Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016

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Be it your UPSC or law exam, have the complete knowledge of IBC 2016 in the simplest way, right here!

[Background- What – Need- Success- Procedure – Analysis]

The Insolvency and Bankruptcy Code has come as a revolution in the world of business. The business world is as risky as it’s profitable. As the right to enter and do business led to growth and development, the absence of the right to exit led to the accumulation of abundant debts, and nonperforming assets in India. The shame attached to bankruptcy in India has to lead to a profusion of non-performing assets, and unethical means to save businesses.

WHAT IS IBC?

The Insolvency and Bankruptcy Code is a single law that lays down complete laws, regulations, and procedures to deal with the insolvent proceedings of an individual, corporate, and partnership firms of India. It was introduced by venerated late Arun Jaitley, then Finance Minister, which came into effect from 28th May 2016. Earlier the debtor (the default) was in control of the bankruptcy procedure and the company, the code made debtors in power. After the case is accepted, the Insolvency Professional is made in-charge of the company.

DIFFERENTIATING INSOLVENCY AND BANKRUPTCY

Insolvency is the incapability of a people to pay back their dues, while bankruptcy is a legal declaration of someone’s inability to pay their creditors. The only difference is of a legal declaration in both the terms. An insolvent person might be able to pay in the future, but a declaration of bankruptcy acknowledges that the person is not capable of paying by any means, hence makes the government responsible for paying his/her dues now. (by their property or confiscation )

WHAT WAS THE NEED OF IBC IN INDIA?

1) Multiple Laws

2) Long-period for liquidation

3) Locked Up Assets

4) Stagnant Economy

Due to the long judicial system, and the bankruptcy process in control of the debtors, the cases would continue for years and years, logjammed. There would be no outcome, creditors money would remain stuck. Thousands of such cases lead to a stagnant economy. Even after years when the case would resolve, the value of assets would drop-down. For example, if a case was filed in 2016, and the debtor’s assets could reimburse  10 crores. But due to a delay in resolution until 2020, the value of assets fell to 3 crores due to various economical reasons. In a World Bank’s report, the average time taken in India for the resolution of bankruptcy cases was 4 years in 2016. The non-performing assets amounted to 6 lakh crores in 2016, in India, which had increased by approximately 7% from 2011.

HOW DOES IBC WORK?

(Procedure, what are IBBI, NCLT, DRT)

Insolvency and Bankruptcy Board of India, a statutory body (IBBI) was established on 1st October 2016 under IBC. The role of IBBI is to oversee, regulate the mechanism of insolvency and bankruptcy in India. All individuals, Companies, Limited Liability Partnerships and Partnership firms of India, except financial institutions are covered by IBBI.

Creditors, debtors, either an individual or company or a firm can file for bankruptcy. Corporate companies have to file in the National Company Law Tribunal (NCLT) and individuals have to file in Debt Recovery Tribunal (DRT) for bankruptcy.  NCLT and DRT are law adjudicators, while NCLT is a resolution tribunal, DRT is a recovery tribunal, according to the authors of IBC.

  • After filing for bankruptcy in NCLT or DRT as required, they need to accept or reject the case in 14 days.
  • As soon as the tribunals accept the case, Insolvency Professional is appointed, who sends a message to all the creditors- financial and operational and forms a committee of creditors.
  • After the formation of the committee, discussions on how to settle the debt are held. Insolvency Professional makes a debt recast plan.[If they don’t reach a consensus, IP suggests adjudicators for liquidation]
  • The above activities are supposed to be done within 330 days. (It was initially 270 days, IBC Amendment 2019 changed it to 330 days)
  • The IP conveys the decision to adjudicating authorities, who then signs an order, to put it into effect.
  • Companies can go to National Company Law Appellate Tribunal to register appeals against the NCLTs ruling.

STUNNING SUCCESS OF IBC SINCE 2016

IBC reduced the time taken in completing the bankruptcy process exceptionally. Navrang Saini, a member of the board of IBBI in a seminar stated that ” In liquidation, the average time taken is 311 days, compared to the earlier regime, when it would take much longer (nearly 8-10 years)”. He said that behavioral changes have been seen in debtors, as they turned more diligent in their workings, for the fear of insolvency.

India’s rank in resolving insolvency climbed up to 52 in 2019 from 136 in 2016. He also said that NPAs have reduced from ₹54 lakh crore in 2014 to ₹20 lakh crore presently. The NPAs have declined to 10% from the previous year’s 11.5 in March 2019.

Under this unified code, 75 crores were recovered in the fiscal year 2019, twice the amount recovered by earlier laws.

CONCLUSION

The Insolvency and Bankruptcy Code is a landmark reform in legislation, but inchoate and still learning from the shortcomings. UK’s bankruptcy laws are considered to be the best in the world. IBC like the UK’s law puts creditors in power, provides a moratorium period, and puts Insolvency professionals in charge of the company. Unlike UK’s law, it does not recognize operational creditors while voting for a resolution in the Committee of Creditors. However, several amendments were made later to fill the loopholes.

Its time-bound rule has been significant in solving the cases quickly while some do think that it is quite stringent. Overall it has remarkably benefited in speedy recovery of blocked assets and improved the ease of doing business in India.

This blog is written by Dharna Prasad, Hindu College.

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