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UNDERSTANDING THE INSOLVENCY & BANKRUPTCY CODE, 2016: A COMPREHENSIVE OVERVIEW

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ABSTRACT

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 by the Indian government to reform the bankruptcy and insolvency process. It aims to establish a comprehensive legal framework for resolving insolvency cases, promoting entrepreneurship, protecting stakeholders’ rights, and enhancing accountability. The IBC structure includes provisions for corporate and individual insolvency, a time-bound resolution process, and the involvement of the National Company Law Tribunal (NCLT) in adjudicating insolvency proceedings. 

The Insolvency and Bankruptcy Code (IBC) consolidates insolvency and bankruptcy laws into a unified framework, ensuring timely resolution of insolvency proceedings to maximize distressed business value. The National Company Law Tribunal and Debt Recovery Tribunal adjudicate corporate and individual insolvency matters respectively. The Committee of Creditors plays a key role in approving resolution plans. Balancing operational and financial debt requires ongoing stakeholder engagement to promote financial stability and responsible governance. The Corporate Insolvency Resolution Process aims at rehabilitating companies rather than liquidating them. 

The Corporate Insolvency Resolution Process (CIRP) consists of several stages with defined timelines and objectives: admission and appointment of an Insolvency Resolution Professional (IRP), imposition of a moratorium period, information gathering, formulation of a resolution plan, evaluation and approval of the plan by creditors, implementation of the plan, and liquidation if necessary. Disputes are common during the CIRP, necessitating a well-defined legal framework and proactive strategies for efficient resolution. Mutual settlement under the Insolvency and Bankruptcy Code allows debtors and creditors to reach compromise agreements, minimizing the economic impact of corporate failures and fostering a healthy business environment.

INTRODUCTION

Insolvency and Bankruptcy are critical components of the financial landscape of any country. They serve as mechanisms through which distressed entities can either recover from financial difficulties or undergo a structure winding-up process. In India, the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 marked a significant overhaul of the insolvency regime. Prior to the IBC, India grappled with a fragmented, inefficient, and often outdated assortment of laws governing insolvency. The IBC was designed to create a unified framework that streamlined the insolvency resolution process, ensuring timely and fair outcomes for all stakeholders involved.

This article aims to provide a comprehensive understanding of the IBC, including its rationale, key features, the process of insolvency resolution, its impact on the economy, challenges, and areas for improvement 

INSOLVENCY & BANKRUPTCY CODE, 2016

In reaction to the critical want for reform, the Indian government legislated the Insolvency and Bankruptcy (IBC) Code in 2016. The IBC was intended to be a transformative number of legislation. It sought revolutionary and artistic  metamorphosis in the bankruptcy and  geography by (i) creating a  complete  law for bankruptcy and  ruin for corporates and  individualities; (ii) establishing a new armature, compromising a commission of creditors (COC) and  devoted adjudging authorities (AA) for bankruptcy  conclusion and liquidation; and (iii)  bringing around judicial discipline in the process.

The primary objective of the IBC is to establish a comprehensive and streamlined process for the resolution of insolvency and bankruptcy cases, thereby promoting a culture of entrepreneurship and ensuring that viable businesses can continue to operate while non-viable ones can be efficiently resolved. The code is structured to balance the interests of all stakeholders, including creditors, debtors, and employees, ensuring that their rights are protected throughout the process.

At the heart of the IBC is the concept of “insolvency resolution,” which aims to restore the viability of distressed businesses through a time-bound process. The code provides a clear legal framework for initiating insolvency proceedings, appointing insolvency professionals, and employing a transparent procedure for the distribution of assets among creditors, thereby enhancing accountability and predictability.

Overall, the IBC reflects a paradigm shift in India’s insolvency regime, promoting financial discipline, improving recovery rates for creditors, and fostering a more disciplined credit market. Its introduction has positioned India as an increasingly attractive destination for investment and entrepreneurship, laying the groundwork for sustainable economic growth.

STRUCTURE OF IBC

The structure of the Insolvency and Bankruptcy Code (IBC), 2016, is organized into several chapters and sections that outline the legal framework for insolvency and bankruptcy proceedings in India. The IBC is designed to be comprehensive, detailing procedures for different entities (like individuals and companies) and various aspects of insolvency resolution. Here’s an overview of the structure of the IBC:

~ Initiation of Insolvency Proceedings:  These can be initiated either by the debtor or creditors through an application filed with the National Company Law Tribunal (NCLT).

~ Adjudicating Authority: The NCLT acts as the adjudicating authority, examining the applications and appointing an insolvency professional to manage the proceedings.

~ Resolution Plan: A crucial aspect of the process is the formulation of a resolution plan, which must be approved by a minimum of 66% of the creditors to be implemented.

~ Liquidation Process: If a resolution is not feasible within the stipulated time frame (typically 180 days), the company’s assets may be liquidated to repay creditors

KEY FEATURE OF THE IBC

  1. Unified Framework

The IBC consolidates various existing laws relating to insolvency and bankruptcy into a single framework, making it simpler and more accessible for all stakeholders involved. This integration has streamlined the resolution process for both corporate entities and individuals.

  1. Timely Resolution

One of the core objectives of the IBC is to ensure that insolvency proceedings are resolved promptly. The law mandates that the Corporate Insolvency Resolution Process (CIRP) is completed within a specified timeframe, currently set at 330 days—this includes time for litigation and appeals. This provision aims to minimize asset erosion and maximize the value of distressed businesses.

  1. Adjudicating Authorities

The National Company Law Tribunal (NCLT) has been designated as the principal adjudicating authority for corporate insolvency matters, while individual insolvency is handled by the Debt Recovery Tribunal (DRT). This clear delineation aims to facilitate a swift and efficient resolution process.

  1. Committee of Creditors (COC)

For corporate insolvency resolutions, the IBC establishes a Committee of Creditors, which comprises financial creditors of the distressed company. This committee plays a central role in reviewing and approving the resolution plans proposed during the CIRP, emphasizing democratic decision-making among creditors.

THE INTERPLAY OF “OPERATIONAL DEBT” AND “FINANCIAL DEBT” UNDER THE CODE

The interplay between operational and financial debt within the IBC framework is complex and multifaceted. While the code provides a structured framework for handling financial distress, it is crucial to acknowledge and address the unique challenges and opportunities presented by different debt categories. Moving forward, a nuanced and inclusive approach that recognizes the interests of all stakeholders, particularly operational creditors, is essential to ensure the effectiveness and sustainability of the IBC in promoting financial stability and responsible corporate governance in India. This necessitates continuous engagement and dialogue among stakeholders, legal experts, policymakers, and industry practitioners to ensure the ongoing evolution of the IBC, adapting to the changing landscape of the Indian financial market and fostering a truly balanced and equitable approach to insolvency resolution.

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

The CIRP, as defined under the IBC, encompasses a time-bound process for resolving financial distress in corporate debtors. It provides a platform for creditors and the debtor to negotiate a mutually acceptable resolution plan, aiming for the company’s revival and continuation as a going concern. This process is distinct from traditional liquidation proceedings, focusing on rehabilitation rather than outright dissolution.

Initiation of the CIRP:

The CIRP is triggered by an insolvency application filed with the National Company Law Tribunal (NCLT) by one or more of the following stakeholders:

Stages of Corporate Insolvency Resolution Process:

The CIRP unfolds in a series of well-defined stages, each with specific timelines and objectives:

  1. Admission and Appointment of IRP: The NCLT admits the insolvency application and appoints an IRP to manage the company’s affairs.
  2. Moratorium Period: A moratorium period of 180 days (extendable by another 90 days) is imposed on the debtor company, prohibiting recovery actions against the company and freezing its assets.
  3. Information Gathering and Verification: The IRP gathers information about the debtor’s financial position, assets, liabilities, and business operations. Creditors are required to file their claims with the IRP.
  4. Formulation of Resolution Plan: The IRP invites bids from potential resolution applicants (often investors or creditors) to submit resolution plans. These plans outline a strategy for reviving the company and addressing its financial distress.
  5. Evaluation and Approval of Resolution Plan: The Committee of Creditors (CoC), comprising the majority of financial creditors, votes on the proposed resolution plans. The plan with the majority vote is submitted to the NCLT for approval.
  6. Implementation of Resolution Plan: Upon NCLT approval, the resolution plan is implemented, restructuring the company’s liabilities, ownership structure, and business operations.
  7. Liquidation: If no viable resolution plan is submitted or approved within the prescribed timelines, the NCLT orders liquidation of the company.

Dispute under CIRP

Disputes under the CIRP are an inherent part of the insolvency resolution process, driven by the complex interplay of legal, commercial, and financial factors. While navigating these disputes can be challenging, a well-defined legal framework and proactive strategies are essential for achieving efficient and equitable outcomes.  By fostering a collaborative environment, prioritizing early intervention, and utilizing appropriate dispute resolution mechanisms, stakeholders can effectively manage these challenges and contribute to the successful resolution of corporate distress under the CIRP. The aim remains to ensure that the CIRP operates smoothly, fostering a healthy corporate environment and maximizing value recovery for all stakeholders involved.

MUTUAL SETTLEMENT UNDER INSOLVENCY AND BANKRUPTCY CODE (IBC)

Mutual settlement, under Section 12 of the IBC, empowers debtors and creditors to reach a compromise agreement, thereby avoiding the complexities and cost associated with formal insolvency proceedings. This process offers flexibility, allowing for tailor-made solutions that cater to the specific circumstances of each case. The provisions for mutual settlement under the IBC provide a valuable tool for resolving corporate distress efficiently and effectively.  By enabling negotiated solutions and promoting collaboration between debtors and creditors, this mechanism has the potential to minimize the economic impact of corporate failures, preserve business value, and foster a healthy business environment. By refining these provisions and ensuring their proper implementation, India can further enhance its economic resilience and establish a truly robust system for dealing with corporate distress.

LEGAL FRAMEWORK FOR DISPUTE RESLUTION

The IBC provides a robust framework for resolving disputes arising under the Corporate Insolvency Resolution Process. 

National Company Law Tribunal (NCLT): The NCLT has the primary jurisdiction to adjudicate disputes related to the CIRP, including the initiation of the process, appointment of the IRP/RP, formation of the Creditors’ Committee, and approval of the resolution plan.

National Company Law Appellate Tribunal (NCLAT): Appeals against the orders of the NCLT can be filed with the NCLAT.

Supreme Court of India: The Supreme Court can entertain appeals against the orders of the NCLAT.

JUDICIAL PERESPECTIVE ON INSOLVENCY AND BANKRUPTCY CODE (IBC)

Case Laws 

1. Scope and Applicability of the IBC:

2. Insolvency Resolution Process:

3. Role of the Adjudicating Authority:

4. Specific Provisions of the IBC:

5. Impact on Stakeholders:

CONCLUSION

The Insolvency and Bankruptcy Code, 2016, represents a major step forward in reforming India’s insolvency and bankruptcy framework. It has significantly improved the resolution process, facilitated debt recovery, boosted investor confidence, and enhanced the overall health of the Indian economy. In conclusion, the Insolvency and Bankruptcy Code, 2016 marks a monumental step in India’s economic evolution, providing a structured and strategic approach to resolving insolvency disputes. By facilitating timely resolutions and promoting a culture of accountability, the IBC has not only transformed the financial landscape but has also laid the groundwork for a more resilient and sustainable economy.  A collaborative approach involving lawmakers, industry representatives, and other stakeholders will be essential in overcoming challenges, enhancing procedural transparency, and ensuring that the spirit of the IBC is upheld, ultimately benefiting the economy as a whole. As India strides towards a more robust financial ecosystem, the IBC stands as a testament to the country’s resolve in navigating the complexities of insolvency with reformative intent.

By

~ Leevanshiqa, 

A student at – Faculty of Law, Kalinga University, Raipur

Frequently Asked Questions (FAQs)

Q1.  Insolvency and Bankruptcy Board of India as a nonsupervisory body for the law. What’s the purpose of enactment of the Insolvency and Bankruptcy Code, 2016?  

Ans. As per Preamble to the Code, the purpose of this Act is as follows:- 

a) To consolidate and amend the laws relating to reorganization and bankruptcy resolution of commercial persons, cooperation enterprises and individualities.  

b) To fix time ages for perpetration of the law in a time bound manner.  

c) To maximize the value of means of stakeholders.  

d) To promote entrepreneurship.  

e) To increase stimulate vacuity of credit.  

f) To balance the interests of all the stakeholders including revision in the order of precedence of payment of Government pretenses.  

g) To establish a Bankruptcy and Bankruptcy Board of India as a nonsupervisory body for the law.   

Q2. Who shall be termed as Corporate Debtor? 

Ans. As per Section 3(8) of the law, Commercial Debtor means a commercial person who owes a debt to any person.

Q3. What is be the category of money advanced by a promoter, director or shareholder of the corporate debtor? 

Ans. Money advanced by a promoter, director or shareholder of the corporate debtor (even without interest) can be filed as financial debt.

Q4. Who is a Fiscal Creditor?

Ans. A person to whom a fiscal debt is owed against consideration for time value of plutocrat. Fiscal creditors are those whose relationship with the reality is a pure fiscal contract, similar as a loan or debt security.

Q5. Who is a Functional Creditor?

Ans. A person to whom a Functional debt is owed on account of goods or services including workman and govt. pretenses. Functional creditors are those whose liability from the reality comes from a sale on operations.   

Q6. When can CIRP be initiated?

Ans. CIRP may be initiated where the  minimal  quantum of  dereliction i.e. failure to pay whole or any part of  investiture of the debt or interest due is Rs./- or  similar advanced  quantum as may be notified by the Central Govt. not exceeding Rs. 1 Cr.

Q7. Who can initiate CIRP?

Ans. It may be initiated by the:

Q8. Can a complainant withdraw its application for insolvency process?

Ans. Yes, an Applicant may withdraw application for insolvency process by making a request to the Adjudicating Authority. However, such a withdrawal may not be made after the application has been admitted by the adjudicating authority.

Q9. Can the Code be triggered in case of non-payment of dues by Government Companies?

Ans. Since there is no specific exemption for Government Companies, the Code shall apply to Government Companies as well.

Q10. What is the effect of order of Moratorium?

Ans. Moratorium shall prohibit:

Q11. Who cannot participate in the meeting of CoC?

Ans. A Related Party to whom a Corporate Debtor owes a financial debt shall not have any right of Representation, Participation or Voting in a meeting of the Committee of Creditors.

Q12. Does NCLT have powers to reject Resolution Plans?

Ans. Yes, NCLT has powers to reject Resolution plans approved by the CoC.

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