The Insolvency and Bankruptcy Code, 2016 (IBC) is a bankruptcy legislation in India to solidify the present system by creating a single rule for debt and liquidation and amending the laws about the elements in India that are already in effect. An appropriate framework for the well-being of corporations or any other corporate organizations with a separate legal existence is provided by the consolidation of Indian laws. On May 5, 2016, Lok Sabha approved it. In cases when insolvency and bankruptcy code appears, this legislation expressly addresses insolvency, bankruptcy, and liquidation.
In contrast, insolvency refers to a situation or legal process where a court of competent jurisdiction declares an entity insolvent based on that entity’s application to declare itself, as opposed to bankruptcy, which implies a circumstance where an entity’s liabilities outweigh its advantages and render it unable to meet its obligations.
Objectives of Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code seeks to balance the interests of all stakeholders, including a change in the priority of payment of government dues, by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals promptly to maximize the value of such person’s assets. It also seeks to encourage entrepreneurship and the availability of credit. A strong legislative framework that allows for prompt insolvency and bankruptcy resolution would boost the growth of the credit markets and promote entrepreneurship. Additionally, it would make doing business easier and encourage additional investments that would boost economic growth and development Free Business Directory.
Upon an occurrence of default, an insolvency resolution process may be started by a financial creditor, an operational creditor, or the corporate applicant (corporate debtor) according to the bankruptcy law in india. Within 180 days following the admission of the application, a revival plan must be finalized. Making this procedure time-limited is crucial since the value of the assets might significantly decline over time. The applicant automatically advances to the next step of the insolvency process in the case of a dispute or if a judgement is not made within the allotted time limit.
Impact of Insolvency and Bankruptcy Code
The primary objective of the 2016 IBC was to establish a comprehensive structure for resolving insolvency issues in India. This law has brought about a transformative shift in the country’s bankruptcy landscape by consolidating and simplifying the existing bankruptcy laws. It has introduced accountability, transparency, and efficiency to the insolvency process. The main goal was to hasten the process of bankrupt corporations’ resolution.
Inefficiencies and delays hindered the Indian bankruptcy process before the IBC was implemented, often resulting in cases lingering for years. The IBC introduced strict timelines for the resolution process, guaranteeing timely resolutions. Consequently, this enhancement has instilled confidence and predictability in the procedure while significantly reducing the time required to address these matters.
One significant impact of the IBC is the change in focus from liquidation to resolution. Instead of ultimately winding up struggling businesses, the IBC now prioritizes their restructuring and revival. It promotes the involvement of experts in resolution and insolvency who aim to develop practical strategies to resolve business challenges. This approach plays a vital role in preventing the complete shutdown of numerous enterprises, safeguarding employees’ jobs, and optimizing asset value.
Furthermore, the Indian Bankruptcy Code (IBC), as put in the bankruptcy law in India, has positively impacted the overall business environment in India. Providing a simplified and efficient framework for managing insolvency cases has enhanced the confidence of domestic and international investors. As a result, all participants in the market now operate under fair and equal conditions, nurturing a healthy sense of competition and encouraging entrepreneurial endeavours. Due to the Insolvency and Bankruptcy Code, conducting business in India has become significantly more convenient, increasing investments and facilitating economic advancements.
Additionally, implementing the IBC has played a pivotal role in fostering the growth of a robust secondary market for distressed assets in India. By adopting a transparent auction process, introducing the Insolvency Resolution procedure (IRP) has effectively streamlined the buying and selling of troubled assets. Consequently, this progressive measure has significantly bolstered the market for transactions involving distressed assets, granting asset reconstruction companies, private equity firms, and other investors a unique opportunity to acquire struggling enterprises at justifiable prices.
The Insolvency and Bankruptcy Code has had a favorable influence on the Indian economy. Through diminishing non-performing assets, enhancing the monetary well-being of banks, and establishing a fairer environment for enterprises, the IBC has effectively stimulated investment, economic expansion, and financial steadfastness. Nevertheless, the IBC does face opposition. Specific individuals contend that the Code excessively favors creditors and fails to adequately safeguard debtors’ rights. Furthermore, others insist that the Code is overly intricate and poses challenges in its execution.
Main features of the Insolvency and Bankruptcy Code 2016
A comprehensive law known as the Insolvency and Bankruptcy Code, 2016 (IBC) offers a time-limited framework for resolving insolvency and bankruptcy proceedings involving businesses, partnerships, and individuals. The following are the key characteristics of the IBC.
- Insolvency Resolution: The Insolvency and Bankruptcy Code of 2016 provides a comprehensive framework for addressing insolvency issues faced by businesses, individuals, and partnership firms. It grants the option to initiate the resolution process to either the debtors or the creditors. The Code also lays down strict timelines for completing the insolvency resolution process for both individuals and corporations.
For corporations, the entire process must be completed within a maximum of one hundred and eighty days. On the other hand, for start-ups, small organizations, and other entities, the resolution method should be finalized within ninety days from the commencement of the necessary proceedings. However, this timeline can be extended for an additional period of up to 45 days if required.
- Administrator for Insolvency: As per the bankruptcy law in India, the duty of overseeing all enterprises that have been enlisted with the board and monitoring domestic insolvency processes lies with the Insolvency and Bankruptcy Board of India. Comprising 10 members, the board will include the RBI and representatives from the Law and Finance Ministries, among others.
- Judge for bankruptcy and insolvency: The Code has implemented a system where two special courts have been set up to oversee the procedure of resolving bankruptcy cases for various entities. These tribunals comprise (i) the National Company Law Tribunal, which specifically handles cases related to corporations and limited liability partnerships, and (ii) the Debt Recovery Tribunal, responsible for overseeing the insolvency process for both individuals and partnership businesses.
- Procedure: An insolvency declaration is made to the body that decides cases based on the operations of the debtor, the financial creditors, or the corporate debtor. The petition might be accepted or refused in a maximum of fourteen days. If the tribunal accepts the plea, an IRP or insolvency resolution professional must be appointed immediately to develop a resolution plan within 180 days. The court would then start the process of resolving corporate insolvency after that. For conducting day-to-day operations, the Insolvency Resolution Professional may ask the company’s management for assistance. If the CIRP is unsuccessful in reviving the organization, the liquidation procedure will be started.
- Amendments: Certain individuals are prohibited from proposing any form of resolution proposal in case of defaults. Consequently, individuals who intentionally default, the management, or the promoters of the company, are ineligible to submit a plan if there is any non-performing debt that has remained unpaid for over a year. Moreover, directors who have been disqualified are also excluded. Furthermore, the provision prohibits the transfer of a defaulter’s assets to any such individuals throughout the liquidation procedure.
Significant flaws in the Insolvency and Bankruptcy Code
First, there are infrastructure problems like one judge sitting on two benches and appointment delays. The NCLT’s mandates are not limited to IBC cases. They also consider various situations under the Companies Act, such as mergers or cases of repression and poor management. India and other nations vary fundamentally because Indian businesses are primarily promoter-owned and managed by their owners.
It makes it challenging to take over the asset because it is primarily controlled, owned, and managed by the same individuals in India. Many historical examples exist in the stock of NPAs (non-performing assets).
There will be fewer cases after the backlog is cleared since the promoters will be more motivated to find a solution out of fear of losing the firm, according to Section 49A of the bankruptcy law in India.
The insolvency and bankruptcy regulations in India have experienced a significant transformation due to the implementation of the Insolvency and Bankruptcy Code of 2016. This Code has introduced a more efficient and productive system for addressing insolvency and bankruptcy matters, leading to a more transparent process for resolving insolvency and prompt repayment of debts for lenders. With the establishment of a more comprehensible structure for resolving insolvency issues, the Code has fostered entrepreneurial spirit by facilitating the initiation of new business ventures and encouraging calculated ventures.