What is the Insolvency and Bankruptcy Code 2016?
The Insolvency and Bankruptcy Code was originally implemented through a parliamentary act and got the approval of the president in 2016. The pile-up of non-performing loans and delayed resolution of debt were the major factors that led to the need for the Insolvency and Bankruptcy Code. This code provides a time-bound process to resolve insolvency.
What are the Objectives of the Insolvency and Bankruptcy Code?
Given below are the major objectives of the Insolvency and Bankruptcy Code -
- Effective Conflict Resolution: It helps address disputes between creditors and debtors efficiently, ensuring fair outcomes for all parties.
- Procedural Clarity: By establishing a clear process for negotiations it minimizes conflicts over shared resources and reduces information gaps among economic participants.
- Distinction Between Malpractice and Business Failure: It defines boundaries between intentional wrongdoing and genuine business setbacks, fostering accountability.
- Flexibility in Negotiations: The law provides parties with the flexibility to find the most efficient solutions, maximizing value during negotiations. It also facilitates a negotiation platform between creditors and external financiers, enabling beneficial restructuring arrangements.
- Allocation of Losses During Economic Downturns: A strong insolvency framework ensures clear and fair distribution of losses. Without it, stereotypes like "rich promoters of defaulting entities" emerge, leading to the belief that all defaults are due to misconduct and that promoters should bear personal and financial responsibility.
A well-defined bankruptcy framework supports transparent loss allocation mechanisms, such as taxes, inflation, currency depreciation, or wage suppression.
Why is the Insolvency and Bankruptcy Code Important?
The need for insolvency and bankruptcy codes can be seen in the following -
- Earlier, India had various overlapping laws and adjudicating forums that aimed to address the financial failure and the insolvency of individuals and companies. This resulted in undue delay in the recovery of Non-performing assets by banks.
- It was also needed to consolidate all the Insolvency and bankruptcy resolution-related laws and make the Insolvency and bankruptcy resolution process simple.
- It helps protect the interest of creditors and stakeholders of the company
- It helps provide a fast resolution to insolvency and bankruptcy-related problems
What is the Time Frame for Completion of Exercise Insolvency and Bankruptcy Code?
Under the Insolvency and Bankruptcy Code, the companies are required to complete the entire insolvency process within 180 days. This timeline can also be extended upon the approval of the creditors. However, if the creditors oppose the extension, then such extension cannot be granted.
Smaller companies and startups with a turnover not exceeding Rs.1 crore are required to complete the insolvency exercise within 90 days. This deadline can further be extended by 45 days upon discussion. If the debt resolution is not completed within the specified timeframe, the company goes for liquidation.
Who regulates the IBC Proceedings?
The Insolvency and Bankruptcy Board of India has been appointed as a regulator to oversee the proceedings. The Insolvency and Bankruptcy Board of India (IBBI) has a total of 10 members from the Finance Ministry and Law Ministry, the Reserve Bank of India.
What is the Applicability of the Insolvency and Bankruptcy Code?
The provisions of the Code apply to the insolvency, liquidation, voluntary liquidation, or bankruptcy of the following entities:
Companies:
- Any company incorporated under the Companies Act, 2013 or earlier laws.
- Companies are governed by a special act, provided the provisions are not inconsistent with such special acts.
Limited Liability Partnerships (LLPs):
- Entities registered under the LLP Act, 2008.
Other Incorporated Bodies:
- Entities formed under any law as specified by the Central Government.
Partnership Firms and Individuals
Applicability Threshold
The Code applies only if the default amount is at least ₹1 lakh. However, the Central Government may raise this threshold to a maximum of ₹1 crore through a notification in the Official Gazette.
Exceptions
The Code does not apply to corporate entities that are regulated financial service providers, such as:
- Banks
- Financial institutions
- Insurance companies
What is the Process of Insolvency Resolution Under the IBC?
The resolution process under the Insolvency and Bankruptcy Code (IBC) follows these steps:
- Initiation of the Process: When a default occurs, the debtor or creditor can initiate the resolution process by approaching the adjudicating authority.
- Appointment of an Insolvency Professional (IP): The National Company Law Tribunal (NCLT) appoints an IP to oversee the Insolvency Resolution Process (IRP).
- Formation of the Committee of Creditors (CoC): The IP identifies financial creditors and forms the CoC to represent their interests.
- Preparation of the Resolution Plan: The CoC formulates a resolution plan for restructuring the defaulted borrower’s loans. This may involve measures such as extending the loan tenure or reducing interest rates.
- Approval of the Plan: The resolution plan must receive approval from at least 66% of the total votes in the CoC to proceed.
What is the Priority of Claims Under IBC?
The Insolvency and Bankruptcy Code provides a priority order for distributing liquidation proceeds. Here is the order of priority at the time of liquidation -
- Insolvency and Liquidation Costs are paid in full before any other claims.
- Secured Creditors and Workmen's Claims are due for the past 24 months.
- Employees’ salaries for up to 12 months are the next priority.
- Financial debts owed to unsecured creditors.
- Government dues for the past 2 years and any unpaid dues to secured creditors.
- Any remaining debts and dues.
- Shareholders and equity holders.
What is the Insolvency Adjudicating Authority?
The adjudicating authority under the Insolvency and Bankruptcy Code (IBC) exercises jurisdiction over cases involving the debtor. The jurisdiction is determined as follows:
- Debt Recovery Tribunal (DRT):
Jurisdiction over individuals and partnership firms, excluding Limited Liability Partnerships (LLPs).
Appeals against DRT orders are made to the Debt Recovery Appellate Tribunal (DRAT).
- National Company Law Tribunal (NCLT):
Jurisdiction over companies and other limited liability entities, including LLPs.
Appeals against NCLT orders are made to the National Company Law Appellate Tribunal (NCLAT).
- Regulatory Appeals:
NCLAT also hears appeals related to orders passed by the regulator concerning insolvency professionals or information utilities.
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