Understanding The Insolvency And Bankruptcy Code

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Index 

  1. Introduction 
  2. What Is Insolvency And Bankruptcy Code, 2016
  3. Key Objectives Of The Insolvency And Bankruptcy Code, 2016
  4. Essence Of The Insolvency And Bankruptcy Code (IBC)
  5. Individuals Who Can File For Corporate Insolvency Resolution
  6. Corporate Insolvency Resolution Process Under The IBC
  7. Successes Of The Insolvency And Bankruptcy Code
  8. Necessity For The Insolvency And Bankruptcy Code (Amendment) Act Of 2020
  9. Conclusion 

Introduction 

The Insolvency and Bankruptcy Code (IBC) Act of 2016 has emerged as a cornerstone of India’s economic reform landscape, revolutionising the way insolvency and bankruptcy proceedings are conducted in the country. With its multifaceted approach, the IBC Act has significantly impacted debt resolution, creditor protection, and the overall business environment. This article delves into the components of the IBC Act, elucidates who can file under its provisions, examines its notable achievements, and discusses the crucial amendments introduced in 2020, highlighting the evolving landscape of insolvency and bankruptcy law in India.

What Is Insolvency And Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) is a legislation enacted by the Indian government to consolidate and amend the laws relating to insolvency resolution and bankruptcy proceedings. It provides a unified framework for the efficient resolution of insolvency issues for individuals, partnership firms, limited liability partnerships, and corporate entities.

Key Objectives Of The Insolvency And Bankruptcy Code, 2016

  1. Timely Resolution:The IBC aims to facilitate the timely resolution of insolvency cases, thereby promoting entrepreneurship and preserving the value of distressed assets.
  2. Maximising Value: It seeks to maximise the value of assets of insolvent entities and promote a competitive market for resolution professionals and stakeholders involved in the insolvency process.
  3. Protecting Creditors: The Code provides mechanisms to protect the interests of creditors, ensuring fair distribution of proceeds from the insolvency resolution process.
  4. Ease of Doing Business: By streamlining and expediting the insolvency resolution process, the IBC contributes to improving the ease of doing business in India.
  5. Rescue and Recovery: The Code emphasises the rescue and recovery of viable businesses, promoting a culture of entrepreneurship and risk-taking while also addressing non-performing assets in the financial system.

The Insolvency and Bankruptcy Code (IBC), 2016 was also introduced to enhance the relationship between creditors and debtors. It was passed by the Lok Sabha on May 5, 2016, and by the Rajya Sabha on May 11, 2016. After receiving the President of India’s assent in 2016, the IBC became active in December 2016. On June 1, 2016, the National Company Law Tribunal (NCLT) and its appellate body were established under the Companies Act, 2013, to resolve disputes in company and limited liability partnership matters.

Essence Of The Insolvency And Bankruptcy Code (IBC)

Adjudicating authorities, such as the National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT), are specialised judicial bodies designated to handle disputes concerning insolvency and bankruptcy. NCLT oversees cases involving companies and limited liability partnerships, with appeals directed to the National Company Law Appellate Tribunal (NCLAT) and potentially to the Supreme Court of India. Conversely, DRT focuses on unlimited liability partnerships and sole proprietors, with appeals proceeding to the Debt Recovery Appellate Tribunal and, if necessary, to the Supreme Court.

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The Committee of Creditors (COC), established under Section 21 of the Insolvency and Bankruptcy Code, 2016, comprises financial creditors. Its primary responsibility within the Corporate Insolvency Resolution Process (CIRP) is to evaluate and either approve or reject the resolution plan proposed by the resolution professional. A minimum vote of 75% from the COC is necessary to approve the resolution plan during their meetings. Although operational creditors can participate in COC meetings, they do not possess voting rights in the decision-making process.

Insolvency professionals encompass two categories, they are interim insolvency professionals and insolvency professionals. Interim insolvency professionals are appointed by the adjudicating authority within seven days of admitting the application. In contrast, insolvency professionals are chosen by the Committee of Creditors (COC) with a 75% majority vote during their initial meeting. If the COC find the interim insolvency professionals unsatisfactory, they can seek replacements by filing an application before the adjudicating authority. The authority then forwards the list to the Insolvency and Bankruptcy Board of India (IBBI) for approval. If the board does not respond within ten days, the adjudicating authority directs the interim professionals to continue until the board confirms the list.

Established on October 1, 2016, the Insolvency and Bankruptcy Board of India (IBBI) oversees and manages various insolvency and bankruptcy cases involving financial and operational creditors, including banks and home buyers in India. Operating under the Insolvency and Bankruptcy Code, 2016, IBBI acts as the regulatory authority for the insolvency resolution process, insolvency professional agencies, and information utilities. It approves the list of resolution professionals, formulates and enforces rules for corporate and individual insolvency, bankruptcy, and liquidation as per the code’s guidelines. Additionally, IBBI participates in amending and updating the code to address evolving needs and challenges.

Individuals Who Can File For Corporate Insolvency Resolution

Under Section 5(7) of the IBC 2016, financial creditors, such as banks and home buyers, provide funds to promoters and are categorised as promotional creditors. When debtors face default, financial creditors can initiate action by filing an application with the adjudicating authority. Within 14 days, the authority determines if a default has indeed transpired. If so, the application is accepted, otherwise it is rejected. Upon admission, the adjudicating authority communicates this to financial creditors within 7 days, triggering the commencement of the corporate insolvency resolution process.

Under Section 5(20) of the IBC 2016, operational creditors are defined as those who provide goods and services to debtors but do not extend monetary loans.  The operational creditor issues a demand notice to the corporate debtor. The debtor responds within 10 days, either committing to repay or disputing the claim. If unresolved, the operational creditor can file an application with the adjudicating authority. The authority then decides within 14 days whether to admit or reject the application, marking the commencement of the insolvency resolution process.

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Under Section 5(a) of the IBC 2016, corporate debtors refer to promoters who incur debt by taking loans from financial creditors or receiving goods or services from operational creditors. Upon default, the corporate debtor submits an application to the adjudicating authority. Within 14 days, the authority decides to admit or reject the application. Admission triggers the commencement of the insolvency resolution process, while rejection prompts the authority to notify the debtor of any rectifiable defects.

Corporate Insolvency Resolution Process Under The IBC

Following the initiation of corporate insolvency resolution, the NCLT imposes a 180-day moratorium on the debtor’s activities. This period, known as a ‘calm period,’ prohibits any legal actions such as recovery proceedings, enforcement of security interests, asset sales or transfers, or termination of critical contracts against the debtor.

If the Corporate Insolvency Resolution Process fails to reach a resolution for the corporate debtor within the specified timeline or if the Committee of Creditors (COC) does not approve the resolution plan with a vote of at least 66%, the corporate debtor undergoes liquidation.

Upon the adjudicating authority’s order under Section 33 of the Code, the debtor enters liquidation, with the resolution professional from the Corporate Insolvency Resolution Process serving as the liquidator, provided they submit written consent to the Adjudicatory Authority unless replaced.

If at any point before confirming the resolution plan, the resolution professional notifies the Adjudicating Authority of the COC’s decision to liquidate the debtor, the Authority issues a liquidation order as per Section 33(1)(b)(i), (ii), and (iii) of the insolvency and bankruptcy code.

Upon receiving an application under Section 33(3) and finding that the corporate debtor has breached the resolution plan’s provisions, the Adjudicating Authority issues a liquidation order as per Section 33(1)(b)(i), (ii), and (iii), subject to Section 52. Following a liquidation order, no legal proceedings can be initiated against the corporate debtor, except as outlined in Sections 33(5) and (6) of the code.

Successes Of The Insolvency And Bankruptcy Code

Achievements of the Insolvency and Bankruptcy Code have significantly impacted India’s business landscape. One notable achievement is the enhancement of ease of doing business, facilitated by a faster insolvency resolution process. This efficiency has not only benefited businesses but has also deepened trust in bond markets, instilling confidence among creditors in recovering debts from debtors.

The establishment of a stronger institutional framework, including entities like the Insolvency and Bankruptcy Board of India (IBBI) and the National Company Law Tribunal (NCLT), has bolstered the Code’s effectiveness. Notably, the Code has played a pivotal role in reducing Non-Performing Assets (NPAs), marking a substantial milestone in the financial sector.

The professionalisation of the process through the involvement of resolution professionals has further streamlined operations and enhanced credibility. Over the course of two years since the inception of the Code, impressive numbers reflect its impact, with a significant number of cases admitted and disposed of, resulting in the recovery and settlement of a substantial amount.

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Key success stories include the resolution of major companies like Electrosteel Steels, Bhushan Steel, Monnet Ispat & Energy, and Amtek Auto, among others. However, the Code has also necessitated the liquidation of certain companies where no buyers were found. Additionally, the Code has influenced loan defaulters’ behaviour, with several high-profile cases constituting a significant portion of bad loans.

Furthermore, the Code’s provisions have encouraged alternative resolution processes and incentivized timely payments by debtors, particularly with the introduction of Section 29(a), which has deterred defaulters from entering the NCLT process. The Code’s success can also be attributed to its insulation from political and governmental interference, ensuring a fair and transparent resolution framework.

Necessity For The Insolvency And Bankruptcy Code (Amendment) Act Of 2020

The outbreak of the novel coronavirus has unleashed widespread destruction globally, with a rising number of infections and subsequent lockdowns imposed by various countries, including India. These lockdown measures have significantly impacted the economy, financial markets, and businesses, leading to temporary halts in operations and cash flow disruptions. Consequently, there has been an increase in non-performing assets and defaults in payments to creditors, banks, and financial institutions.

In response to these challenges and to safeguard the interests of corporate debtors facing financial distress due to the pandemic, the Indian government has introduced two amendments to the Insolvency and Bankruptcy Code, 2016. Firstly, the threshold for initiating the corporate insolvency resolution process (CIRP) under Section 4 of the Code has been raised from one lakh rupees to one crore rupees. Secondly, Section 10A of the IBC, 2016 has been enacted, suspending the initiation of the corporate insolvency resolution process for defaults occurring on or after March 25, 2020, for a period initially set at 6 months, extendable up to 1 year from the specified date of notification, which was June 5, 2020. It’s important to note that this suspension does not apply to defaults that occurred before March 25, 2020, under the specified sections of the Code.

Conclusion 

In 2016, India ranked 136th out of 189 countries in the World Bank’s ease of resolving insolvencies index. By 2019, India’s ranking had significantly improved to 63rd place. Before the introduction of the Insolvency and Bankruptcy Code (IBC), the debt recovery rate was a mere 26%, with cases taking over four years to close. Since the implementation of the IBC, the average recovery rate has increased to 43% for financial creditors and 49% for operational creditors, showcasing its effectiveness. The IBC, applicable to both companies and individuals, provides a time-bound process for resolving insolvency, a critical measure in light of the economic challenges posed by the Covid-19 pandemic. The amendments to the IBC will play a crucial role in safeguarding the interests of both debtors and creditors, particularly as non-performing assets are expected to rise. Despite the existence of various laws and forums dealing with financial failures and insolvency issues, the IBC stands out as a commendable reform by the Modi government, thanks to its well-crafted framework.

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