Insolvency and Bankruptcy Code

By Prachi Mishra and Puranjani

Introduction

It is believed that "it was simpler to invade another nation than to handle insolvency and bankruptcy processes in India” since if a company or an individual goes bankrupt, there were hundreds of laws and sub laws that made the process exceedingly difficult and time-consuming. To deal with the many components of a business that may be combined under a single roof, India needed a single codified legislation. This is precisely why the Insolvency and Bankruptcy Code was enacted in 2016.

What is the Insolvency and Bankruptcy Code?

The Insolvency and Bankruptcy Code (IBC), 2016, is the bankruptcy law of India that attempts to consolidate and amend the existing laws that deal with reorganisation and insolvency resolution of companies, limited liability entities, partnerships, and individuals, into a single legislation.

The overall motive behind the code is to address insolvencies in a strict time-bound manner where the evaluation and viability determination must be done within 180 days. The intention is that some businesses will inevitably fail, so why not provide a quick and efficient exit with a painless method. Thus, the code has substantial value for all stakeholders, including various government regulators, as instead of being embrangled by prior judgments, they will be able to move forward.

However, before understanding the objective and features of the code, it is important to be clear with the two basic terminologies: Insolvency and Bankruptcy. Insolvency refers to a situation in which an individual, corporation, or other organisation is unable to meet its financial commitments, such as paying debts on time, bankruptcy is a situation whereby a court of competent jurisdiction declares a person or other entity insolvent and issues necessary orders to rectify the situation and protect creditors' rights. So, it is a legal declaration of an individual's incapacity to repay debts. (muds, 2021)

Therefore, IBC is the most significant economic law and policy reform of the recent decade, which aims to

promote entrepreneurship and credit availability
safeguard the interests of creditors
ensure that all stakeholders' interests are balanced
provide creditors with the required relief and, as a result, enhance the credit supply in the economy.
establish an Indian Insolvency and Bankruptcy Board (IBBI) (cleartax, 2021)

In fact, according to the World Bank Report, India improved by 56 spots in terms of solving insolvency, that is, from being ranked 108 in the year 2018 to rank 52 in 2019. As a result of IBC, the companies have effective instruments to restore financial viability, while creditors have efficient tools to negotiate and have increased prospects of realising the money successfully. As a result, the overall recovery rate for creditors increased from 26.5 cents to 71.6 cents on the dollar, and the time it took to resolve insolvency decreased from 4.3 to 1.6 years. (Think & SAHOO, 2016)

Also, according to IBBI, the resolution plans yielded roughly 191% of the realisable value for financial creditors in an average of 380 days. This is a huge increase compared to the previous framework, which took over 1500 days to resolve. (Kaushik, 2021)

Background and history

The IBC was created to replace the SICA (Sick Industrial Companies Act), which was repealed on December 1, 2016. The Insolvency and Bankruptcy Code was created with a broader scope and the goal of resolving issues through more effective provisions and implementation, taking into account past mistakes. The Insolvency and Bankruptcy Code, 2015, was presented in the Lok Sabha on 21 December, 2015 by the former Finance Minister, Late Arun Jaitley. The Code was presented before the Joint Committee of Parliament on 23rd December 2015 and suggested by the Committee on April 28, 2016. The Code was passed by the Lok Sabha and the Rajya Sabha on 5th May and 11th May 2016 separately. Thus, it got consent from President Pranab Mukherjee and was informed in The Gazette of India on 28 May 2016. The Code was enacted by parliament in May 2016 and went into force in December of the same year. (Upadhyay, 2017)

The Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 are repealed under this code.

Furthermore, it has suggested amending:

the Companies Act of 2013
the Sick Industrial Companies (Special Provisions) Repeal Act of 2013
the Limited Liability Partnership Act of 2008.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002
The Recovery of Debts Due to Banks and Financial Institutions Act of 1993
The Indian Partnership Act of 193 (Ministry of law and justice, 2016)

The Insolvency and Bankruptcy Code Ecosystem

As stated earlier, the IBC established a new legal framework, which aided in the formalisation and liquidation of an insolvency resolution process that was time-bound.

The framework consists of the following elements:

Insolvency Professionals: These professionals oversee the resolution process, manage the debtor's assets, and offer creditors information to help them make decisions.

Insolvency Professional Agencies: This body registers the insolvency professionals by conducting exams and imposes a code of conduct for their performance.

Information Utilities: They maintain a record of the financial information about debts owed to creditors, as well as details of repayments, defaults, and liabilities.

Adjudicating authorities: They sanction the initiation of the resolution procedure, appoint the insolvency professional, and sign off on the creditors' ultimate judgment. It consists of: The National Company Law Tribunal (NCLT), the deciding authority for corporations and limited liability firms, and the Debt Recovery Tribunal (DRT), which adjudicates the debts of individuals and partnership firms.

The Insolvency and Bankruptcy Board: It is the apex body that oversees the insolvency professionals, insolvency professional agencies, and information utilities established under the Code. It has ten members from the Ministry of Finance, Law, and RBI.(Taxmann,2021)

Shortcomings of IBC, 2016

There were several flaws in the IBC 2016 code, such as:

the code failed to offer enough protections to preserve the company's interests prior to handing over administration to the resolution expert
The Code was heavily reliant on the indisputable word of the creditors.
The Code did not give the corporate debtor the chance to make a representation at any level of the settlement procedure.
The Code failed to define a resolution applicant. All such resolution plans were placed before the financial creditors and were implemented by an order by the NCLT.
If the financial creditors failed to reach a consensus, the default plan was to liquidate the company.
The Code prohibited withdrawal of the application once it had been admitted. This meant that there was no scope for settlement. (Sehgal, 2021)

The Insolvency and Bankruptcy Code (Amendment) Bill, 2021

To address the inadequacies of IBC 2016 and make it a one-step solution to overhaul the insolvency procedure in India dramatically, it was updated several times, most recently in 2017, to prevent judicial intervention and have a rapid adjudication of the dispute. The defining clause was then amended again in 2018 to include house purchasers. Following this modification, house purchasers were included under the category of financial debtors and may reclaim the sum paid as an advance. It was updated again in 2019 to cover significant holes in the Code's corporate insolvency resolution structure while maximising value from the Corporate Insolvency Resolution Process (CIRP). In 2020, it was revised once again to create a time-bound method for resolving insolvency in businesses and among people. The most recent modification was passed in 2021 to create an alternate insolvency resolution mechanism for Micro, Small, and Medium Enterprises ["MSMEs"] with defaults of up to INR 1 crore. (TaxGuru Consultancy & Online Publication LLP, 2019)

Conclusion

Undoubtedly, IBC is one of the best legislative initiatives ever and a boon to the economy. Its swift and precise mechanism and time-bound aspect is a win-win situation since the companies' resources are deployed in the appropriate place at the right time, whether by paying creditors or winding up. Now, with the latest amendments in place, the recovery process has improved noticeably, and the protection of creditor rights has already resulted in billions of dollars being invested in the country.

References and Background

cleartax. (2021, October 12). Insolvency and Bankruptcy Code, 2016. Defmacro Software Pvt. Ltd. Copyright (c) 2016. Retrieved November 6, 2021, from https://cleartax.in/s/insolvency-and-bankruptcy-code-2016

Kaushik, A. (2021). Is IBC 2016 Effective? | NITI Aayog. Niti Aayog. Retrieved November 5, 2021, from https://www.niti.gov.in/ibc-2016-effective

Ministry of law and justice. (2016, May). THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (No. 37). https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

muds. (2021, July 25). Insolvency and Bankruptcy-History and Objective. Retrieved November 10, 2021, from https://muds.co.in/insolvancy/

Sehgal, D. R. (2021, February 10). Challenges of interpretation of Insolvency and Bankruptcy Code, 2016. IPleaders. Retrieved November 9, 2021, from https://blog.ipleaders.in/challenges-interpretation-insolvency-bankruptcy-code-2016/

TaxGuru Consultancy & Online Publication LLP. (2019, August 1). Insolvency and Bankruptcy code, 2016 (Amendments). TaxGuru. Retrieved November 8, 2021, from https://taxguru.in/corporate-law/insolvency-bankruptcy-code-2016-amendments.html

Think, & SAHOO, M. S. (2016). Moving up in ‘ease of resolving insolvency (No. 1). https://ibbi.gov.in/uploads/whatsnew/faf3af70524e6c7ccf0b6762ab70216c.pdf

Upadhyay, J. P. (2017, August 16). NCLT okays first insolvency resolution scheme under IBC. Mint. Retrieved November 7, 2021, from https://www.livemint.com/Industry/qHRj0OlhehKDXFXFlckkoJ/NCLT-okays-first-insolvency-resolution-scheme-underIBC.html

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