IBC Lawyers Insolvency and Bankruptcy Code Advocates IBC Insolvency and Bankruptcy Code Advocate India: What is Insolvency And Bankruptcy Code? Definition of Bankruptcy: The legal status of an entity or a person where the debt owed to the creditors cannot be repaid is known as Bankruptcy. A court order imposes bankruptcy in most of the jurisdictions. It is mostly initiated by the debtor. It is important to note that bankruptcy is not synonymous with insolvency. It is not the only legal status that could be applicable to an insolvent individual or an entity. In countries like the UK, bankruptcy is exclusive to individuals. Liquidation, administration and other such insolvency proceedings are applicable to entities and companies. The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Objectives of IBC To consolidate and amend all existing insolvency laws in India. To simplify and expedite the Insolvency and Bankruptcy Proceedings in India. To protect the interest of creditors including stakeholders in a company. To revive the company in a time-bound manner. To promote entrepreneurship. To get the necessary relief to the creditors and consequently increase the credit supply in the economy. To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals. To set up an Insolvency and Bankruptcy Board of India. Maximization of the value of assets of corporate persons. IBC – What does the Code aim to do? The 2016 Code provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency within 180 days. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency. Who facilitates the insolvency resolution under the Code? The Insolvency Professionals: These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making. Insolvency Professional Agencies: insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance. Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults. Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors. Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. What is the procedure to resolve insolvency in the Code? The Code proposes the following steps to resolve insolvency: Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The decision to resolve insolvency: A committee consisting of the financial creditors will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation. Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the already established order of precedence. Insolvency and Bankruptcy Code (IBC) 2016 was implemented through an act of Parliament. It got Presidential assent in May 2016. Centre introduced the IBC in 2016 to resolve claims involving insolvent companies. The bankruptcy code is a one stop solution for resolving insolvencies, which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. The IBC has 255 sections and 11 Schedules. IBC was intended to tackle the bad loan problems that were affecting the banking system. The IBC process has changed the debtor-creditor relationship. A number of major cases have been resolved in two years, while some others are in advanced stages of resolution. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency. Under IBC, debtor and creditor both can start ‘recovery’ proceedings against each other. Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections on the extension. For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn’t happen the company goes for liquidation. What is the Insolvency and Bankruptcy Code (IBC)? In a growing economy like India, a healthy credit flow and generation of new capital are essential, and when a company or business turns insolvent or “sick”, it begins to default on its loans. In order for credit to not get stuck in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible from the defaulter and as quickly as they can. What is the process followed under the IBC? When a corporate debtor (CD), or a company which has taken loans to run its business, defaults on its loan repayment, either the creditor (a bank or an entity that has lent money for operational purposes) or the debtor can apply for the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 6 of the IBC. Earlier, the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh, but considering the stress on companies amid the pandemic, the government increase the minimum amount to ₹1 crore. To apply for insolvency, one has to approach a stipulated adjudicating authority (AA) under the IBC— the various benches of the National Company Law Tribunal (NCLT) across India are the designated AAs. ALSO READ Need framework to study impact of insolvency law: Corporate Affairs Secretary The Tribunal has 14 days to admit or reject the application or has to provide a reason if the admission is delayed. The CIRP or resolution process begins once an application is admitted by the AA. The amended mandatory deadline for the completion of the resolution process is 330 days. Once the application is admitted, the AA appoints an interim resolution professional (IRP), registered with an insolvency professional agency (IPA). IRPs could be experienced and registered chartered accountants, company secretaries, lawyers and so on. Once appointed by the Tribunal, the IRP takes control of the defaulter’s assets and operations, collects information about the state of the company from Information Utilities (repositories keeping track of the debtor’s credit history), and finally coordinates the constitution of a Committee of Creditors or a CoC. A CoC, comprising all (unrelated) financial creditors of a defaulting company, is the most important business decision-making body in every CIRP, as it decides whether the defaulting company is viable enough to be restructured and given a fresh start, or liquidated. It also appoints an insolvency professional (IP), who can either be the same as the IRP or a new professional, who looks after the operations of the company during the CIRP. The IP invites and examines proposals for a resolution plan for a company, which could include restructuring of debt, merger or demerger of the company. It submits eligible plans to the CoC, which can approve a plan if it receives 66% of the voting share of committee members. If the CoC fails to approve any resolution plan, the company goes for liquidation. If a plan is approved, the CoC submits it to the Tribunal (before the maximum 330-day deadline), which then approves the plan which the debtor is bound to implement. The AA can also reject a plan. In July this year, the IBC was amended to introduce pre-packs or pre-pack insolvency resolution process (PIRP) for Micro, Small, and Medium Enterprises (MSMEs).. Under a pre-pack resolution, creditors and owners of a business agree out-of-court to sell the business to an interested buyer. The buyer may be a third party or someone related to the business. The current law limits the pre-pack resolution mechanism to defaults not exceeding Rs. 1 crore. The Insolvency and Bankruptcy Board of India was established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code). It is a key pillar of the ecosystem responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It is a unique regulator: regulates a profession as well as processes. It has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies, Insolvency Professional Entities and Information Utilities. It writes and enforces rules for processes, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code. It has recently been tasked to promote the development of, and regulate, the working and practices of, insolvency professionals, insolvency professional agencies and information utilities and other institutions, in furtherance of the purposes of the Code. It has also been designated as the ‘Authority’ under the Companies (Registered Valuers and Valuation Rules), 2017 for regulation and development of the profession of valuers in the country.
Insolvency and Bankruptcy Code, 2016
Insolvency and Bankruptcy Code, 2016
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