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Insolvency and Bankruptcy Code (IBC), 2016: Overview

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive legislation in India designed to consolidate and amend laws related to the insolvency and bankruptcy of companies, individuals, and partnerships. It provides a structured and time-bound process for resolving insolvency and aims to improve the ease of doing business by ensuring better debt recovery mechanisms.

Objectives of the IBC:

  1. Maximization of Asset Value:

    • Ensures that the value of an insolvent entity’s assets is maximized through efficient management.

  2. Timely Resolution:

    • Provides a time-bound process for insolvency resolution to avoid the erosion of asset value.

  3. Promotion of Entrepreneurship:

    • Facilitates the exit of non-viable businesses, allowing entrepreneurs to move on to new ventures.

  4. Balancing Interests:

    • Protects the interests of all stakeholders, including creditors, employees, and shareholders.

  5. Enhancing Credit Market:

    • Strengthens the credit ecosystem by improving recovery rates and reducing defaults.

Key Concepts:

  1. Insolvency vs. Bankruptcy:

    • Insolvency: A financial state where an entity cannot pay its debts as they become due.
    • Bankruptcy: A legal declaration of an individual or entity’s inability to repay debts, usually leading to liquidation.

  2. Corporate Insolvency Resolution Process (CIRP):

    • A process initiated when a corporate debtor defaults on a debt of ₹1 crore or more.
    • The process must be completed within 330 days, including any litigation time.

  3. Resolution Plan:

    • A proposal submitted by potential investors or creditors to restructure or revive the insolvent company.

  4. Liquidation:

    • If no resolution plan is approved, the company’s assets are sold to repay creditors.

Key Stakeholders Under the IBC:

  1. Corporate Debtor:

    • The company or entity that has defaulted on its debt.

  2. Operational Creditors:

    • Entities owed payments for goods and services (e.g., suppliers, employees).

  3. Financial Creditors:

    • Institutions or individuals who have provided financial loans (e.g., banks, bondholders).

  4. Resolution Professional (RP):

    • An insolvency expert appointed to manage the CIRP and oversee the resolution or liquidation process.

  5. Committee of Creditors (CoC):

    • A group consisting of financial creditors that makes key decisions regarding the resolution plan.

  6. Adjudicating Authorities:

    • National Company Law Tribunal (NCLT): Handles cases related to corporate insolvency.
    • Debt Recovery Tribunal (DRT): Deals with insolvency cases involving individuals and partnerships.

Process Under the IBC:

1. Initiation of CIRP:

  • Who can file:
    • Financial creditors, operational creditors, or the corporate debtor itself.
  • The NCLT must decide on the application within 14 days.

2. Moratorium Period:

  • Once the CIRP is admitted, a moratorium is imposed, preventing legal actions or recovery proceedings against the debtor during the process.

3. Appointment of Interim Resolution Professional (IRP):

  • The IRP takes control of the debtor’s management and operations.

4. Formation of the Committee of Creditors (CoC):

  • The CoC reviews and votes on the resolution plan. Decisions require 66% approval.

5. Submission and Approval of Resolution Plan:

  • Resolution applicants submit their plans, which are evaluated and approved by the CoC and NCLT.

6. Liquidation (if no resolution):

  • If no viable plan is approved, the debtor’s assets are liquidated, and the proceeds are distributed according to the IBC’s priority order.

Order of Priority for Debt Repayment:

  1. Insolvency Resolution Costs and Liquidation Costs (e.g., fees for professionals).
  2. Secured Creditors and Workmen’s Dues.
  3. Unsecured Financial Creditors.
  4. Operational Creditors.
  5. Government Dues.
  6. Shareholders/Equity Holders.

Insolvency for Individuals and Partnerships:

  • Process: Initiated before the Debt Recovery Tribunal (DRT).
  • Resolution Options:
    • Repayment Plan: Approved by creditors and the DRT.
    • Bankruptcy Order: If repayment fails, the individual’s assets are liquidated.

Key Amendments and Developments:

  1. Amendment in 2019:

    • Introduced homebuyers as financial creditors, giving them a voice in the resolution process.
    • Extended the resolution timeline to 330 days.

  2. Amendment in 2020:

    • Increased the default threshold from ₹1 lakh to ₹1 crore.
    • Provided special provisions for MSMEs (Micro, Small, and Medium Enterprises).

Challenges and Criticisms:

  1. Delays in Resolution:

    • Despite a time-bound framework, many cases exceed the stipulated timeline due to litigation.

  2. Value Erosion:

    • Prolonged processes can reduce the value of assets, impacting recovery rates.

  3. Lack of Qualified Resolution Professionals:

    • The growing number of cases has led to a demand-supply gap for experienced insolvency professionals.

  4. Litigation by Stakeholders:

    • Frequent legal challenges by creditors or promoters can delay the process.

Impact of the IBC:

  1. Improved Recovery Rates:

    • Enhanced creditor confidence and faster recovery of debts compared to previous laws.

  2. Increased Foreign Investment:

    • Improved investor confidence due to a transparent and predictable insolvency framework.

  3. Cultural Shift:

    • Encouraged a shift from “debtor-friendly” to “creditor-friendly” systems, promoting financial discipline.
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