The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the significant pieces of legislation, aimed at consolidating and amending the laws concerning insolvency resolution in a time-bound manner. Some of the key aspects are:
- Objective: The primary objective of IBC mainly considers the consolidation and amendment to the laws relating to reorganization as well as the insolvency resolution of corporate debtors/persons, partnership firms, and individuals. Also, it strives to provide such resolutions in a time-bound manner in order to provide maximization of value of corporate debtor’s assets, promotion of entrepreneurship, credit availability and most importantly the balancing of interests of all stakeholders.
- Applicability: The IBC applies to companies, limited liability partnerships, and other entities specified by the government.
- Insolvency Resolution Process (IRP): The IBC is a time-bound process for resolving the insolvency. Upon default, creditors or the debtor themselves may initiate the insolvency resolution process (IRP).
- National Company Law Tribunal (NCLT): For the better implementation of IBC, the NCLT plays a very crucial role. It is responsible for admitting or rejecting insolvency applications, appointing insolvency professionals, and overseeing the insolvency resolution process.
- Insolvency Professional (IP): An Insolvency Professional is a professional, appointed by the Hon’ble NCLT, for the management of the affairs of the corporate debtor, and make it run as a going concern, during the insolvency resolution process. They act as intermediaries between creditors and the debtor.
- Liquidation: If the insolvency resolution process fails, the entity goes into liquidation. The proceeds from the liquidation are distributed in a specified order of priority among creditors.
- Amendments and Challenges: Since its enactment, the IBC has undergone several amendments to address practical challenges and improve its effectiveness.
Now, lets discuss the above aspects of IBC in detail –
Objective
Insolvency and Bankruptcy Code, 2016 aimed to consolidate and also to amend the laws pertaining to insolvency resolution of corporate debtors/persons, partnership firms, and individuals. Its primary objectives include:
- Time-bound resolution process for insolvency and bankruptcy cases
- Maximization of value of assets
- Promotion of entrepreneurship
- Availability of credit
- Balancing of the interests of all stakeholders, including the creditors and debtors.
Applicability
The IBC applies to the following entities:
- Companies (including registered companies, limited liability partnerships, and any other body incorporated under any law for the time being in force)
- Partnership firms
- Individuals
Key Provisions
1. Insolvency Resolution Process (IRP)
- Initiation: The IRP can be initiated by the creditors of the corporate debtors, consisting of the financial creditors, operational creditors, or the corporate debtor itself.
- Moratorium: Once initiated, a moratorium period is imposed to prevent any legal action against the debtor.
- Resolution Plan: An insolvency professional manages the process and invites resolution plans from prospective resolution applicants.
- Adjudication: The National Company Law Tribunal (NCLT) adjudicates on the approval of the resolution plan.
2. Liquidation
- If the resolution plan is not approved or implemented within the prescribed time, the company goes into liquidation.
- Under this, the liquidation proceeds are to be distributed among the creditors of the corporate debtor in a specific order of priority.
3. Insolvency Professionals (IP)
- IPs are licensed professionals who manage the affairs of the debtor during the insolvency process.
- They act as intermediaries between creditors and the debtor.
4. Adjudicating Authorities
- The IBC has undergone several amendments since its enactment to address operational challenges and improve efficiency.
Benefits
- Provides a time-bound process for resolving insolvency, enhancing predictability for creditors and debtors.
- Promotes a culture of entrepreneurship by allowing businesses to exit in a timely manner.
- Enhances the availability of credit in the economy by improving the recovery prospects for creditors.
Challenges
- Operational challenges in the implementation of the resolution process.
- Legal complexities and judicial interpretation issues.
- Balancing of the interests of various stakeholders, including operational creditors, workmen/employees and even the promoters.
Impact
- The IBC has significantly streamlined the insolvency resolution process in India, marking a shift towards a creditor-friendly regime.
- It has facilitated faster resolution of stressed assets and improved the recovery rate for creditors.
Overall, the IBC, 2016 represents a significant reform aimed at addressing the long-standing issue of insolvency and bankruptcy in India by providing a structured and time-bound process for resolution, thereby promoting ease of doing business and enhancing creditor rights.
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The IBC is a comprehensive law enacted in 2016 to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. It aims to maximize asset value, promote entrepreneurship, and balance the interests of all stakeholders, while also promoting ease of doing business.
- Early identification of financial distress.
- Consolidated and streamlined insolvency and bankruptcy resolution processes.
- Maximize value of assets of the insolvent entity.
- Promote entrepreneurship by allowing for easier exit.
- Provide a robust legal framework to resolve insolvencies in a time-bound manner (typically within 180-270 days).
- Protect the interests of creditors.
Under the IBC, a financial creditor, an operational creditor, or the corporate debtor itself can initiate the CIRP when a default of Rs. 1 crore or more occurs (threshold as of 2021, subject to updates).
Insolvency Professional or IPs are licensed professionals who manage the affairs of the debtor during the insolvency process, acting as an intermediary between creditor and debtor.
Pre-packaged insolvency is a quicker and more cost-effective insolvency resolution process introduced for MSMEs. It allows the debtor and creditors to negotiate and finalize a resolution plan before formally initiating the insolvency proceedings.
Yes, the IBC covers individuals and partnership firms. However, the provisions for individuals and partnership firms have not yet been fully operationalized for all types of debtors.
The IBBI is the regulator for overseeing insolvency professionals, insolvency professional agencies, and information utilities under the IBC. It also frames and enforces rules and regulations for the efficient working of the insolvency and bankruptcy resolution processes.
The IBC has improved India’s business environment by providing a time-bound insolvency resolution framework, which has helped improve the ease of doing business, increase creditor confidence, and promote restructuring over liquidation.
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