Everything You Need To Know About Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, or IBC, is a bankruptcy legislation established by Parliament in 2016. It consolidated prior principles and rules to produce unified bankruptcy legislation.

The IBC's primary goal is to safeguard corporate-indebted individuals in difficulties. Individuals, corporations, and partnership businesses are all included. The Code specifies a time-bound bankruptcy determination procedure, which must be completed in 330 days for any case. The instances with effective resolutions show that the IBC's aims have been met. Despite the fact that the number of firms in liquidation is approximately four times that of those protected, the resources of the 250 protected companies are more than those of the 955 companies in liquidation.

The Insolvency and Bankruptcy Code

The Indian Insolvency & Bankruptcy Code (IBC) was mandated to strengthen an already inadequate framework. Before the introduction of the legislation, it took a long time for a firm to dissolve, which frequently caused issues in lengthy litigation. As a result, the Bankruptcy Law Reforms Committee was established in 2014. Finally, in 2016, the transformation was realised with the approval of the IBC (IBC), bringing an end to a defaulters' paradise. The Committee conveyed that haste was critical in order to reduce the need for liquidation and ensure optimal rehabilitation.
 

Working of Insolvency and Bankruptcy Code

The Insolvency & Bankruptcy Board of India guides the IBC processes. The IBBI comprises 10 people who work as facilitators in financial services, legal services, and the RBI. According to the Insolvency and Bankruptcy Code basic legislation, the diverse board can make thorough and knowledgeable decisions for a successful resolution.

IBBI appoints Insolvency Professionals (IPs) who help in the proceedings as licenced professionals by managing the debtor's assets and guaranteeing the flow of information between creditors and debtors to make better judgments.

The code provides two quasi-judicial agencies or tribunals for executing orders based on the interpretation of the law for adjudication of resolution processes. The National Company Law Tribunal (NCLT) is responsible for company and limited liability partnership (LLP) proceedings. Debt Recovery Tribunals (DRTs) obtain the same objectives for partnerships and individuals.

Purpose of the Code

The main purpose of the Code is discussed below-

• Improved conflict resolution between debtors and creditors:

It can provide procedural confidence regarding the negotiation process, eliminating common property concerns and knowledge asymmetry for all economic participants.

• Define the line between deceit and commercial failure:

It also allows parties to select the most cost-effective method to maximise value during conversations. The bankruptcy law will set the stage for talks between creditors and outside financiers, potentially enabling such reorganisations.

• Someone must bear the costs of macroeconomic downturns:

The stereotype of "rich promoters of insolvent enterprises" arises as a result of an unstable insolvency regime, leading to arguments like

Misconduct is at the foundation of all defaults and promoters should be held personally and financially responsible for the failures of the firms under their control.

Key Elements of Insolvency and Bankruptcy Code

The key elements of the Insolvency and Bankruptcy Code are-

Adjudicating Authority

NCLT and DRT are judicially established special organisations adjudicating insolvency and bankruptcy disputes. NCLT appeals to National Company Law Appellate Tribunal (NCLAT); after NCLAT, the parties can appeal to the Supreme court of India. Similarly, DRT appeals are heard by the Debt Recovery Appellate Tribunal before being heard by the Supreme Court of India. NCLT and DRT are distinct tribunals. NCLT is for firms and limited liability partnerships, while DRT is for unlimited liability partnerships and single proprietors.

Committee of Creditors

Section 21 of the Insolvency & Bankruptcy Code, 2016 provides for a Committee of Creditors (COC). COC comprises exclusively financial creditors. The COC's duty in the Corporate Insolvency Resolution Process is to approve or disapprove the resolution plan provided by the resolution professional (CIRP). In a COC meeting, a majority vote of 75% is necessary to adopt the resolution plan. Operational creditors are permitted to attend meetings of the committee of creditors, but they do not have voting rights.

India's Insolvency and Bankruptcy Board

The Insolvency & Bankruptcy Board of India (IBBI) was established on October 1, 2016, to regulate and prosecute different Insolvency and Bankruptcy cases submitted by financial and operational creditors, including banks in India and house purchasers. The IBBI falls under the Insolvency & Bankruptcy Code 2016.

The IBBI is the regulating authority for all bankruptcy resolution processes, professional insolvency agencies, and information utilities. Approving the list of resolution professionals is perfomed by IBBI. The Insolvency and Bankruptcy Code of 2016 also enacts and enforces laws to resolve corporate insolvency, corporate liquidation, individual insolvency, and individual bankruptcy. IBBI also contributes to the creation of new code modifications.

Insolvency professionals

There are two categories of insolvency experts: interim and insolvency professionals. The adjudicating body appoints interim insolvency professionals within 7 days of the application being allowed, and a committee of creditors appoints insolvency professionals with a 75% majority vote in the first meeting of the COC.

If the COC is not pleased with the chosen interim insolvency specialists, they can change them by applying to the adjudicating body. The adjudicating body subsequently transmits the list to the Insolvency & Bankruptcy Board of India (IBBI) for approval of the list. Suppose the board does not react within 10 days. In that case, the adjudicating authority instructs the interim insolvency professionals to continue the insolvency resolution process until the board approves the list of insolvency experts.

Who can Apply for Corporate Insolvency Resolution 

People who can apply for corporate insolvency resolution are-

Financial Creditors

According to section 5(7) of the IBC 2016, financial creditors are primarily creditors that lend money to promoters. The term "electronic commerce" refers to the sale of electronic goods. In the event of a default, the debtors take the following procedures.

• Financial creditors have the right to file an application with the adjudicating body.
• After receiving the information, the adjudicating authority has 14 days to determine the default, and the application is allowed if a default has happened.
• If there is no default, the application is refused.
• The adjudicating body must notify the financial creditors of the admission of the application within 7 days after the admission, and then the corporate insolvency resolution procedure begins.

Operational Creditors

As per Section 5(20) of the Insolvency and Bankruptcy Code 2016, operational creditors are those creditors who do not offer money or cash to the promoters but instead provide them with products and services.

• The term "independent" refers to someone who does not work for the government.
• Within 10 days of receiving notification of payback of the unpaid operational or notice of the existence of disputes, the debtor notifies the creditor.
• If the disputed payment is not received within 10 days, file an application with the adjudicating authority.
• The operational creditors then offered a resolution professional, and the adjudicating body had 14 days to accept or reject the application.
• Beginning of the insolvency resolution procedure.

Corporate Debtor

Corporate debtors are promoters who receive loans or money from financial creditors or products or services from operational creditors as debt, according to Sec 5(a) of IBC 2016. The process is as follows:

• Following a notice of default, the corporate debtor applies with the adjudicating body.
• Following the submission of information, the adjudicating body issues an order admitting or rejecting the application within 14 days.
• If the application is allowed, then the initiation of the insolvency resolution procedure takes place. Still, in case the application is refused, notice will be provided by the adjudicating body to fix the faults.

Corporate Insolvency Resolution Process

The corporate insolvency resolution process involves the following steps-

Moratorium

After the initiation of corporate insolvency resolution, the NCLT puts a moratorium on the debtor's operations for a term of 3 months. This is known as a "calm time," during which no judicial procedures for recovery, enforcement of security interests, sale or transfer of assets, or cancellation of key contracts against the debtor are permitted. 

Liquidation

If the Resolution Process fails to find a resolution for the corporate debtor within the specified time frame or if the COC does not adopt the resolution plan by a vote of at least 66% of the voting share, the corporate debtor is liquidated.

After the adjudicating authority passes an order under section 33 of the Code, the debtor goes into liquidation, the resolution professional who was appointed for the Corporate Insolvency Resolution Procedure shall act as the liquidator for the liquidation, subject to submission of written consent to the Adjudicatory Authority, unless replaced.

If the resolution professional informs the Adjudicating Authority of the judgment of the committee of creditors to liquidate the corporate debtor at any time during the corporate insolvency resolution process. Still, before confirmation of the resolution plan, the Adjudicating Authority shall pass a liquidation resolution as referred to in sub-clauses I (ii) & (iii) of clause (b) of sub-section (1) section 33 of the insolvency and bankruptcy code.
 

Benefits of Insolvency and Bankruptcy Code

The benefits of the Insolvency and Bankruptcy Code are-

Ease of conducting business - due to the accelerated insolvency resolution procedure.
Bond market expansion to boost creditors' confidence in recouping their losses from borrowers.
Improved institutional frameworks, such as the Insolvency and Bankruptcy Board of India (IBBI), the National Company Law Tribunal (NCLT), and others.
Reduction of Non-Performing Assets (NPAs) is one of the major successes of the insolvency and bankruptcy code,2016.
Professionalisation of the procedure with the assistance of a resolution specialist.
In the first two years of the insolvency and bankruptcy legislation, 1332 cases were admitted before the NCLT, while 4452 cases were disposed of in the pre-admission stage. This finally aided recovery and resulted in a settlement of roughly Rs. 2.2 lakh crore.
Many matters are resolved outside the courts through the Alternative Dispute Resolution procedure.
The term "independent" refers to someone who does not work for the government (a). Bank receives funds from potential debtors who pay in advance of default.
Defaulters understand that if they enter IBC, they will lose control of their firm according to Section 29(a); hence companies are clearing their NPAs.
No political and governmental intervention.

Need for Insolvency and Bankruptcy Code

To protect the interests of corporate borrowers and to assist those corporate people who may default on their financial commitments, the government of India introduced two modifications to the Insolvency and Bankruptcy Code, 2016.

Including the lifting of the threshold for beginning the corporate insolvency resolution procedure under Section 4 of the Code from one lakh rupees to one crore rupees, vide a notice issued by the Ministry of Corporate Affairs (MCA) dated 24 March 2020.

Section 10A of the 2016 IBC: suspension of the commencement of the corporate insolvency resolution procedure Notwithstanding anything contained in sections 7, 9, & 10 of the IBC, 2016- No application for the starting of a corporate insolvency resolution procedure of a corporate debtor shall be submitted for any default occurring on or after March 25, 2020, for six months not exceeding one year from the date of notification, i.e. 05.06.20. It is expressly stated that the provisions of this section do not apply to any default under the sections mentioned above occurring before March 25, 2020.

Conclusion

The Insolvency and Bankruptcy Code, 2016 was adopted to unify the then-existing legislation pertaining to insolvency and bankruptcy. Insolvency is a situation in which a company's financial issues are so severe that it cannot do business.

Various types of changes were required to reduce the burden of rising non-performing assets. However, a quick adjustment in the Insolvency and Bankruptcy laws was critical. As a result, the Bankruptcy Law Reforms Committee (BLRC), chaired by Mr. T.K. Viswanathan, former Union Law Secretary, was formed in 2014 with the goal of adopting an Indian Bankruptcy Code to replace the existing laws and applying to both non-financial organisations and people. In 2015, a draft of the Insolvency and Bankruptcy Code was submitted.