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Insolvency and Bankruptcy Code, 2016- An insight



Insolvency and Bankruptcy Code 2016 has been enacted to be the fasted mechanism to redress the distressed corporate entities.Previous to IBC, there were various legislations dealing with insolvency and restructuring procedures of corporate bodies, partnership firms, and individual entities, such as the Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993.By lapse of time the new Act was felt to be the need of the hour for addressing the challenges in this area.


The earlier laws were often complex and failed to address timely resolution for the distressed corporate entities, leading to the devaluation of the assets of the borrower and failing the whole process of insolvency proceedings. The Insolvency and Bankruptcy Code 2016 was introduced to address these issues and encourage entrepreneurship and innovation by providing a simpler and more efficient framework for insolvency and bankruptcy proceedings. It has provided a structured and time-bound process for resolving insolvency, which was previously a lengthy and cumbersome process.


The Insolvency and Bankruptcy Code 2016 deals with provisions of bankruptcy, which is a state when an individual or organization fails to repay its creditors and provides a framework for the recovery of the debt. The IBC is applicable to both, organizations as well as individuals. When a corporate body fails to repay loans, the insolvency proceeding is known as corporate insolvency.


The Insolvency and Bankruptcy Code 2016 aims to make the process of liquidation more efficient and handles it rapidly and swiftly. A collective mechanism for resolution of insolvencies has been laid down in the IBC 2016 for preserving the economic value of the process in a time-bound manner. The IBC provides a time-stipulated process by which creditors and borrowers must take decisions within a time frame of 180 days. In case of a default in repayment, the creditor gains control over the borrower’s assets, and both parties take decisions to resolve the insolvency.


Under the Insolvency and Bankruptcy Code 2016, when there is a default by the corporate debtor, the financial creditor, operational creditor, or the corporate applicant (according to Section 7, 8 & 10 respectively) may initiate the corporate insolvency resolution process.


A creditor, in case of default by the debtor, may submit a notice to the debtor along with a copy of invoices stating the amount involved in the default. A financial creditor may either by itself or jointly with other financial creditors file an application against the corporate debtor for the resolution process before the Adjudicating Authority, provided it should conform to the terms of the resolution plan which was approved by the authority.


When a Financial Creditor files an application for Corporate Insolvency Resolution Process (CIRP), they must propose the name of an Interim Resolution Professional (IRP). The NCLT/DRT will then admit the application within 14 days of receipt, after looking into the existence of default.


In case the Creditor is an Operational Creditor, they are required to send a demand notice or invoice demanding payment of the default to the Corporate Debtor. The Debtor is then required to deliver the disputed records, suit or arbitration proceedings or proof of payment within 10 days. If the Debtor fails to do so, the Creditor can file an application before the adjudicating authority, who may admit or reject the application within 14 days of receipt.


To summarize, after the application for Corporate Insolvency Resolution Process (CIRP) is accepted, a moratorium is issued which stays all pending suits against the Corporate Debtor and prevents any fresh suits from being filed. An Interim Resolution Professional (IRP) is appointed to draft a plan of resolution within 180 days, which can be extended by 90 days. The Committee of Creditors (CoC) is formed under section 18(c) of the Code and consists only of Financial Creditors as given under section 21(2) of the Code. CIRP must be completed within 180 days from the 'insolvency commencement date', with a single extension of up to 90 days. For start-ups and micro and small companies, the resolution time period is 90 days and can be extended by 45 days at the discretion of the Adjudicating Authority.


The Insolvency Professional who acts as the liquidator under Section 34 of the Code is responsible for administering the liquidation process if the debtor goes into liquidation under Section 33. They are also responsible for appointing two registered valuers for evaluating the assets, consolidating, verifying, admitting, and determining the claims of the creditors.


It is important to note that the IBC restricts the Insolvency Professional from selling the Corporate Debtor's property to any person who is ineligible to be a resolution applicant, in order to prevent any potential conflicts of interest. This ensures that the sale of assets is done in a fair and transparent manner.


Conclusion


This enactment has brought drastic changes in the commercial laws of India and has been instrumental in addressing the issue of non-performing assets.The Code has also helped in promoting entrepreneurship and ease of doing business by providing an efficient exit mechanism for failed businesses. It has enabled faster resolution of cases, which has helped in freeing up resources and capital that were earlier stuck in non-performing assets. This, in turn, has led to the creation of new investment opportunities and has given a boost to the economy.


There still exists some challenges in implementing this new law. The main hurdle being faced is the interpretation of some of the provisions like the applicability of the IBC law on Personal Guarantors which is still under challenge and review before Hon’ble Supreme Court. Lack of infrastructure and adequate number of professionals in this field is also an impediment.


Despite these challenges, the Insolvency and Bankruptcy Code remains an important instrument for addressing the issue of non-performing assets and promoting economic growth in India. Its success will depend on effective implementation and continuous improvements to address the challenges faced by the stakeholders involved.

 

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