take early legal actions. The focus of IBC lies on instituting a proper insolvency resolution process, which focusses on efficient resolution mechanism and not a recovery system. Currently, it is an initiative in process with improving future anticipations only if it conquers its present day obstacles, plugs gaps and tackles crucial concerns.
If you have any questions or would like to discuss more about the Code, our experts can ensure right business insights and best practices for you.
We can also assist you in setting up your business in India, accounting, bookkeeping, payroll, auditing, taxation, secretarial compliances, and trademark registration, business structuring and advisory services. If you require any assistance in this regard, kindly click here

Kick-start your business: Paid-up capital essentials

For starting a business, a paid-up capital, also called paid-in capital is usually the amount that an entrepreneur needs to invest in a business. In most cases, this required amount is specified in an economy’s commercial code or company law. It is the amount of money pumped in by shareholders in exchange for shares or stock of an entity. When a company wants to raise equity, it cannot simply sell stock of the company to the highest bidder. Businesses must request permission to issue public shares by filing an application with the agency responsible for the registration of companies in the country of incorporation. Paid up capital is also referred as contributed capital including two funding sources – the par value of stock and excess over par. Deriving equity from balance sheet comes to the following calculation:
Paid up capital = par value of stock + excess over par
Paid-up capital represents the extent to which it depends on equity financing to fund its operations which can be compared with the company’s level of debt to assess for a healthy balance of financing, its operations and industry standards. Mentioned below are some crucial concepts regarding paid-up capital while incorporating your business:

Paid-capital requirement for private and public limited companies
Earlier every private company had a minimum paid-up capital requirement of INR 1 lakh whereas for public limited company minimum INR 5 lakhs were required. However, with effect from May 29, 2015, the limits have been omitted and no minimum amount needs to be invested in the company by the shareholders to commence a business, thereby lowering the costs to entrepreneurs to operate in the formal sector. (Company registration)
Withdrawal of paid-up capital
Once the money is loaded into your company as paid-up capital, it becomes part of your company which can be utilized for valid business purposes only. You cannot withdraw that amount for your non-commercial expenses. If in case you withdraw that amount from the bank account of the company for personal expenses, it will be treated as a loan from the company.
Increasing paid-up capital
Paid-up capital of a company can be increased by following a standard procedure, keeping all the parties concerned in loop and after taking prior approval wherever required.

• Verifying Article of Association (AOA) of the companyVerify AOA to ensure provisions in the AOA explicitly permit increasing paid-up capital of your entity. If no such provisions are available, the entity must first make changes to the AOA of the company.
  
• Convene board meetingConduct a board meeting to fix time, date and place for an extra-ordinary general meeting (EGM) obtaining approval of shareholders for increment of paid-up capital and making changes to Memorandum of Association (MOA).
  
• Extra-ordinary general meetingAs per the provisions of section 61(1) of Companies Act 2013, an ordinary resolution for increment or alterations in authorised share capital is to be passed.
  
• Registrar of companies (ROC) form documentingForm SH-7 is filed with ROC with recommended charges for modifying MOA of the company.

It is believed that minimum capital requirements significantly hinder entrepreneurship which sometime also fail to serve the purpose for preventing customers and creditors from expeditiously establishment and potential insolvent firms. Despite these shortcomings, it continued to be a reality for many economies. But every year more economies slash or eliminate how much money entrepreneurs must deposit to start businesses. Various other relevant steps can be initiated to protect investors and creditors and minimizing bankruptcy risks which safeguards the interests of the consumers.
If you are looking for assistance to kick start your business and wish to gather more information about paid up capital requirements or compliances associated with it to refine your business strategies, our team of experts can assist you throughout the process.
We can also assist you in setting up your business in India, accounting, bookkeeping, payroll, auditing, taxation, secretarial compliances, and trademark registration, business structuring and advisory services. If you require any assistance in this regard, kindly click here