Economy Simplified: Insolvency and Bankruptcy Code (IBC) 2016

1. Centre introduced the IBC in 2016 to resolve claims involving insolvent companies through an act of the parliament. 
2. The bankruptcy code is a one stop solution for resolving insolvencies, which previously was a long process that did not offer an economically viable arrangement. 
3. IBC was intended to tackle the bad loan problems that were affecting the banking system.
4. The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
5. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency. 
6. Under IBC, debtor and creditor both can start ‘recovery’ proceedings against each other.
Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.
Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.

What does the IBC aim to do?

IBC aims to reorganize and resolve the insolvency of corporations, individuals, and partnerships in a time-bound manner.
The sole intention of the Insolvency and Bankruptcy Code, 2016 is to provide a justified balance between
  • the loss that a creditor might face because of the default, and
  • the interest of all the stakeholders of the company so that they enjoy credit availability.

What are the objectives of IBC?

  • To consolidate all existing insolvency laws in India and make amends if needed.
  • To make the process of Insolvency and Bankruptcy Proceedings in India simple and fast.
  • To protect the interest of creditors, including stakeholders in a company.
  • To timely revive the company.
  • To resolve India’s bad debt problem by creating a database of defaulters.
  • To promote entrepreneurship.
  • To create a new and timely recovery procedure to be adopted by the financial institutions, banks, or individuals.
  • To maximize the value of assets of interested persons.
  • To set up an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law.

Who can file an application under IBC?

Financial Creditor, Operational Creditor or Corporate Debtor can file a petition before NCLT (National Company Law Tribunal) to initiate the insolvency process (corporate insolvency Resolution process CIRP).

What is the timeframe for completion of the exercise under the IBC?

Under IBC, companies have up to 180 days to complete the insolvency exercise. However, the deadline can be extended if the creditors do not object to the extension.

Who regulates the IBC proceedings?

The IBC proceedings are regulated by the Insolvency and Bankruptcy Board of India (IBBI). The IBBI has 10 members from the Law Ministry, Finance Ministry and the Reserve Bank of India to oversee the proceedings.

Who adjudicates over the proceedings?

For companies, the National Companies Law Tribunal (NCLT) and for individuals, the Debt Recovery Tribunal (DRT) adjudicate over the proceedings of the resolution process.

What is the procedure to resolve insolvency under the IBC Code?

When a default occurs, the debtor or creditor initiates the resolution process. The insolvency professional is appointed to administer the process. The appointed professional’s task is to provide the debtor’s financial information to the creditor and manage the debtor’s assets. This resolution process lasts for 180 days. During this period, any legal action against the debtor is prohibited.
IBC is a comprehensive legislation with a simple and speedy process to deal with insolvency issues. Since the resolution process under IBC is time-bound, it is a win-win situation for both the creditors and the debtors.

Recently, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.

1. It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
2. The PIRP also allows for a Swiss challenge to the resolution plan submitted by a Distressed Corporate Debtors (CD) in case operational creditors are not paid 100 % of their outstanding dues.
Pre-packaged Insolvency Resolution Process (PIRP): A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
Swiss Challenge: A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.
Content Credit: Moneytap

Leave a Comment

Your email address will not be published. Required fields are marked *