Before the Insolvency and Bankruptcy Code (IBC), resolving insolvencies required a time-consuming process and there was no economically viable option. The IBC works to streamline the business process while defending the rights of small investors. The IBC contains 255 parts and 11 schedules.
Let's examine the significance of IBC, IBC 2016, modifications to IBC, and its difficulties in this article.
What Is The Bankruptcy And Insolvency Code?
• India's bankruptcy law, the Insolvency and Bankruptcy Code, 2016 (IBC), seeks to harmonize the current framework by introducing a unified insolvency and bankruptcy law.
• A debtor who is unable to pay off their debts is said to be insolvent.
• An individual or business that is insolvent and unable to pay its debts declares bankruptcy.
• In order to aid creditors, such banks, in recovering debts and avoiding bad loans, which are a significant drag on the economy, it provides clearer and quicker insolvency procedures.
• It is a comprehensive insolvency code that governs all corporations, partnerships, and people (apart from financial institutions).
The 2016 Insolvency And Bankruptcy Code
• The code provided a uniform framework for handling insolvency and bankruptcy issues and eliminated all preceding regulations.
• It enables creditors to evaluate a debtor's commercial viability. Additionally, creditors can support the idea for the company's resurrection or suggest a hasty liquidation.
• A new judicial system is established by the Code. This approach helped with the formalization and closure of a time-limited insolvency resolution process. The following components make up the framework:
• Professionals in insolvency: They are in charge of the resolution process. They also manage the debtor's assets and give creditors information to aid in decision-making.
• Professional insolvency firms: Practitioners of insolvency will register with professional insolvency organizations. To certify insolvency professionals, exams would be given, and the agencies would enforce a code of behavior for their work.
• Information utilities: They will keep track of payments made to creditors, missed payments, and defaults on debts.
• Judgment-making bodies: They will approve the beginning of the resolution process, select the insolvency professional, and approve the final decision of the creditors.
• The Debt Recovery Tribunal (DRT) makes decisions about the debts of private individuals and partnership businesses.
• The professional organizations, information utilities, and insolvency experts established under the Code shall be governed by the Insolvency and Bankruptcy Board. The code's aim is to deal with insolvencies quickly; the evaluation and viability determination must be completed in less than 180 days.
• A 180-day moratorium (which may be extended for an additional 270 days) is in place for the Company. Startups and small firms have a 90-day resolution window that can be extended by 45 days.
Objectives of The Insolvency And Bankruptcy Code
• There should be a consolidation and amendment of the current insolvency legislation in India.
• The insolvency and bankruptcy process in India has to be streamlined and expedited.
• To protect creditors' interests, including those of the firm's stakeholders.
• A prompt resurrection of the company.
• To inspire individuals to launch enterprises.
• To offer the necessary assistance to creditors and, as a result, increase the availability of credit in the economy.
• To come up with a fresh and quick recovery method that banks, financial organizations, and people can adopt.
• To create a Board of Insolvency and Bankruptcy in India.
• Maximization of a corporation's asset worth.
IBC Bill (Amendment) To The Insolvency And Bankruptcy Code Bill, 2021
• Resolution of insolvency in a prepackaged form: The modification allows for the use of pre-packaged insolvency resolution as an alternate resolution method for MSMEs. Between Rs. 10 lakh and Rs. 1 crore is needed to start a Pre-Packaged insolvency settlement.
• The use of pre-packaged insolvency resolution options (PPIR) is permitted by Section 54A.
• In PPIR restructuring, creditors and debtors work together to create a loose plan before submitting it for approval.
• Under this strategy, financial creditors will agree to the terms of a potential investor.
• Additionally, they will ask the National Company Law Tribunal (NCLT) for approval of the settlement proposal.
• Financial creditors' approval: However, the resolution plan cannot be submitted to NCLT directly. A resolution plan must receive the blessing of at least 66 percent of unaffiliated financial creditors before it can be submitted.
• A request for PIRP may be made in the case that there has been a default of at least one lakh rupees. The national government could increase the minimum default level to one crore rupees by issuing a notification.
• Moratorium: During the PIRP procedure, the debtor will be given a moratorium, during which time certain actions against the debtor are prohibited. Court orders may be followed, lawsuits may be initiated or continued, and property may be reclaimed.
• Launch of CIRP: The NCLTs must assess a pre-packaged insolvency process before approving a Corporate Insolvency Resolution Process (CIRP).
• CIRP is defined as the process of resolving corporate insolvency in compliance with the Insolvency and Bankruptcy Code, 2016, and its provisions.
• Benefits of the Bankruptcy and Insolvency Code - Benefits of a Quicker Resolution: More than 86% of ongoing bankruptcy resolution procedures had surpassed the 270-day threshold as of December 2020.
• On the other hand, the PPIR process is only allowed a maximum of 120 days. Additionally, before the NCLT, the stakeholders only have 90 days to propose a settlement proposal.
• Greater Debtor Independence The current management still has jurisdiction in pre-packs. On the other side, a resolution specialist takes control of the debtor on behalf of the creditors. This results for the debtor in a solution that is both economical and valuable.
• Prevents system abuse by rogue promoters: Financial creditors have robust consent rights under the PPIR. For instance, at least 66% of financial creditors must consent to a resolution plan before it can be submitted. As a result, financial creditors cannot take advantage of the system.
• A just conclusion: The amendment makes sure that creditors and debtors both participate in the resolution procedure. This method differs from the prior one. Because creditors receive excessive attention in the settlement under the IBC 2016.
• PPIR lessens the likelihood of liquidation, preventing employment losses. As a result, business continuity is assured and the number of employee layoffs is decreased.
Challenges With The Insolvency And Bankruptcy Code
• Poor Approval Rate: From 2016 to 2019, just 15% of corporate bankruptcy cases were approved by NCLT, according to data from the IBBI (bankruptcy and Bankruptcy Board of India).
• Putting more of an emphasis on liquidation: The IBC wanted to promote enterprise and resolution. IBC, on the other hand, gave liquidation more of a priority. The potential for economic growth is thus constrained.
• In 2019, about one-third of all business disputes that were filed for settlement ended in liquidation.
• Supreme Court ruling: If the 270-day threshold was crossed, the government had imposed a statutory deadline of 330 days. However, the SC lowered the requirement that the CIRP be "mandatorily" addressed within 330 days in the Essar Steel insolvency case. The PPIR process deadline may also be broken using this choice.
• Insufficient Resources: The government planned to add 25 new single and division benches to the NCLT in July 2019. They were established all over the world, including Delhi, Jaipur, Kochi, and other cities. However, the majority of these continue to be non-operational or only partially functioning due to a lack of necessary infrastructure and support personnel.
Increased NCLT benches are required, as well as the appointment of additional skilled professionals. The IBC platform will be used as a resolution tool rather than a recovery tool as a result of this. Alternative dispute resolution procedures such Lok Adalat, Arbitration, and others should also be made known to the public. As a result, insolvency tribunals might be able to handle less work. The government may expel businesses from the NCLT that do not possess tangible assets, such as those in the building and energy industries. When looking for IBC, this would save these firms time and money.