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Insolvency and Bankruptcy Code 2016 - Objectives and Procedure

Author 
Neha Garg
 | 
September 8, 2022
Insolvency and Bankruptcy Code

Insolvency and Bankruptcy Code is a gamechanger that the Indian market had been waiting for.

What’s This Law About

The Insolvency and Bankruptcy Code (IBC) 2016 is a comprehensive and systemic economic reform by India that consolidates all existing laws dealing with bankruptcy and insolvency.

It is one of the biggest insolvency reforms that the parliament implemented in November 2016 to bring uniformity to India’s scattered bankruptcy laws. The provisions of the Act apply to the following in case of insolvency, liquidation, or bankruptcy:

  • Company
  • Limited Liability Partnership (LLP)
  • Partnership Firms
  • Corporate Persons
  • Individuals

Objectives of Insolvency and Bankruptcy Code

The Bankruptcy and Insolvency Code aims to reorganize and resolve the insolvency of corporations, individuals, and partnerships in a time-bound manner. The sole intention of IBC 2016 is to provide a justified balance between

  • The loss that a creditor might face because of the default
  • The interest of all the stakeholders of the company so that they enjoy improved liquidity.

The first objective is timely Resolution. Second objective is to maximize the value of the assets of the Corporate Debtor (CD). Third objective is to promote entrepreneurship, availability of credit and balancing the interests. Essentially, the order of these objectives is sacrosanct.

Four Pillars Of IBC Infrastructure

1. Insolvency Professionals (IPs)

An Insolvency Professional is one of the most important components of the IBC ecosystem. An IP is a regulated and licensed professional, responsible for managing and overseeing the Corporate Insolvency Resolution Process (CIRP) or the liquidation process of the Corporate Debtor (CD).

2. Information Utilities (IUs)

IUs collect, collate, authenticate and disseminate financial information of the Corporate Debtor to be used in insolvency resolution, liquidation & bankruptcy proceedings.

3. Adjudicating Authorities (AAs)

AAs are specialized tribunals tasked with ensuring that the Insolvency Resolution, Liquidation and Bankruptcy process is being performed as per the Bankruptcy and Insolvency Code and its related rules and regulations. Further, any person aggrieved by an order of the National Company law Tribunal (NCLT) can appeal before the Appellate tribunal - National Company law Appellate tribunal (NCLAT). Similarly, aggrieved by an order of NCLAT, an aggrieved party can file an appeal before the Hon’ble Supreme Court.

4. Insolvency and Bankruptcy Board of India (IBBI)

IBBI is a regulator of IP (Insolvency Professional), IPAs (Insolvency Professional Agencies), IPEs (Insolvency Professional Entities) and IUs (Information Utilities)– it regulates both the professionals involved and the transactions conducted.

Origins of Insolvency and Bankruptcy Code (IBC)

IBC came into light, repealing Sick Industrial Companies Act, 1985 (SICA), with effect from 1st December 2016. SICA was the primary rehabilitative statute that allowed a “sick” industrial firm to voluntarily initiate a rescue and rehabilitation process if its net worth had eroded. Two of the main reasons for its failure were the unending moratorium protection (which was sometimes abused by the debtors in possession) and the absence of a time-bound resolution process.

Further, Bankruptcy Law Reform Committee Noted That

“Erstwhile, different laws were implemented in different judicial fora creating conflicts between creditors and debtors in the resolution of Insolvency. Cases that are decided at the Tribunal/ Board for Industrial and Financial Reconstruction (BIFR) often come for review to the High Courts. This gives rise to two types of problems in implementation of the resolution framework –

  • First is the lack of clarity of Jurisdiction. For instance, where one forum decides on matters relating to the rights of the creditor, another decides on those relating to the rights of the debtors, the decisions are readily appealed against or either stayed or overturned in a higher court.
  • Second problem is the multiplicity of Judicial fora. The fora entrusted with adjudicating on matters relating to bankruptcy and insolvency may not have the business or financial expertise, information or bandwidth to decide on such matters which further causes delays and extensions in arriving at an outcome and increases vulnerability to appeals of the outcome.

Mistakes of the past were considered, and the Bankruptcy and Insolvency Code came into being with a wider scope, aiming to resolve the issue via more effective provisions and implementations.‍

Insolvency and Bankruptcy Code downfall

Now that we know the origin of the code, let’s look at how it works

Under the IBC, the Indian Insolvency regime shifted from ‘debtor-in-possession’ to ‘creditor-in-control’. The creditor-in-control model hands control of the debtor to its creditors and relies upon the managerial skills of a newly appointed management to take over an ailing company and ensure business continuance. The core objective of the IBC is to ensure revival and continuation of the corporate debtor. Thus, the IBC has a larger public-welfare consideration in play.

Process Under the Code

Who Can File An Application?

Financial Creditor, Operational Creditor, or Corporate Debtor itself can file a petition before the Adjudicating Authority National Company Law Tribunal (NCLT) to initiate the CIRP.

It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, the debtor or creditor initiates the resolution process. Hence, the trigger for initiating CIRP is the default by the CD.

Appointment of IRP/RP

From the Insolvency commencement date (ICD), the powers of the board of directors or the partners of the CD are suspended and are exercised by the Interim Resolution Professional (IRP), the insolvency professional is appointed by NCLT to administer the process. The IRP constitutes the Committee of Creditors (COC), which can then decide to either continue the IRP as Resolution Professional (RP) or replace him with another IP as RP.

Moratorium

On the ICD, a “moratorium” in respect of the CD and its assets is declared, the entire period of CIRP is covered under this moratorium or calm period, during which all suits, legal proceedings and recovery actions against the CD are held in abeyance to give time to the CD to resolve its status.

Timeline

RP must complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended by NCLT approval in exceptional circumstances. For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. The CD may get “resolved” – when a resolution plan for the CD is approved by the requisite majority of the COC of the CD and the plan is then approved by the AA by way of an order passed under IBC. If no resolution plan is received or approved for the CD, the liquidation process will start against the CD.

Thus, there two phases under IBC for Insolvency process for the CD.

  • In the First Phase an attempt is made to resolve the CD’s default through the CIRP.
  • If no plan is approved, the CD goes into liquidation in the Second Phase

How can you Benefit from the Code?

The Insolvency and Bankruptcy Code (IBC) has brought clarity to the process of insolvency and bankruptcy procedure which was not known to individuals or companies before. Prior to the introduction of IBC, 2016, the process of resolution of insolvency cases was scattered, interminable, desultory, and un-economical. The fact that the Bankruptcy and Insolvency Code was introduced by repealing two Laws and amending 11 others, shows how many laws governed the insolvency proceedings. The Code has streamlined the process, made it time-bound and provided a one-stop solution.

The IBC successfully remedies several shortcomings of the earlier insolvency resolution process, and with the undernoted enablers, benefit all stakeholders

  • Timely Resolution of Insolvencies

The process of resolution is carried out in a time-bound manner, the business is transferred as an ongoing concern to the resolution applicant, thus ensuring minimum loss to the economy, minimum loss of employment, revenues to government, local ecosystem, ancillary industries, operational creditors, home buyers and other creditors.

  • Certainty and Clean Title

If the company is bought under Insolvency process, the buyer gets a clean company irrespective of any old defaults, such as non-compliance made by the company including Tax obligations if any. There is certainty in the settlement of liabilities and ownership of assets, when the insolvency is resolved through the Code. Since all liabilities including government dues are settled, the Resolution Applicant is vested with a clean and litigation-free business and assets, etc.

  • Prevent Fraudulent Activities by Debtors

On admission of application by the AA, ownership and control of the business entity, its assets and business activities stand transferred from the debtor to an IP. Hence, the debtor is pre-empted from indulging in any activity to defraud the creditors.

Notably, IBC is still a fast-evolving legislation and maturing with additions/amendments to the Statute, its rules & regulations and with every new Judgement of Hon’ble Supreme Court, NCLAT & NCLT. The purpose of introducing IBC was to settle the NPAs & give a fresh start to the Indian industry by keeping aside the defaulters & providing opportunities to better market players for acquiring the insolvent companies under CIRP as clean companies, regardless of their earlier defaults & compliance irregularities.

Also Read: FAQ's on The Insolvency and Bankruptcy Code 2016

In conclusion, the Bankruptcy and Insolvency Code has paved the path forward to lubricate the economic machinery of the country and provide fresh starts to companies and individuals.

About the author
Neha Garg

Neha is the IP support executive at Ancoraa and a budding professional in the field of insolvency. She supports CIRP and PG engagements at Ancoraa and keeps track of NCLT proceedings throughout the admission process. She has a background in Law and CS.

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