The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code (IBC) of 2016 is a significant legislative reform in India, aimed at consolidating and amending laws related to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. The Code seeks to ensure a time-bound resolution for the repayment of debts, thereby improving the ease of doing business and ensuring a better recovery rate for creditors. Let’s delve deeper into the IBC and understand its key components and implications.

Formation of the Insolvency and Bankruptcy Code, 2016

The IBC journey began with the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha on December 21, 2015. After being referred to a Joint Committee for recommendations, a modified Bill was presented based on their suggestions. In May 2016, both the Houses of Parliament passed the Insolvency and Bankruptcy Code, 2016. The primary objective of this economic reform is to focus on creditor-driven insolvency resolution, shifting the existing regime from ‘debtor in possession’ to ‘creditor in control’.

Key Objectives of the IBC

Consolidation of Laws: The IBC consolidates various laws relating to insolvency and bankruptcy into a single legislation, which was earlier governed by multiple laws like the Companies Act, SARFAESI Act, and others.
Time-bound Processes: It aims to resolve insolvency cases within a stringent timeframe of 180 days, extendable by an additional 90 days, to ensure quick resolution.
Maximization of Asset Value: The Code ensures the maximization of the value of the debtor’s assets to promote entrepreneurship and availability of credit.
Balancing Interests: It balances the interests of all stakeholders, including alteration in the priority of payment of government dues.

Applicability of the Code

The IBC applies to:

Any company incorporated under the Companies Act, 2013 or any previous company law.
Companies governed by any special act, except where provisions of the special act are inconsistent with the IBC.
Limited Liability Partnerships under the LLP Act, 2008.
Any other body incorporated under any law specified by the Central Government.
Partnership firms and individuals.

Exceptions include corporate persons who are regulated financial service providers like banks, financial institutions, and insurance companies. The Code is applicable if the minimum amount of default is Rs. 1 lakh, with the Central Government having the authority to specify a higher amount up to Rs. 1 crore.

Key Components of the IBC

Corporate Insolvency Resolution Process (CIRP): This process is initiated when a corporate entity defaults on its debt. The CIRP involves the appointment of an Insolvency Resolution Professional (IRP) who manages the debtor’s operations until a resolution plan is approved.
Insolvency and Bankruptcy Board of India (IBBI): This regulatory body oversees the implementation of the IBC. It also regulates insolvency professionals, insolvency professional agencies, and information utilities.
National Company Law Tribunal (NCLT): The adjudicating authority for insolvency resolution of companies and limited liability entities. For individuals and partnership firms, the Debt Recovery Tribunal (DRT) is the adjudicating authority.
Resolution Plan: The plan proposed by a resolution applicant (potential buyer) for the revival of the debtor. It must be approved by at least 66% of the creditors in the Committee of Creditors (CoC).

Insolvency Resolution Process

The insolvency resolution process under IBC can be broken down into several key stages:

Initiation: The process can be initiated by financial creditors, operational creditors, or the debtor itself upon default.
Moratorium: Once the application is accepted, a moratorium is declared, which halts all legal proceedings against the debtor.
Appointment of IRP: An interim resolution professional is appointed to take control of the debtor’s assets and operations.
Formation of CoC: The IRP forms the Committee of Creditors, which comprises all the financial creditors of the debtor.
Resolution Plan: The resolution professional invites resolution plans from potential applicants, which are then reviewed and approved by the CoC.
Implementation or Liquidation: If a resolution plan is approved, it is implemented to revive the debtor. If no plan is approved, the debtor goes into liquidation.

Objectives of the Code

Consolidation and Amendment of Laws: To streamline the legal framework for insolvency resolution.
Time-bound Settlement: To resolve insolvency within 180 days.
Maximization of Asset Value: To ensure the best possible recovery for creditors.
Promotion of Entrepreneurship: To facilitate business growth and innovation.
Increase Availability of Credit: By improving the recovery rate, more credit can be available.
Balanced Stakeholder Interests: Ensuring fair treatment of all stakeholders.
Establishing Regulatory Bodies: To oversee the implementation and functioning of the Code.
Painless Exit Mechanisms: For easier resolution of insolvencies.

Implications of the IBC

1. Improved Recovery Rates: The introduction of IBC has significantly improved the recovery rates for creditors, as it ensures a structured and time-bound resolution process.
2. Credit Culture: It promotes a culture of timely repayments, as the stringent norms discourage defaults.
3. Ease of Doing Business: By providing a clear framework for insolvency and bankruptcy, the IBC has enhanced the ease of doing business in India, making the environment more investor-friendly.Economic Growth: By resolving distressed assets efficiently, the IBC helps in the optimal allocation of resources, thereby contributing to economic growth.

Challenges and Criticisms

Despite its successes, the IBC faces several challenges:

Judicial Delays: The resolution process often faces delays due to the backlog of cases in NCLT.
Limited Infrastructure: There is a need for more trained insolvency professionals and infrastructure to handle the volume of cases.
Resistance to Change: Stakeholders, including promoters and banks, sometimes resist the changes brought by the IBC due to vested interests.

The Insolvency and Bankruptcy Code, 2016, has been a transformative reform in India’s financial and business landscape. It provides a comprehensive and systematic approach to resolving insolvency, ensuring the interests of all stakeholders are balanced. While challenges remain, the continued refinement and implementation of the IBC hold promise for fostering a healthier business environment in India.