Insolvency and Bankruptcy Code, 2016 – An Overview

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TABLE OF CONTENTS

RESEARCH METHODOLOGY
SCOPE AND LIMITATION
INTRODUCTION
THE CODE
OBJECTIVE OF THE CODE
KEY COMPONENTS IN RESOLUTION PROCESS UNDER THE CODE
INSTITUTIONAL FRAMEWORK OF THE CODE
APPEAL UNDER THE CODE
WHEN DOES THE INSOLVENCY RESOLUTION PROCESS BEGIN?
CORPORATE INSOLVENCY RESOLUTION PROCESS
LIQUIDATION PROCESS
RECENT AMENDMENTS TO IBC, 2016
CONCLUSION
REFERENCES

INTRODUCTION

The Bankruptcy and Bankruptcy Code, 2016[1] restructured India’s insolvency resolution framework. It establishes a framework for debtors’ bankruptcy resolution in a time-bound way in order to maximise the value of their assets, while promoting entrepreneurship, credit availability, and balancing the interests of all stakeholders.

According to the preamble of the Insolvency and Bankruptcy Code, 2016 (Code), which says this Act was enacted to consolidate and amend the laws in regards to the reorganisation and insolvency resolution of corporate entities, partnership firms, and individuals in a fair and timely manner in order to maximize the benefits of such persons’ assets, to encourage entrepreneurship, the accessibility of credit, and to balance the interests of stakeholders, including changes in the terms of precedence of such persons.

The Code of Insolvency and Bankruptcy, 2016, proposes to combine and update the   laws which are pertaining to resolution of insolvency of various companies and LLP’s, Partnership firms, and individuals, which are scattered across different enactments, into a single piece of legislation. The primary goal of this Act is to provide resurrection and resolution in a timely way as with an aim in order to maximise the value of the assets of the debtor. The Code has proposed an overall structure to assist ailing enterprises in either winding down or engineering a resurrection plan, as well as investors in exiting. Notably, the Code empowers operational creditors (workmen, suppliers, etc.) to begin the insolvency resolution procedure if any default occurs.

The Code separates the business and judicial parts of insolvency and bankruptcy processes, empowering and facilitating stakeholders and the Authority Adjudicating to quickly resolve disputes within their respective domains. It envisions a market system for rescuing companies in financial trouble and facilitating the liquidation of companies in economic hardship, in compliance with the Code’s processes and rules and regulations.

THE CODE

The Code (IBC), 2016 was enacted by Parliament. It was signed into law by the President in May of 2016. In 2016, the IBC was introduced by the Centre to handle disputes concerning bankruptcy of various companies, firm’s, limited liability Partnerships, etc. The bankruptcy code provides a one-stop shop for resolving insolvencies, which was formerly a time-consuming procedure with no economically acceptable remedy. The regulation strives to safeguard small investors’ interests while also making the business process easier. There are 255 sections and 11 schedules in the IBC.

The debtor-creditor relationship has been altered as a result of the IBC procedure. It brings in a time-bound process for deciding and resolving matters in relation to insolvency. When a debtor fails to make a payment, creditors obtain ownership of the assets belonging to the debtor and are forced in making decisions about how to resolve the bankruptcy. Here the debtor as well as the creditor can initiate the ‘recovery’ procedures against one another under the Code.

OBJECTIVE OF THE CODE

The 2016 Code establishes a time-limited procedure for resolving the insolvency. When a debtor fails to make a payment, creditors tend to seize the ownership of the assets belonging to the debtor and have 180 days to resolve and settle the insolvency. To ensure that the resolution process goes on appropriately, the Code grants the debtors an immunity from the creditors resolution claims during this time. This Code also brings together elements from existing legislation to provide a single venue for debtors and creditors of various types to acknowledge the insolvency.

The Insolvency and Bankruptcy Cod e, 2016, is designed to strike the correct balance of interests for all stakeholders in a commercial venture, ensuring that corporates and other business entities have access to credit while creditors are spared from losses due to default. The Insolvency and Bankruptcy Code, 2016, was enacted for the following reasons:

(a) To harmonise and revise the legislation governing the reorganisation and insolvency of corporations, partnerships, and individuals.

(b) To balance the interests of all stakeholders, including a change in the order in which government dues are paid.

(c) To maximise the value of the assets of those who are interested.

(d) To boost credit availability

(e) To encourage entrepreneurship

(f) Create an Indian Insolvency and Bankruptcy Board as a regulatory authority for insolvency and bankruptcy legislation.

(g) To provide time frames for the law’s execution in a time-bound way.

KEY COMPONENTS IN RESOLUTION PROCESS UNDER THE CODE

  1. ADJUDICATING AUTHORITY: The National Company Law Tribunal (NCLT) and Debts Recovery Tribunal (DRT) are judicially established special bodies which have been assigned with the adjudication of the insolvency and bankruptcy cases. The National Company Law Appellate Tribunal (NCLAT) hears the appeals of NCLT, and following NCLAT, the party if not satisfied by the decision of the NCLAT can further appeal to the Supreme Court of India. Similarly, DRT appeals go to the Debt Recovery Appellate Tribunal (DRAT), which if can be further appealed before the Supreme Court. The NCLT and the DRT are two different tribunals set in order to look after the insolvency proceedings. NCLT is for various companies and limited liability partnerships, whereas DRT is for sole proprietorships and unlimited liability partnerships.
  2. COMMITTEE OF CREDITORS (COC): Section 21 of the Code mentions about the Committee of Creditors (COC). The Committee is made up entirely of financial creditors. The duty of the Committee in relation to the process of Corporate Insolvency Resolution (CIRP) is to grant approval to the resolution plan provided by the professional or disapprove the resolution plan provided by the resolution professional. In order to adopt any resolution plan in the meeting of COC it is necessary to have majority votes of 75%.
  3. INSOLVENCY PROFESSIONAL: Insolvency Professionals are members of an Insolvency Agency who assist in the dissolution of insolvent individuals, corporations, limited liability partnerships, and partnerships. These specialists have the authority to act on behalf of bankrupt individuals, businesses, and other entities.

There are two categories of insolvency professionals: interim insolvency professional and insolvency professional.

  • INFORMATION UTILITIES (IU’s): The construction of information utilities to gather, aggregate, validate, and transmit financial information of debtors in centralised electronic databases is a prominent component of the Code. The Code mandates creditors to report continuing financial information about debtors to several utilities. Creditors, resolution specialists, liquidators, as well as other stakeholders in bankruptcy and insolvency processes would have access to this information. The goal is to eliminate asymmetric information and reliance on debtor management for essential information required to quickly resolve insolvency.

INSTITUTIONAL FRAMEWORK OF THE CODE

The legislation proposes the establishment of many new entities with specific duties in the bankruptcy resolution process. The IBC established the Insolvency and Bankruptcy Board of India (IBBI), a regulation and supervision agency with the overall task of successfully operationalizing, implementing, and educating the Code of Insolvency and Bankruptcy.

The IBBI also has the role of smoothing the operation of the IBC by enacting rules and regulations and examining the practical ramifications in order to overcome any obstacles or difficulties. The Code proposes the formation of a RP (Resolution Professionals), a group of experienced insolvency practitioners entrusted with monitoring key components of the resolution process.

The IBC also establishes IPA’s[2], which are, regulatory agencies for RPs. Individual RPs must register with the IPA, which has the authority to administer tests, create codes of behavior, and certified professionals.

APPEAL UNDER THE CODE

The National Company Law Tribunal, which was created as a specific body to deal with all elements of insolvency resolution processes, will judge any cases brought under the Code against business entities. NCLT is referred to as the exclusive adjudicatory body in regards to corporate insolvency, and no other tribunal or court has the authority to stay action commenced through the NCLT. Appeals from NCLT orders are heard by the NCLAT[3].

The Supreme Court of India hears all appeals against the NCLAT.[4] The IBC has expressly declared that the Civil Courts have no jurisdiction over the topics covered by the IBC.[5] Furthermore, it is already generally established that the Limitation Act applies to actions under the IBC.[6]

WHEN DOES THE INSOLVENCY RESOLUTION PROCESS BEGIN?

Any creditor can commence an insolvency resolution procedure under the IBC if the debtor defaults on the creditor’s obligation by at least INR 1,00,000/-. Either operational creditor or a financial creditor may submit such an application with the applicable jurisdictions of the National Company Law Tribunal (“NCLT”). The NCLT will look after whether there is any debt, or there is a default, or there is any notice (by an operational creditor in application) before giving approval to the application filed by the operational or financial creditor.

The National Company Law Appellate Tribunal (“NCLAT”) shall hear an appeal from any NCLT ruling or judgement within the timeframe stated therein. In addition, the Supreme Court will hear appeals from the NCLAT.

CORPORATE INSOLVENCY RESOLUTION PROCESS

Who all can commence CIRP?

  • According to Section 5(7) of the Code, a “financial creditor” is anybody to whom a financial obligation is owed, including anyone to whom such debt has been legitimately assigned or transferred.
  • According to Section 5(20) of the IBC, “operational creditor” is a person who is due an operational debt, as well as anybody to whom the obligation has been legitimately assigned or transferred. These creditors are people working for the corporation or who owe the company money for goods and services they delivered towards the corporate debtor.
  • According to Section 5(5) of the law, the following individuals can be considered “corporate applicants”.

During this procedure, financial creditors examine the corporate debtor to see whether or not it is viable to continue operations. Furthermore, the creditors devise a strategy to reorganise the corporate debtor. A CIRP consists of the following steps:

  • Application to the NCLT: To begin insolvency resolution procedures, the creditor is required to submit an application with the NCLT. Within 14 days after receiving the application, the NCLT must either accept the application or reject it.
  • Initiation of the bankruptcy procedure and suspension of management: After the NCLT accepts the application, the debtor is removed from management and the NCLT appoints an ‘interim insolvency resolution expert’ to oversee the corporate debtor. Upon acceptance of the CIRP application, the NCLT imposes a moratorium on the corporate debtor, banning the continuation or commencement of any legal proceedings, the transfer of its assets, or the enforcement of any security interests.
  • Appointment of CoC: 30 days after the NCLT accepts the CIRP application, the interim resolution professional reviews the claims of their creditors and a committee of creditors is formed.
  • Appointment of IRP: To maintain debtor management throughout the CIRP, the creditors’ committee chooses an independent individual as a resolution professional (known as the Insolvency Resolution Professional or IRP) who is responsible for managing the corporate debtor.
  • Resolution Plan Approval: Within 180 days of the CIRP’s inception, an IRP must develop a resolution plan for the resurrection of a corporate debtor. This proposal must be authorised by creditors who possess at least 75% of the business debt.

LIQUIDATION PROCESS

A corporate debtor under the code may be put for liquidation in following situations:

  • A creditor’s committee with a 75% majority votes to liquidate the corporate debtor at any moment throughout the bankruptcy resolution procedure;
  • The debtor violates the agreed-upon resolution plan, and an aggrieved person petitions the NCLT to liquidate the corporate debtor;
  • On technical grounds, the NCLT rejects the resolution plan presented to it; or
  • The creditor’s committee fails to accept a resolution plan within 180 days (or the additional 90-day period).

If the CIRP fails, the financial creditors can wind up the corporate debtor and liquidate and distribute its assets in accordance with the IBC’s liquidation preference order. When the NCLT issues a liquidation order, the current legal procedures against the corporate debtor are put on hold, and the debtor’s assets[7] are transferred to the liquidation estate.

RECENT AMENDMENTS TO IBC, 2016

  • Insolvency and Bankruptcy Code (Amendment) Act, 2020

The IBC, 2016, was amended by the Second Amendment Act of 2020, which included the following provisions:

  • Section 10-A was added, which prevents the start of the corporate insolvency resolution procedure if the corporate debtor defaults on or after March 25, 2020. The suspension will last for six months, or as long as you’ve been notified, but not more than one year from the day you’ve been told.
  • The proviso to Section 10-A prohibits the filing of such an application for a default that occurs within that period for the rest of time.
  • The Act introduced clause (3) to Section 66 of the IBC, prohibiting a resolution professional from submitting an application in respect of a default suspension as described in Section 10-A.
  • The responsibility for improper trading on a director or a partner for defaults in the period from March 25, 2020 to June 30, 2020 was forbidden under Section 66 (3), which was inserted by the Amendment Act. The responsibility arose when a person failed to conduct reasonable diligence in reducing the possible damage to creditors despite knowing that the bankruptcy procedures could not be averted.

The Amendment Act was enacted in response to the various nations’ efforts to handle bankruptcy procedures. Such measures have taken into account the issues that firms may encounter as a result of the pandemic, like as insolvency and other economic reasons such as supply shortages.

The IBC, 2016 was been implemented in accord to resolve the problems of insolvency, to look after the matters in regards of NPA, etc.; however, as there was seen delay in resolution, low recovery rates, and due to the rise in the cases of liquidation it was suggested by the parliamentary standing committee on finance, chaired by Mr. Jayant Singh, that there is need to review the Insolvency and Bankruptcy Code.

  • Insolvency and Bankruptcy Code (Amendment) Act, 2021

The Amendment Act of 2021 to the IBC of 2016, aimed at making the insolvency process easier for micro, small, and medium businesses (MSMEs). There has been a desire for a simpler version of IBC that saves small firms in crisis time and money during bankruptcy procedures. As a result, in April of this year, an ordinance was passed that provided for a ‘pre-packaged’ or pre-packaged resolution plan. It’s a less formal means of putting together a company recovery plan that will later be submitted to a tribunal for approval. This comes after the revocation of a similar ordinance that was passed in April of this year.

  • Aside from the CIRP, the new bill includes the Pre-package Insolvency Resolution Process (PIRP).
  • PIRP has been designed specifically for MSMEs as specified by the MSME Act of 2006.
  • The bill also establishes a default amount cap of Rs 1 crore. This indicates that PIRP would be a possibility for default ranging from Rs 1 lakh to Rs 1 crore. The government may, at any time, by notification, increase the minimum sum (Rs 1 lakh) to any amount less than Rs 1 crore.
  • The company’s management will stay with the Corporate Debtor.
  • To begin the PIRP procedure, the corporate debtor must get approval from at least 66% of creditors (based on the financial worth of the debt) before filing an application with the Adjudicating Authority i.e. NCLT.
  • If the resolution plan is been submitted within the limit set of 90 days, the NCLT must give its approval to the plan within 30 days. As a result, the full procedure must be completed in 120 days.

CONCLUSION

Individuals and businesses alike are referred to as insolvent. Individual bankruptcy is referred to as bankruptcy, whereas corporate insolvency is referred to as corporate insolvency. Both terms allude to a scenario in which a person or a firm is unable to pay a debt now or in the near future because their assets are worth less than their liabilities.

The 2016 Insolvency and Bankruptcy Code have different insolvency resolution processes for corporations, individuals, and partnership firms. The procedure can be started by either the creditors or the debtors. Individuals and corporations must complete the insolvency resolution procedure within a certain amount of time, according to the statute. In the event of companies, the procedure has to be completed within the limit of 180 days, which can further be extended by ninety days subject to as if a majority of creditors grant their consent. In the event of start-ups (other than partnership firms), small organisations, and other organisations (with less than Rs 1 crore in assets), the resolution procedure will be completed within ninety days after commencing the requirement, which can be extended by up to 45 days.

The goal of the Code is to establish the correct balance of interests for all stakeholders in a commercial venture so that corporations and other business entities have access to credit while the creditor is spared from losses resulting from default. The entire code’s success hinges on its execution and the timely disposal or settlement of situations.

REFERENCES

https://www.livemint.com/Industry/TDenpfU0nhiXjlqAE6ZtPJ/12-large-NPA-cases-listed-for-insolvency-yet-to-come-before.html

https://taxguru.in/income-tax/insolvency-bankruptcy-code-2016-analysis-section-10-a.html#:~:text=Recently%2C%20on%2024%20April%2C%20a%20government%20official%20hinted,default%20for%20a%20minimum%20period%20of%20six%20months.

https://www.mondaq.com/india/insolvencybankruptcy/870978/personal-guarantors-now-subject-to-ibc-a-brief-overview-of-the-insolvency-resolution-process


[1] Herein referred as “The Code”

[2] Insolvency Professional Agencies

[3] As per Section 61, of the IBC

[4] As per Section 182, of the IBC

[5] As per Section 231, of the IBC

[6] Section 238A, Insolvency and Bankruptcy Code, 2016 (As amended by the Insolvency and Bankruptcy (Amendment) Ordinance, 2018

[7] including the proceeds of liquidation

Author: Bhushan Yadav, MAHARASHTRA NATIONAL LAW UNIVERSITY, AURANGABAD 

Editor: Kanishka VaishSenior Editor, LexLife India

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