(Provisions of this code override the existing laws on matters pertaining to insolvency and bankruptcy)
The Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) was passed in order to consolidate and amend the existing legal framework available to deal with the insolvency and bankruptcy matters.
The IBC offers a comprehensive and uniform mechanism and brings within its ambit all companies, individuals and partnerships. One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.
The objective with which the code was passed is as follows;
An act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
To enroll and regulate insolvency professionals as its members in accordance with the Insolvency and Bankruptcy Code 2016 and read with regulations a Section 8 company has been formed by the Institute of Chartered Accountants of India known as “The Institute of Insolvency Professionals of ICAI”
- Key Terms:
Some of the key terms under the IBC;
|Insolvency and Bankruptcy Board (IBB)||-||It is the apex body responsible for the administration of the Code and will be involved in setting up the infrastructure and accrediting the Insolvency Professionals and Insolvency Utilities|
|Insolvency Utilities (IU)||-||
It is the centralized repository in which the financial and credit information of borrowers would be stored and would be accessible to the creditors.
|Insolvency Professionals (IP)||-||They are the persons enrolled with Insolvency Professional Agency as its member and registered with IBB as insolvency professionals. Eligibility criteria for IP:
|Adjudicating authority (AA)||-||Adjudicating Authority here refers to the National Corporate Law Tribunal (NCLT) and it deals only with applications of corporate insolvency. AA has the power to approve/reject resolution plans, decide on matters of claims or matters of law of facts thereof.
In case of Individuals and other persons, the AA is Debt Recovery Appellate Tribunal (DRT) and thereafter the Supreme Court.
|Insolvency||-||Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts that are due.|
Bankruptcy is determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.
|Insolvency Resolution Process (IRP)||
It is a process during which financial creditors assess whether the debtor's business is viable to continue and the options for its rescue and revival
It is a period granted to corporate debtors by the NCLT. During which there will be no institution of suits, transfer of assets, no foreclosure, and no recovery of assets. In short it is like a calm period granted to the corporate debtor.
III. Corporate Insolvency Resolution Process (“CIRP”) under the Code-
- For application under the Code the minimum default in case of corporate debt shall be Rupees One Lakh;
- After default by the corporate debtor, the financial or operational creditor (including government & employees/workmen) or even the corporate debtor has to make an application to NCLT
- The name of the Insolvency Professional (IP) shall be proposed in the application and the NCLT will appoint an IP.
- The NCLT will grant the corporate debtor with a moratorium period
- The IP shall constitute a committee of creditors and exclude the related parties.
- The IP shall prepare an information memorandum and invite resolution plans from the committee of creditors.The committee of creditors shall then devise an insolvency resolution plan and if 75% of the members of the committee approve the plan, the NCLT will implement it and the corporate debtor’s business will be restructured according to the process approved by such majority.
- If the committee of creditors does not approve the plan within the specified period of 180 days or a maximum of 270 days then, the corporate debtor will go into liquidation.
- During liquidation the IP shall exercise all the powers that are available to the liquidator.
In case of liquidation the priority of payment shall be as follows:
- First- Insolvency related costs
- Second- secured creditors and workmen dues upto 24 months
- Third- salaries of other employees and dues upto 12 months
- Fourth- dues of unsecured creditors
- Fifth- Government dues upto 2 years
- Sixth-remainder of debts and dues
- Seventh-to equity shareholders
IV. Resolution plan for Individuals and other persons:
For individuals and unlimited partnerships, the resolution process is governed by the DRT;
- Automatic Fresh Start- Here the debtor can apply to the DRT for discharge of certain kinds of debts (not exceeding the threshold limits) and this allows them to start afresh
- Insolvency Resolution Process (IRP)Under this process a repayment plan is submitted by the debtor for approval of creditors and if it is approved then an order is passed by the DRT to give effect to the repayment plan.If the plan is rejected then either the debtor or creditor may apply for bankruptcy order.
V. Key Highlights of the code:
- It’s a creditor driven insolvency resolution
- Thrust on identification of financial failure and maximizing the asset value of insolvent firms
- Order of settlement of claims is clearly defined
- Cross border insolvency can also be addressed through bilateral agreements and reciprocal agreements with other countries
- It is a structured and time-bound process for insolvency resolution and liquidation
Considering the poor record of the country in resolving the insolvencies when compared with other countries and also keeping in mind the inefficiencies and systematic abuse, the credit market is in dire straits and IBC seems as a welcome change and could be a game changing scenario for the brand India in the time to come.