Insolvency & Bankruptcy Code, 2016

Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive law introduced by the Indian government to address insolvency and bankruptcy issues in a time-bound manner. Here are the key details of the Code:

Objective of the IBC

The primary objectives of the IBC are:

• Consolidation of laws related to insolvency for companies, partnerships, and individuals.
• Time-bound resolution of insolvency cases.
• Maximizing the value of assets for creditors.
• Balancing the interests of all stakeholders, including employees, shareholders, and creditors.
• Promotion of entrepreneurship by freeing up capital from unviable businesses.

Applicability

IBC applies to:

• Companies, incorporated under the Companies Act.
• Limited Liability Partnerships (LLPs).
• Partnership firms and individuals.
• It includes provisions for the resolution of insolvency cases for both corporate persons and individuals.

Key Features of the IBC

• Adjudicating Authorities: The National Company Law Tribunal (NCLT) is the authority for companies and LLPs, while the Debt Recovery Tribunal (DRT) handles individual and partnership insolvencies.

• Insolvency Resolution Process:

  • Corporate Insolvency Resolution Process (CIRP): The process begins when a company defaults on payments of ₹1 crore or more (threshold).
  • Any creditor (financial or operational), or the corporate debtor itself, can initiate CIRP.
  • The Insolvency Professional (IP) takes control of the debtor’s assets and operations.
  • The IP forms a Committee of Creditors (CoC) which is responsible for approving the resolution plan.
  • Time frame: CIRP should be completed within 180 days, extendable by 90 days.

• Liquidation Process:

  • If CIRP fails to resolve the insolvency within the stipulated time or the CoC rejects the resolution plan, the debtor is sent into liquidation.
  • The assets of the debtor are liquidated, and proceeds are distributed to creditors in the order of priority defined by the Code.

• Moratorium: Once the CIRP begins, a moratorium is declared, halting all legal actions against the debtor to prevent asset depletion during the insolvency process.

• Fast-Track Insolvency: For small companies or startups, a fast-track insolvency process can be completed in 90 days, extendable by 45 days.

Order of Priority for Debt Resolution

The IBC establishes a waterfall mechanism for debt repayment during liquidation:

1. Insolvency resolution costs.
2. Secured creditors and workmen’s dues for the preceding 24 months.
3. Unsecured financial creditors.
4. Operational creditors.
5. Government dues and remaining secured creditors.

Key Amendments and Updates

Several amendments have been made to the IBC since its introduction:

• The 2018 Amendment lowered the minimum default amount for homebuyers to file against developers and provided additional protection to financial creditors.
• The 2019 Amendment clarified the rights of financial creditors and operational creditors in decision-making.
• The 2020 Amendment raised the minimum default threshold for triggering insolvency to ₹1 crore (from ₹1 lakh) and provided immunity for corporate debtors during the COVID-19 pandemic.

Key Institutions Under IBC

• Insolvency and Bankruptcy Board of India (IBBI): A regulatory body overseeing the implementation of the IBC.
• Insolvency Professionals (IPs): Licensed professionals who manage the insolvency process.
• Information Utilities: Entities that store financial information of companies to ensure a smooth insolvency process.

Recent Reforms

• Pre-Packaged Insolvency Resolution: Introduced in 2021, pre-pack insolvency is a fast-track insolvency process for MSMEs, allowing the debtor to work out a resolution with creditors before formal proceedings.

Impact of the IBC

The IBC has been lauded for:

• Improving the ease of doing business in India.
• Helping recover large sums of money from defaulting companies.
• Bringing discipline to borrowers and fostering a culture of timely debt repayment.

However, challenges remain, such as delays in the resolution process due to high case volumes in NCLTs and issues with the implementation of liquidation proceedings.

Process of Insolvency Resolution for Corporate Persons

The IBC provides a structured mechanism for the resolution of insolvency and bankruptcy of corporate entities, which includes:

a. Initiation of Insolvency Resolution Process

• Application: An application for initiating Corporate Insolvency Resolution Process (CIRP) can be filed by:
  • A financial creditor: e.g., banks and financial institutions that have provided loans.
  • An operational creditor: e.g., suppliers or vendors with outstanding payments.
  • The corporate debtor itself: a company that declares it is unable to pay its debts.
• The application is submitted to the National Company Law Tribunal (NCLT), and once admitted, the process begins.

b. Appointment of Interim Resolution Professional (IRP)

• Upon the admission of the insolvency application by the NCLT, an Interim Resolution Professional (IRP) is appointed.
• The IRP takes over the management of the corporate debtor and assumes control over its assets, operations, and financial information.
• A moratorium is declared, which prevents creditors from filing or continuing any legal suits or enforcement actions against the company.

c. Committee of Creditors (CoC)

• The IRP forms the Committee of Creditors (CoC), consisting of financial creditors.
• The CoC decides on the key aspects of the resolution process, including the approval of the resolution plan.
• For major decisions, such as the approval of the final resolution plan or liquidation, a 75% majority vote by the CoC is required.

d. Resolution Plan

• Any resolution applicant can submit a resolution plan, which outlines how the company’s debt will be restructured, repaid, or converted into equity.
• The plan must prioritize payment to operational creditors and must also comply with regulations regarding fairness to all stakeholders.
• The CoC evaluates the resolution plans and selects the one that maximizes asset value and offers a feasible business revival for the corporate debtor.

e. Approval of the Resolution Plan

• Once a plan is approved by the CoC, it is submitted to the NCLT for final approval.
• If the NCLT approves the plan, the company is resolved as per the terms of the plan.
• If no resolution plan is approved within the prescribed timeline, the company is sent into liquidation.

Individual Insolvency Process

The IBC also applies to individuals and partnerships, particularly for resolving insolvency cases for businesses that are not companies. The process includes:

• Fresh Start Process: Available to individuals with limited assets and income who cannot repay their debts. Under this, eligible individuals are allowed a debt waiver of specified debts.
• Insolvency Resolution Process: This process allows an individual to work out a plan with creditors to pay off debts.
• Bankruptcy Process: If a resolution plan cannot be worked out, the debtor is declared bankrupt, and their assets are liquidated to repay the creditors.

Pre-Packaged Insolvency Process

A notable feature introduced in 2021 is the Pre-Packaged Insolvency Resolution Process (PIRP), which is aimed at MSMEs (Micro, Small, and Medium Enterprises). This fast-track process allows:

• A debtor-initiated process, where the corporate debtor proposes a resolution plan to creditors before entering formal insolvency proceedings.
• It reduces the burden on courts and is completed in 120 days.

Cross-Border Insolvency

IBC currently does not have comprehensive provisions for cross-border insolvency, but there are efforts underway to address this gap. India is considering adopting the UNCITRAL Model Law on Cross-Border Insolvency, which provides a framework for dealing with insolvencies that involve assets or creditors in more than one country.

Sinificant Case Studies Under IBC

The IBC has played a pivotal role in resolving some of India’s biggest insolvency cases, which highlight its effectiveness and challenges:

a. Essar Steel Case

• One of the most high-profile cases under the IBC, it involved the insolvency of Essar Steel, one of India’s largest steel producers.
• After a long legal battle, the ArcelorMittal-Nippon Steel consortium took over Essar Steel in a deal worth ₹42,000 crore, making it one of the largest resolutions under the IBC.

b. Bhushan Power & Steel

• Another major case involved Bhushan Power & Steel, which was acquired by JSW Steel for ₹19,700 crore after several delays.

c. Jet Airways

• The airline entered the insolvency process after failing to pay off its debts.
• A consortium of investors led by Kalrock Capital and Murari Lal Jalan was selected as the winning bidder in the resolution process.

Challenges in Implementation

While the IBC has brought significant reform to the insolvency and bankruptcy landscape, several challenges remain:

• Overburdened NCLTs: Due to the increasing number of insolvency cases, NCLTs face delays in processing and resolving cases.
• Liquidation over resolution: Many companies that enter the insolvency process end up in liquidation, meaning asset sale rather than revival, which may not be the ideal outcome for creditors.
• Operational creditors: In some cases, operational creditors (like vendors and suppliers) have argued that the resolution process gives more priority to financial creditors, sidelining them.
• Time-bound resolution: Though the law mandates resolution within 180 to 330 days, the reality is often extended due to litigation, challenges, or lack of resolution plans.

Future Outlook and Reforms

Several reforms and changes are being discussed to make the IBC more effective:

• Strengthening the infrastructure of NCLTs by increasing the number of benches and appointing more judges to reduce case backlog.
• Framework for cross-border insolvency to allow smoother resolution of cases involving international entities.
• Increased focus on MSMEs: With the introduction of the pre-pack insolvency framework, there’s a push to further tailor the IBC for small businesses.

Important Definitions in IBC

• Insolvency: When a person or entity is unable to pay their debts as they come due.
• Bankruptcy: A legal process where an insolvent entity is declared bankrupt, and its assets are liquidated to pay off creditors.
• Financial Creditor: A person or institution that has given a loan or financial assistance to a debtor.
• Operational Creditor: A person or entity to whom the debtor owes payment for goods or services.
• Resolution Professional: An individual licensed by the Insolvency and Bankruptcy Board of India to manage the resolution process.

Legal Framework

IBC is supported by various rules and regulations issued by the Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India (IBBI). The IBC, being a dynamic law, is frequently amended to address gaps and improve its effectiveness.