IBC Regulation

IBC Regulation

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive legislation in India that consolidates and amends laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. Its objective is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders, including the debtor, by focusing on early identification of financial distress and ensuring maximum value of assets.

Key Features of the Insolvency and Bankruptcy Code (IBC), 2016:

1. Applicability:

   • Applicable to companies, limited liability partnerships (LLPs), partnership firms, and individuals.
   • For corporate persons, insolvency resolution can be initiated for a minimum default of ₹1 lakh (this threshold can be changed by the government).
   • It applies to cases of insolvency, bankruptcy, and liquidation.

2. Institutional Framework:

   • Insolvency and Bankruptcy Board of India (IBBI): IBBI regulates insolvency professionals (IPs), insolvency professional agencies (IPAs), and information utilities (IUs). It frames and enforces rules for resolution processes.
   • Insolvency Professionals (IPs): Licensed individuals who manage the insolvency process, take control of the debtor’s assets, and act as intermediaries between the debtor and creditors.
   • Insolvency Professional Agencies (IPAs): Bodies that certify insolvency professionals.
   • National Company Law Tribunal (NCLT): The adjudicating authority for companies and LLPs.
   • Debt Recovery Tribunal (DRT): The adjudicating authority for individuals and partnership firms.

3. Insolvency Resolution Process:

   • Corporate Insolvency Resolution Process (CIRP):
     • A debtor or creditor can initiate CIRP upon default.
     • The debtor’s management is transferred to a resolution professional during this process.
     • A committee of creditors (CoC) is formed, and it evaluates and approves resolution plans. The CoC consists mainly of financial creditors.
     • The process must be completed within 180 days (extendable by 90 days).
     • If no plan is approved within the specified period, the company goes into liquidation.

4. Liquidation Process:

   • If insolvency resolution fails, the corporate debtor is placed under liquidation.
   • Liquidation can also be initiated voluntarily by the debtor or creditors.
   • Liquidator is appointed to manage the debtor’s assets and repay creditors based on a priority waterfall mechanism.

5. Priority of Claims:

   • The code defines the order of priority in which creditors are paid. Secured creditors, workers, and employees are given preference over unsecured creditors.
   • The resolution process prioritizes recovery for operational creditors (e.g., suppliers, workers) after meeting secured creditors’ dues.

6. Fast-Track Insolvency:

   • For small businesses, the code provides a fast-track insolvency process with a resolution period of 90 days, extendable by 45 days.

7. Cross-Border Insolvency:

   • Although the IBC currently lacks a specific framework for cross-border insolvency, efforts are being made to include provisions for dealing with cross-border insolvency in line with the UNCITRAL Model Law.

8. Pre-Packaged Insolvency Resolution Process (Pre-Pack):

   • Introduced in 2021, this mechanism allows for a faster insolvency process for MSMEs by negotiating a resolution plan in advance and seeking approval from creditors before it is presented to the NCLT.

Amendments and Changes:

• The IBC has undergone several amendments since its inception to address practical challenges. Key amendments include:
  • Section 29A: Prevents defaulters or related parties from submitting a resolution plan, ensuring only clean promoters or companies can bid.
  • Increasing the default threshold from ₹1 lakh to ₹1 crore for triggering corporate insolvency to protect MSMEs during the COVID-19 pandemic.

Objectives of IBC:

1. Timely resolution: Speedy resolution of insolvency issues to maximize asset value.
2. Promote entrepreneurship: Helps in resolving financial distress in a time-bound manner and encourages entrepreneurship.
3. Ease of doing business: Improves investor confidence by providing a clear framework for insolvency resolution.
4. Maximization of value: Aims to achieve the highest possible returns for creditors by preserving and maximizing the value of the debtor’s assets.