The Insolvency and Bankruptcy Code (IBC) is a one-stop solution for resolving insolvencies, which was formerly a time-consuming process with no economically acceptable remedy. The IBC strives to protect small investors' interests while also making the business process easier. There are 255 sections and 11 schedules in the IBC.

In this article, let us see the meaning of IBC, IBC 2016, changes to IBC and its challenges. Insolvency and Bankruptcy Code is an important topic for the UPSC IAS Exam.

What is the Insolvency and Bankruptcy Code?

• The Insolvency and Bankruptcy Code, 2016 (IBC) is India's bankruptcy law, which aims to unify the existing framework by establishing a single insolvency and bankruptcy law.
• Insolvency is a condition in which a debtor is unable to pay his/her debts.
• Bankruptcy is a legal process that involves an insolvent person or company that is unable to pay its debts.
• It establishes clearer and faster insolvency procedures to assist creditors, such as banks, in recovering debts and avoiding bad loans, which are a major drag on the economy.
• It is an all-encompassing insolvency code that applies to all businesses, partnerships, and individuals (other than financial firms).

Insolvency and Bankruptcy Code 2016

• The code repealed all previous legislation and established a standardised framework for resolving insolvency and bankruptcy cases.
• It enables creditors to analyse a debtor's viability as a business decision. Furthermore, creditors might either agree to the plan for its resurrection or propose a quick liquidation.
• The Code establishes a new legal structure. This framework aided in the formalisation and liquidation of an insolvency resolution process that was time-bound. The framework consists of the following elements:
  • Insolvency Professionals: They will be in charge of the resolution procedure. They also handle the debtor's assets and provide information to creditors to help them make decisions.
  • Insolvency Professional Agencies: Insolvency practitioners will be registered with professional agencies for insolvency. Exams would be conducted to certify insolvency specialists, and a code of behaviour for their performance would be enforced by the agencies.
  • Information utilities: They will maintain track of debts owed to creditors, as well as repayments and debt defaults.
  • Adjudicating authorities: They will sanction the start of the resolution procedure, appoint the insolvency professional, and sign off on the creditors' ultimate judgement.
    • The National Company Law Tribunal (NCLT) is the deciding authority for corporations and limited liability firms.
    • Individuals and partnership firms have their debts adjudicated by the Debt Recovery Tribunal (DRT).
  • The Insolvency and Bankruptcy Board will oversee insolvency experts, professional agencies, and information utilities established under the Code.

• The goal of the code is to address insolvencies in a timely way; the evaluation and viability determination must be done within 180 days.
• The Company is subject to a 180-day moratorium (which can be extended up to 270 days). The resolution time frame for startups and small businesses is 90 days, which can be extended by 45 days.

Insolvency and Bankruptcy Code - Objectives

• All existing insolvency laws in India should be consolidated and amended.
• Insolvency and bankruptcy proceedings in India should be made simpler and faster.
• To safeguard the interests of creditors, including firm stakeholders.
• To resurrect the business in a timely manner.
• To encourage people to start businesses.
• To provide creditors with the required relief and, as a result, enhance the credit supply in the economy.
• To devise a new and timely recovery technique that banks, financial institutions, and individuals can use.
• To establish an Indian Insolvency and Bankruptcy Board.
• Maximization of the value of a corporation's assets.

Insolvency and Bankruptcy Code (Amendment) Bill, 2021

• Pre-packaged insolvency resolution: Pre-Packaged insolvency resolution can now be used as an alternative resolution process for MSMEs, according to the amendment. The amount required to initiate a Pre-Packaged insolvency resolution is between Rs 10 lakh and Rs 1 crore.
• Section 54A: It enables the adoption of pre-packaged insolvency resolution options (PPIR).
  • PPIR is a type of restructuring in which creditors and debtors collaborate on an informal plan before submitting it for approval.
  • Financial creditors will consent to the terms of a possible investor under this method.
  • They will also seek clearance from the National Company Law Tribunal for the settlement plan (NCLT).
• Approval of financial creditors: The resolution plan, however, cannot be submitted directly to NCLT. Before submitting a resolution plan, it must be approved by a minimum of 66 per cent of financial creditors who are unrelated to the corporate debtor.
• Minimum default amount: In the event of a default of at least one lakh rupees, an application for PIRP can be submitted. By issuing a notification, the national government could raise the minimum default level to one crore rupees.
• Moratorium: The debtor will be granted a moratorium during the PIRP process, during which certain measures against the debtor will be forbidden. Suits can be filed or continued, court orders can be carried out, and property can be recovered.
• Initiation of CIRP: Before allowing a Corporate Insolvency Resolution Process (CIRP), the NCLTs must evaluate a pre-pack insolvency process.
  • The Insolvency and Bankruptcy Code, 2016, defines CIRP as the process of resolving corporate insolvency in accordance with its provisions.

Insolvency and Bankruptcy Code - Benefits

• Faster Resolution: As of December 2020, over 86 percent of current bankruptcy resolution processes had passed the 270-day mark.
  • The PPIR procedure, on the other hand, is limited to a maximum of 120 days. Furthermore, the stakeholders have only 90 days to submit a settlement plan before the NCLT.
• Greater Debtor Autonomy: In the event of pre-packs, the present management retains authority. A resolution professional, on the other hand, assumes control of the debtor as a representative of financial creditors. For the debtor, this leads in a cost-effective and value-maximizing solution.
• Prevents errant promoters from abusing the system: The PPIR offers financial creditors strong consent rights. For example, before submitting a resolution plan, it must have approval from at least 66 per cent of financial creditors. This prohibits financial creditors from abusing the system.
• A fair resolution: The amendment ensures that both debtors and creditors have a role in the resolution process. This is a departure from the previous strategy. Because the IBC 2016 places an overabundance of emphasis on creditors in the settlement.
• Prevents job losses: PPIR reduces the likelihood of liquidation. As a result, company continuity is ensured, and worker layoffs are reduced.

Insolvency and Bankruptcy Code - Challenges

• Poor Approval Rate: According to data from the IBBI (Insolvency and Bankruptcy Board of India), NCLT approved just 15% of corporate insolvency cases from 2016 to 2019.
• Greater emphasis on liquidation: The IBC's goal was to encourage entrepreneurship and resolution. IBC, on the other hand, placed a greater emphasis on liquidation. This limits the country's economic potential.
  • Almost a third of all business cases filed for resolution in 2019 ended up in liquidation.
• Supreme Court Judgement: The government had set a mandatory deadline of 330 days if the 270-day mark was breached. However, in the Essar Steel insolvency case, the SC reduced the requirement that the CIRP be resolved "mandatorily" within 330 days. This decision can also be used to violate the PPIR process deadline.
• Deficiency in Resources: In July 2019, the government intended to install 25 more single and division benches to the NCLT. They were founded in a variety of locations, including Delhi, Jaipur, Kochi, and others. However, due to a lack of suitable infrastructure and adequate support people, the majority of these remain non-operational or partially operational.

Conclusion

The number of NCLT benches must be increased, and more qualified specialists must be appointed. This will ensure that the IBC platform is used as a resolution tool rather than a recovery tool. People should also be informed of alternative dispute resolution methods such as Lok Adalat, Arbitration, and so on. Insolvency tribunals may be able to lessen their workload as a result of this. Companies that do not have physical assets, such as construction and power, can be placed outside the NCLT by the government. This would save these corporations money and time when it came to seeking IBC.