Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive law introduced in India to address issues of insolvency and bankruptcy in a time-bound and efficient manner. Prior to the IBC, India lacked a uniform legal framework to address corporate insolvency, leading to delayed and often ineffective resolutions. The IBC aims to provide a structured process for resolving corporate insolvency, improving the ease of doing business, and enhancing the credit culture in India.

Background and Objectives:

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to consolidate and amend the existing laws relating to insolvency and bankruptcy. It aims to:

• Provide a time-bound process for resolving insolvency of individuals and businesses.
• Improve the overall business environment by addressing issues such as non-performing assets (NPAs) and corporate debt.
• Promote entrepreneurship by offering a clean slate to viable businesses that face insolvency.
• Protect the interests of creditors and other stakeholders while providing an opportunity for companies in distress to restructure.

The IBC combines various laws and procedures related to insolvency and bankruptcy into one comprehensive code. It also introduces mechanisms for resolving insolvency both for individuals and corporate entities, ensuring transparency, accountability, and fairness in the process.

Features of the Insolvency and Bankruptcy Code, 2016:

1. Insolvency Resolution Process: The IBC sets out a clear, standardized process for insolvency resolution. It is divided into three primary parts:
   • Corporate Insolvency Resolution Process (CIRP): A process for resolving insolvency of companies and limited liability partnerships (LLPs). The process is initiated by creditors, who can file a petition with the National Company Law Tribunal (NCLT).
   • Individual Insolvency Resolution Process (IIRP): For individuals and partnership firms, the IBC provides a process to address insolvency situations.
   • Liquidation: In cases where a resolution plan fails, the company may undergo liquidation, where its assets are sold to settle outstanding debts.
2. Time-Bound Process: The IBC mandates that the insolvency process be completed within 180 days (extendable by another 90 days). This is to ensure that resolution or liquidation occurs without unnecessary delays. The time-bound nature of the process is crucial in preserving the value of distressed assets and ensuring a quicker recovery for creditors.
3. Resolution Professional: During the insolvency resolution process, an external expert known as a “Resolution Professional” is appointed. The Resolution Professional manages the affairs of the company and works with creditors and other stakeholders to come up with a resolution plan that maximizes the recovery value of the company. The professional is responsible for overseeing the process and ensuring that the interests of all parties are protected.
4. Committee of Creditors (CoC): The IBC establishes a Committee of Creditors, composed of financial creditors, which has the power to approve or reject resolution plans. The CoC plays a central role in the insolvency process, and their decision is binding on the debtor company. The committee also oversees the role of the Resolution Professional.
5. Insolvency and Bankruptcy Board of India (IBBI): The IBBI is the regulatory authority responsible for overseeing the functioning of the insolvency and bankruptcy framework. It is tasked with laying down the regulations and ensuring that professionals involved in the process, including Resolution Professionals and Insolvency Professionals, adhere to the standards set by the law.
6. Creditor’s Hierarchy and Recovery Process: The IBC provides a clear hierarchy of creditors during the resolution process. Secured creditors (such as banks) are given priority, followed by unsecured creditors. Shareholders, however, are the last in line when it comes to recovery. This ensures that creditors’ interests are prioritized in the distribution of proceeds from asset sales.
7. Adjudicating Authorities: The National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) are the primary adjudicating authorities under the IBC. The NCLT resolves disputes related to the corporate insolvency process, while the DRT is responsible for individual insolvency matters. Appeals can be filed with the National Company Law Appellate Tribunal (NCLAT) and the Appellate Tribunal for Debt Recovery.
8. Cross-Border Insolvency: The IBC allows for cooperation between Indian courts and foreign courts in cases involving cross-border insolvencies. This ensures that assets held by an Indian company abroad or foreign creditors can participate in the insolvency proceedings. This provision helps multinational companies and foreign creditors resolve insolvency issues efficiently.

Advantages of the Insolvency and Bankruptcy Code:

• Faster Resolution:

IBC ensures quicker resolution of insolvency cases compared to earlier methods. With a fixed timeline, the process helps to minimize delays.

• Improved Credit Market:

IBC has led to a cleaner and more transparent credit market by providing a legal framework that ensures quicker recovery of debts and reducing defaults.

• Higher Recovery Rate:

Creditors can expect a higher recovery rate compared to the earlier approach, where a significant portion of their debt went unpaid due to prolonged legal battles.

• Reduction in Non-Performing Assets (NPAs):

The introduction of IBC has contributed to the reduction of NPAs in the banking sector, improving the financial health of banks and financial institutions.

• Promotes Entrepreneurship:

By offering a mechanism for revival, the IBC allows businesses to restructure their operations rather than be forced into liquidation. This encourages entrepreneurship and reduces the fear of failure.