The Insolvency and Bankruptcy Code (IBC) of 2016, enacted in India, marks a significant milestone in the country's legal framework, aiming to streamline and expedite the resolution of insolvency cases for individuals and corporations. Bankruptcy, a legal state where an entity or individual faces an inability to repay debts, prompted the creation of the IBC to establish a unified and effective insolvency resolution process.
What is the Bankruptcy and Insolvency Code?
What is meant by bankruptcy?
Bankruptcy is the legal position of a person or corporation when there is no way to repay debt to creditors. In most jurisdictions, bankruptcy is imposed by a court order. The debtor is primarily the one who starts it. It is crucial to understand that insolvency and bankruptcy are not the same thing. An insolvent person or organization may be able to claim another legal status. Bankruptcy is limited to people in nations such as the United Kingdom. For entities and companies, insolvency procedures such as liquidation, administration, and others are applicable.
India's bankruptcy law, the Insolvency and Bankruptcy Code, 2016 (IBC), aims to unify the current system by establishing a unified bankruptcy and insolvency law.
The IBC's goals
to reform and combine all of India's current bankruptcy laws.
to speed and streamline India's bankruptcy and insolvency procedures.
to safeguard the interests of lenders, including a company's stakeholders.
to quickly bring the company back to life.
to encourage self-employment.
to enhance the amount of credit available in the economy by obtaining the required relief for the creditors.
to develop a fresh, prompt recovery process that banks, other financial organizations, or individuals might use.
to establish the India Insolvency and Bankruptcy Board.
maximizing the worth of corporate entities' assets.
IBC: What is the Code meant to accomplish?
The 2016 Code stipulates a timeline for resolving insolvency. Creditors take possession of the debtor's assets in the event of a repayment default, and they have 180 days to decide how to handle the debtor's insolvency. The Code also shields debtors from creditor resolution claims during this time to guarantee a continuous resolution process. In order to create a common platform for debtors and creditors of all classes to address insolvency, the Code also unifies several sections of the existing legislative framework.
Who carries out the Code's insolvency resolution process?
The professionals in charge of insolvency will oversee the debtor's assets, manage the resolution procedure, and give creditors information to help them make decisions.
Insolvency Professional Agencies: Professionals dealing with insolvency will be registered with these agencies. The organizations administer tests to certify specialists in insolvency and enforce a code of conduct for their work.
Information Services: Debtors' creditors will provide them with the financial details of the debt they owe. Documents pertaining to debt, liabilities, and defaults will be included in this data.
Authorities that will render decisions: The Debt Recovery Tribunal (DRT) for individuals, and the National Companies Law Tribunal (NCLT) for corporations, shall decide the resolution process's proceedings. The authorities will be responsible for approving the start of the resolution process, designating the insolvency specialist, and sanctioning the creditors' ultimate choice.
Board of Insolvency and Bankruptcy: The Board shall oversee insolvency practitioners, insolvency professional organizations, and information services established in accordance with the Code.
How does insolvency in the Code get resolved?
The following actions are suggested by the Code to address insolvency:
Initiation: The debtor or creditor may start the resolution process in the event of a default. Choosing how to end insolvency The creditors will decide how to proceed with their outstanding debt in a committee made up of the creditors. In order to pay back the debts owing to them, they have two options: they can decide to sell the debtor's assets, or liquidate them. The debtor's assets are placed into liquidation if no decision is made within 180 days.
Liquidation: A specialist in insolvency manages the liquidation procedure in the event that the debtor enters it. The debtor's assets are sold, and the proceeds are divided according to the predetermined order of precedence.
The 2021 Bill to Amend the Bankruptcy and Insolvency Code
A prepackaged resolution mechanism for stressed Micro, Small, and Medium Enterprises is being provided under the Insolvency and Bankruptcy Code (Amendment) Bill, 2021, which was tabled in the Lok Sabha to reform the insolvency law.
The ordinance that was issued on April 4 of this year will be replaced by the bill. It suggested "pre-packs" as a way for MSMEs to resolve insolvency.
Instead of holding a public bidding procedure, major parties like creditors and shareholders get together to find a potential purchase and bargain.
Sections of the Bill:
It stipulates that in order to start the pre-packaged insolvency resolution process, the minimum threshold must not exceed Rs 1 crore.
It allows for the simultaneous processing of pre-packaged bankruptcy resolution procedures and applications for the start of the insolvency resolution process, all of which are pending against the same corporate debtor.
Penalties for launching a pre-packaged bankruptcy resolution process dishonestly, maliciously, or with the intention of defrauding others, as well as for manipulating the corporate debtor during the proceedings.
Penalties for violations pertaining to the pre-packaged insolvency resolution procedure.
How do "pre-packs" work?
An arrangement to settle a troubled company's debt is known as a pre-pack. It is not a public bidding procedure; rather, it is an agreement between investors and secured creditors.
Under the plan, only the debtor may file for bankruptcy on their own, with the consent of their creditors.
Under general bankruptcy procedures, lenders gain operational control of a small business from the founders or large shareholders.
The owners or shareholders of the business maintain control over it in a pre-pack insolvency plan.
The creditors will negotiate arrangements with the promoters or a possible investor and apply to the NCLT for approval of the resolution plan.
A resolution plan could not be filed to the NCLT unless it has received the consent of at least 66% of unaffiliated financial creditors.
Before addressing a petition for a CIRP, the NCLTs decide whether to accept or reject the application for a pre-pack insolvency process.
Analysts predicted that this plan will result in resolution more quickly than the corporate insolvency resolution procedure (CIRP).
The 2018 Amendment to the Insolvency and Bankruptcy Code Ordinance
In order to make it clear that allottees under a real estate project should be recognized as financial creditors, the Ordinance changes the Insolvency and Bankruptcy Code, 2016.
For regular decisions made by the committee of creditors, the voting threshold has been lowered from 75% to 51%. This cutoff point is now 66% for some important judgments.
Retraction of a resolution application filed with the NCLT in accordance with the Code is permitted by the Ordinance. If 90% of the creditors' committee approves this decision, it can be made.
Problems with IBC 2016
Not meeting the deadline: An insolvent asset must be addressed within 270 days, according to IBC regulations. Of the twelve large accounts that IBC was first directed to, five cases have been pending for more than 600 days as a result of ongoing litigation by one or more parties. One of the most notable instances of this rocky path for the IBC is the bankruptcy of Essar Steel. The Rs 50,000-crore account entered the IBC more than 600 days ago.
Absence of benches and judges: Of India's 14 NCLTs, two have not yet begun operations. A few years ago, the government declared its intention to establish twenty-four bankruptcy courts. According to the NCLT judge roster, 27 members are currently splitting the workload instead of the intended 60 judicial and technical members being appointed. The responsibilities of the benches in Jaipur, Chandigarh, Guwahati, and Cuttack are split between Delhi and Kolkata. The government recently announced that it has been working to expand the National Company Law Tribunal's (NCLT) bench strength from 10 to 15. In addition, 26 more members have joined, bringing the total to 52.
Haircuts: The amount of write-off that banks take on as a component of a resolution strategy to help the business turn a profit. Thus far, 43% of the claims made by financial creditors have been fulfilled, along with 188% of the liquidation value. It is necessary to take action to decrease haircuts.
Concerns are being raised by all of these considerations that IBC will eventually lose the trust of banks and suffer the same fate as DRT and SARFAESI.
Another incorrect precedent has been created by the recent Supreme Court ruling that overturned the RBI's decision to refer all electricity corporations to the NCLT.
To address a number of the problems, the Insolvency and Bankruptcy Code (Amendment) Bill 2019 was just passed by Parliament.
Bill 2019: Insolvency and Bankruptcy Code (Amendment)
The Code offers a deadline-driven procedure for resolving personal and corporate insolvency. A circumstance known as insolvency occurs when people or businesses are unable to pay back their outstanding debt.
A financial creditor may start the insolvency resolution procedure under the Code by submitting an application to the National Company Law Tribunal (NCLT). Within 14 days, the NCLT has to determine if a default has occurred. After that, financial creditors will form a Committee of Creditors (CoC) to make judgments about the resolution of insolvency. The CoC may choose to sell the debtor's assets or restructure the debt by creating a resolution plan.
A resolution specialist appointed by the CoC will provide the CoC with a resolution plan. A resolution plan needs to be approved by the CoC, and the process needs to be finished in 180 days. If accepted by NCLT, this may be extended for a maximum of ninety days.
The debtor will enter liquidation if the CoC rejects the resolution plan. In the event of the debtor's liquidation, the Code specifies a priority sequence for the distribution of assets. Financial creditors are ranked above operational creditors (such as suppliers) in this hierarchy. Homebuyers who made loans to developers were to be regarded as financial debtors, according to a 2018 Amendment. An NCLT-appointed insolvency specialist would represent them.
Three topics are covered by the bill. It first fortifies provisions pertaining to deadlines. Secondly, it outlines the lowest amounts that any resolution plan must pay operating creditors. Thirdly, it outlines how the representative of a class of debtors (such homeowners) is to cast their vote.
Act 2020: The Insolvency & Bankruptcy Code (Second Amendment)
1.The Insolvency & Bankruptcy Code (2nd Amendment) Act 2020 was just enacted by the Rajya Sabha. On June 5th, 2020, the IBC Bill 2020 went into effect.
2.The following section of the Insolvency and Bankruptcy Code, 2016 is to be introduced after section 10:
The commencement of the corporate insolvency resolution process is suspended under Section 10 A. According to Section 10A, "No application for the initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date," notwithstanding the provisions of Sections 7, 9, and 10. In light of the COVID-19 outbreak, no new bankruptcy cases will be filed for at least six months beginning on March 25. Repayment defaults starting on March 25, the day the countrywide lockdown was implemented to reduce COVID-19 infections, would not be taken into consideration for the start of bankruptcy procedures for at least six months.
3.Amendment of section 66.
Section 3 - "Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of the corporate insolvency resolution process is suspended as per section 10A" - is to be inserted after sub-section (2) in section 66 of the principal Act.
4.The pandemic has caused uncertainty and stress for businesses for reasons beyond their control, and the nationwide lockdown has further disrupted normal business operations. Accordingly, the ordinance suspends sections 7, 9, and 10, on the grounds that it would be difficult to find an adequate number of resolution applicants for a distressed/defaulting business.
Conclusion
Even though numerous revisions have resolved many issues, much work still needs to be done. The new modifications aim to enable a timely resolution of bankruptcy cases in addition to closing loopholes in the bankruptcy and Bankruptcy Code (IBC) that certain promoters have exploited to delay the resolution of their bankrupt enterprises. Due to the protection of creditors' rights, there has been a noticeable improvement in the recovery process, which has already resulted in billions of dollars being invested in the nation. The speed at which we have accomplished this is especially remarkable when compared to other markets. For instance, it took ten years (starting in 1978) for the bankruptcy law in the United States to stabilize. By international measures, India has made great growth.
Note for UPSC Aspirants:
Insolvency and Bankruptcy Code, IBC, bankruptcy, insolvency resolution, creditors, debt, legal framework, amendments, NCLT, creditors committee, resolution plan, liquidation, prepackaged resolution, MSMEs, legislative measures, debtor, financial creditors, COVID-19, pandemic, amendments, infrastructure, challenges, resolution delays, creditor trust, legal state.
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