The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with the intention to consolidate already existing laws for debt recovery. This framework was introduced in the Lok Sabha in December 2015. It came into force in December 2016. This piece of legislation primarily provides comprehensive provisions for resolving insolvencies, which is considered to be a long process with cost-efficient measures.
The main idea of the Insolvency and Bankruptcy Code is to protect the interests of investors and create an atmosphere where carrying out business becomes uncomplicated. It was framed with the intention to expedite and simplify the process, which was once considered to be a lengthy one.
History of Bankruptcy Laws
Before IBC Code 2016 came into existence, many statutes were working on matters relating to debt recovery. For instance, the SICA (Sick Industrial Company Act), its main objective was to facilitating and deciding the recovery of potentially practical units (companies). The primary setback faced by the said Act was that it was applicable only to sick industrial companies, which entirely ignored the non-industrial companies and small/ ancillary companies.
The Companies Act, 1956 also provided a process for the liquidation and winding up of all types of corporate entities.
The following are the Acts that previously governed in place of the Insolvency and Bankruptcy Code. 2016.
- SARFAESI Act, 2002
- The Presidency Towns Insolvency Act, 1909, and The Provincial Insolvency Act, 1920
- Companies Act, 2013
- The Sick Industrial Companies (Special Provisions) Act, 1985
All these fragmented frameworks led to an unreasonable amount of delay in the resolution process, creating an unfavorable environment for businesses as well.
IBC Code Structure
The IBC contains the following:
5 Chapters 4 Parts 255 Sections 11 Schedules
Given below is the breakdown of the contents of each part of the Insolvency and Bankruptcy Code, 2016:
- Part I – Preliminary
- Part II – Insolvency Resolution and Liquidation for Corporate Persons
- Part III – Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
- Part IV – Regulation of Insolvency Professionals, Agencies, and the Board
Chapters include the details regarding the following topics:
- Corporate Insolvency Resolution Process
- Liquidation Process
- Fast Track Insolvency
- Voluntary Liquidation
- Individual Insolvency Process
- Powers of NCLT/ NCLAT
- Role of IBBI (Insolvency and Bankruptcy Board of India)
Applicability of the IBC Code
Section 2 of the IBC provides that the provisions of the Code shall apply to the following persons:
- Any company incorporated under the Companies Act, 2013 or any other previous laws.
- Any other company that is governed by any Special Act
- Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008
- Partnership firm, whether registered or not, under the Partnership Act, 1932
- Any individual person
Let’s begin with the absolute basics of the Code.
Insolvency and Bankruptcy Board of India
The Insolvency and Bankruptcy Board of India (IBBI) was established under the Insolvency and Bankruptcy Code 2016. The IBBI is a very crucial authority and is responsible for the implementation of the provisions of IBC Code. It ensures a time-bound process that is in the interest of the creditors. It also encourages credit availability and entrepreneurship.
The main function of IBBI includes the following:
- Registration of Insolvency Professionals and Agencies
- Regulation of the Insolvency process
- Promotion and education of an efficient insolvency system
What is Corporate Insolvency resolution Process?
CIRP is a recovery mechanism for companies to minimize risk for creditors. It is a standard process wherein proceedings are initiated for the Insolvency of Corporate entities.
Who is a Corporate Debtor?
A Corporate Debtor is a corporate entity which owes a debt to any person. In other words, someone who has accepted or taken money or a loan from any person.
Who is a Financial Creditor?
Section 5 (7) of IBC lays down the definition of Financial Creditor. Any person to whom financial debt is owed is the Financial Creditor. It includes a person to whom such debt has been legally assigned or transferred. For Instance, Banks, NBFCs, Financial institutions, or any other person who provides financial assistance.
Who is an Operational Creditor?
Section 5 (20) of the IBC states the definition of an operational creditor. Any person to whom operational debt is owed is known as an operational creditor.
Who can File for Initiation of CIRP??
The above-mentioned persons are eligible to apply to initiate CIRP.
- Under Section 7, the Financial Creditor can, upon the occurrence of default as prescribed under the provisions of the Code.
- Under Section 8, the Operational Creditor is eligible to file an application to initiate CIRP against the Corporate Debtor upon the occurrence of default as mentioned under the Code.
- Corporate Debtor can suo moto initiate CIRP by virtue of Section 10 of the Code.
Liquidation
The most basic understanding of the term liquidation is that the company is being closed, and all the assets are divided among the creditors and owners. It can also be called as Winding up of a company or Dissolution, being the last and final stage of liquidation.
There are two ways in which a company can be liquidated:
- Compulsory Liquidation
- Voluntary Liquidation
Adjudicating Authorities under IBC
Under IBC 2016, Adjudicating Authorities (AA) are bodies consisting of Judicial and Technical members as appointed by or on the instructions of the Central Government. These bodies are constituted to exercise and discharge powers and functions that are laid out in the Code. As seen below, there are two types of adjudicating authorities, namely:
- NATIONAL COMPANY LAW TRIBUNAL
- DEBT RECOVERY TRIBUNAL
Let’s discuss their main functions under the Insolvency and Bankruptcy Code, 2016:
- NATIONAL COMPANY LAW TRIBUNAL
The NCLT is constituted under Section 408 of the Companies Act, 2013, and is recognized as an adjudicating authority under the said Code. It is a quasi-judicial body responsible for resolving corporate disputes that are related to the insolvency and liquidation of corporate persons.
Further, NCLT shall determine which resolution plan is to be approved and rejected.
- DEBT RECOVERY TRIBUNAL
This quasi-judicial body is constituted under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and is designated as an Adjudicating Authority under Section 79 of IBC, 2016. DRT is responsible for determining the insolvency of individuals and partnership firms.
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
Orders passed under NCLT can be filed for appeal under the appellate authority. Several benches have specific territorial jurisdiction all over India.
Any person aggrieved (unsatisfied) by the order of the Adjudicating Authority can file for an appeal within a time of 30 days from the date of the order passed by NCLT.
Timelines under IBC Code
CIRP
- As per Section 12 (1) of the IBC 2016, the Corporate Insolvency Resolution Process is required to be completed within a period of 180 days from the date of acceptance order by the AA.
- However, a further extension of which is only one time can only be applied for by the Resolution Professional, subject to the resolution passed by the COC (Committee of Creditors) having a minimum approval of 66%.
- Overall, the CIRP Process is to be completed within a period of 330 days failing which the Adjudicating Authority shall initiate the Liquidation Process under Chapter III, Section 33 of the Code.
LIQUIDATION
- As mentioned above, the liquidation process is either commenced by the order of the court, or the company can itself commence the liquidation process, which is known as Voluntary Liquidation.
- In the case of Compulsory Liquidation, the process is required to be completed within 1 year from the liquidation commencement date as mentioned under Regulation 44 of the IBBI (Liquidation Process) Regulations, 2016.
- Similarly, in the case of Voluntary Liquidation is required to be completed within 1 year from the liquidation commencement date as mentioned under Voluntary Liquidation Regulations, 2017.
Conclusion
The Insolvency and Bankruptcy Code, 2016 has not only changed the process of insolvency but also introduced a time-bound process which specifically caters to the interests of creditors. With the introduction of the Corporate Insolvency Resolution Process (CIRP), Liquidation Proceedings, and fast track resolutions, IBC has strengthened creditors’ confidence, improved recovery rates, and also enhanced India’s ease of doing business.
There are amendments to the Insolvency and Bankruptcy Code every now and then, in order to keep up with the changing times and judicial interpretations. Overall, the IBC Code stands as a transformative reform in the country’s economic landscape.
The Insolvency and Bankruptcy Code, 2016 has been simplified by our intern, Ms Tisha Parmar. She has been assisting the team in bringing informational legal blogs.
