INTRODUCTION:
Bankruptcy and insolvency have long been complex issues in India. But, in 2016 Central Government introduced a code i.e. Insolvency and Bankruptcy code (IBC) ,2016 to resolve insolvency. Before introduction of this code companies who were unable to repay their debts had to go through long and tedious process to seek a resolution.
IBC was introduced by repealing 2 laws the i.e. Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920. It also amended 11 other laws. IBC provides a streamlined and time-bound framework for resolving insolvency.
What is Insolvency?
Insolvency refers to a situation where a company or an individual is unable to repay its debts.
What is Bankruptcy?
It is a legal process where a court formally recognizes that a person or a company is unable to repay its debts. It is initiated to resolve insolvency.
Applicability of IBC:
Corporate Entities: companies registered under Companies Act, 2013 or any previous company law (includes both public & private company). It also applies to LLPs registered under LLP Act, 2008
Partnership firms: IBC also applies to partnership firms
Individuals: Applies to individuals who have given personal guarantee for the debts of corporate debtors. It also applies to individual insolvency, including sole proprietors
IBC does not apply to financial service providers like banks and insurance companies.
Role of Insolvency and Bankruptcy Board of India:
It was established as a regulatory body to supervise the implementation of IBC. It also regulates the entities involved in insolvency process
Key functions of IBBI:
- It plays a crucial role in developing insolvency profession
- It provides detailed guidelines on how insolvency is to be conducted
- IBBI does not directly adjudicate cases, it plays an advisory role to NCLT and other bodies involved in insolvency process
Adjudicatory authorities under IBC
The primary adjudicatory authorities under the IBC are:
- National Company Law Tribunal (NCLT) – It is adjudicating authority for corporate insolvency resolution processes (CIRP) and matters involving companies and LLPs
- National Company law Appellate Tribunal (NCLAT)- Appeal against the decision of NCLT is made in NCLAT
- Debt Recovery Tribunal (DRT)- DRT serves as the adjudicating authority for insolvency and bankruptcy proceedings related to individual and partnership firms. It also handles appeals related to orders passed by insolvency professionals during the insolvency resolution process
- Debt Recovery Appellate Tribunal (DRAT) – It is a quasi-judicial body that handles appeals against the decision of Debt Recovery Tribunal (DRT)
- Supreme Court- It is the highest appellate body under the Insolvency and Bankruptcy Code. Parties aggrieved by the orders of the National Company Law Appellate Tribunal (NCLAT) can appeal to Supreme Court.
Key features of the IBC 2016
- Unified Code– IBC consolidates various laws into a single code
- Time bound- It is one of the significant features of IBC. It ensures time bound resolution of insolvency. Corporate Insolvency Resolution Process (CIRP) is required to be completed within 180 Days. It can be extended for 90 days further. In cases of pre-packaged insolvency for MSMEs, the process is even quicker
- Insolvency Resolution- IBC provides a framework for insolvency resolution of companies, LLPs, individuals and partnership
- Insolvency professional- IBC created a new class of professionals who are responsible for managing the insolvency process
- Pre-Packaged Insolvency- IBC introduces a pre-packaged insolvency resolution process specifically for Micro Small and Medium Enterprises (MSMEs) which allows even quicker resolution.
- Corporate Insolvency Resolution Process- It is primary mechanism for resolving insolvency of corporate debtors.
- Insolvency and Bankruptcy Board of India- IBBI is a regulatory body for supervising the implementation of IBC
- Appeal and Adjudication Mechanism-National Company Law Tribunal (NCLT) is the adjudicatory authority for corporate insolvency cases, and the Debt Recovery Tribunal (DRT) for individual insolvency cases. Appeal against the order of NCLT lies in National Company Law Appellate Tribunal (NCLAT), and appeal against order of NCLAT lies in Supreme Court.
Objectives of IBC, 2016:
- Time-Bound Insolvency Resolution- To ensure time-bound resolution of insolvency cases
- Maximization of Asset value- To maximize the value of asset for the benefit of all the stakeholders.
- Promoting Entrepreneurship– It provides a clear exit mechanism for businesses which encourages more entrepreneurial experiments.
- Balancing the interests of Stakeholders– objective is to balance the interest of all the stakeholders including creditors employees and debtors.
- Improving Ease of doing business– By reducing time and complexity involved in resolving insolvencies, IBC contributes to more stable and investor-friendly economic environment.
- Encouraging resolution over Liquidation– IBC promotes resolution-first approach, where efforts are made to restructure and revive business before resorting to liquidation
What is Liquidation?
Liquidation is a process of closing down a business by selling off its assets to pay its debts. It usually occurs when company is unable to meet its legal obligations and is insolvent. And the process ensures that creditors are repaid to the extent possible, and the company is formally dissolved after the liquidation process is completed.
Corporate Insolvency Resolution process:
The Corporate Insolvency Resolution (CIRP) under the IBC, 2016 is a structured mechanism for resolving of insolvency of corporate debtors. The process is designed to either revive the company through a resolution plan or liquidate its assets if revival is not feasible.
Following is the overview of key steps of CIRP:
- Initiation of CIRP: The CIRP can be initiated by financial creditor, operational creditor or corporate debtor itself. The application must be filed before NCLT demonstrating that default has occurred.
- Admission of Application: NCLT after examining g the application can accept it or reject it within 14 days. If admitted CIRP is formally initiated.
- Moratorium– Upon admission of application by NCLT, a moratorium is declared.
What is Moratorium?
It refers to a period during which a legal proceeding cannot be initiated against corporate debtor. It remains in place until resolution process is completed or company is liquidated.
Appointment of Interim Resolution Professional: Once CIRP is initiated, the NCLT appoints an Interim Resolution Professional (IRP) to take over the management of corporate debtor.
Public Announcement: IRP makes a public announcement of the CIRP and invites claims from creditors.
- Committee of Creditors (CoC): IRP forms the CoC, which comprises all the financial creditors of the corporate debtor. The CoC plays a central role in CIRP by approving or rejecting the resolution plan
- Appointment of Resolution Professional (RP): The Coc reviews the resolution plan and selects the one that maximizes the value of debtor’s assets while providing best possible results to creditors. The selected plan mut be approved by 66% of CoC members by voting share. Once approved plan must be sent to NCLT for final approval
- Implementation of the Resolution Plan: Upon approval by NCLT, the resolution plan becomes binding on all stakeholders, including the corporate debtors, creditors, employees
- Liquidation: If no resolution plan is approved within prescribed period i.e. 180 days extendable by an additional 90days or if CoC decides liquidation is the only viable option, then NCLT will pass liquidation order.
- Closure of CIRP: Completion: The CIRP concludes either with successful implementation of the resolution plan or liquidation of corporate debtor
Exit from CIRP: If the resolution plan is implemented, the corporate debtor exits the CIRP and resumes normal business operations.
Key Timelines:
CIRP Duration- The entire CIRP should be completed within 180days, with possible extension of up to 90days.
Fast-Track CIRP– For smaller companies or specific cases, a fast-track process completes within 90days, extendable by 45days.
Conclusion:
The CIRP under IBC is a critical tool for reviewing distressed companies or ensuring an orderly liquidation. It brings discipline to the process of insolvency resolution, protecting the interests of creditors while giving viable companies a chance to turn round their fortunes.
Author: Ashmita