Understanding the Insolvency and Bankruptcy Code (IBC) in India

The Insolvency and Bankruptcy Code (IBC) of India, enacted in 2016, represents a landmark reform aimed at overhauling the existing framework for insolvency and bankruptcy proceedings in the country. The IBC consolidates and amends laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner to maximize the value of assets, promote entrepreneurship, and balance the interests of all stakeholders. This article provides an in-depth understanding of the IBC, its structure, processes, and its impact on the Indian economy.

Historical Context and Need for IBC

Before the enactment of the IBC, India had a fragmented and inefficient framework for handling insolvency and bankruptcy cases, governed by multiple laws such as the Sick Industrial Companies Act (SICA), 1985, the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993, and the Companies Act, 2013. This disjointed approach led to prolonged resolution processes, low recovery rates, and a lack of clarity for creditors and debtors.

The need for a comprehensive insolvency framework became pressing in the wake of rising non-performing assets (NPAs) in the banking sector and the inefficiency of the existing system in resolving financial distress. The IBC was introduced to provide a unified and streamlined process for insolvency and bankruptcy proceedings, ensuring a more effective resolution of distressed assets.

Key Objectives of the IBC

1. Time-bound Resolution: The IBC aims to resolve insolvency cases within a strict timeframe of 180 days, extendable by another 90 days, to ensure swift resolution and minimize the loss of asset value.
2. Maximization of Asset Value: By providing a structured process for insolvency resolution, the IBC seeks to maximize the value of the debtor’s assets, benefiting creditors and other stakeholders.
3. Promoting Entrepreneurship: The IBC encourages a fresh start for entrepreneurs by providing a clear exit route for failed businesses, reducing the stigma associated with failure.
4. Balancing Interests: The Code aims to balance the interests of all stakeholders, including creditors, debtors, and employees, ensuring fair and equitable treatment.
5. Establishing a Robust Framework: The IBC establishes a regulatory framework for insolvency professionals, information utilities, and adjudicating authorities to oversee the resolution process effectively.

Structure and Components of the IBC

The IBC is structured into five parts, each dealing with different aspects of insolvency and bankruptcy proceedings:

1. Part I: Preliminary: This section includes the short title, extent, commencement, and definitions related to the Code.
2. Part II: Insolvency Resolution and Liquidation for Corporate Persons: This part deals with the insolvency resolution process for companies and limited liability partnerships (LLPs). It includes provisions for initiating insolvency resolution, the role of insolvency professionals, the formation of a committee of creditors, and the liquidation process if resolution fails.
3. Part III: Insolvency Resolution for Individuals and Partnership Firms: This part covers the insolvency resolution process for individuals and partnership firms, providing mechanisms for fresh start, insolvency resolution, and bankruptcy.
4. Part IV: Regulation of Insolvency Professionals, Agencies, and Information Utilities: This part outlines the regulatory framework for insolvency professionals, their agencies, and information utilities, ensuring their effective functioning and accountability.
5. Part V: Miscellaneous: This section includes provisions related to the application of the Code to service providers, cross-border insolvency, and other miscellaneous aspects.

Insolvency Resolution Process for Corporate Persons

The insolvency resolution process for corporate persons under the IBC involves several key stages:

1. Initiation of CIRP: The Corporate Insolvency Resolution Process (CIRP) can be initiated by a financial creditor, an operational creditor, or the corporate debtor itself upon default. An application is filed with the National Company Law Tribunal (NCLT), the adjudicating authority.
2. Appointment of Interim Resolution Professional (IRP): Upon admission of the application, the NCLT appoints an Interim Resolution Professional (IRP) who takes control of the debtor’s assets and management.
3. Moratorium Period: A moratorium period is declared, during which no legal proceedings can be initiated or continued against the debtor. This provides a breathing space for the resolution process to take place.
4. Formation of Committee of Creditors (CoC): The IRP constitutes a Committee of Creditors (CoC) comprising all financial creditors. The CoC plays a crucial role in approving the resolution plan.
5. Preparation of Resolution Plan: The resolution professional prepares an Information Memorandum and invites resolution plans from potential resolution applicants. The submitted plans are evaluated based on feasibility and viability.
6. Approval of Resolution Plan: The CoC votes on the resolution plans, requiring at least a 66% majority for approval. The approved plan is then submitted to the NCLT for final approval.
7. Liquidation Process: If no resolution plan is approved within the stipulated timeframe, the NCLT orders the liquidation of the corporate debtor. The liquidation process involves the sale of the debtor’s assets to repay creditors.

Insolvency Resolution for Individuals and Partnership Firms

The IBC provides separate mechanisms for insolvency resolution for individuals and partnership firms:

1. Fresh Start Process: This process is available for individuals with low income and minimal assets, providing them with a fresh start by discharging their qualifying debts.
2. Insolvency Resolution Process: Similar to the CIRP, this process involves the appointment of a resolution professional, preparation of a repayment plan, and approval by creditors.
3. Bankruptcy Process: If the insolvency resolution process fails, the individual or partnership firm can be declared bankrupt, leading to the distribution of their assets to repay creditors.

Impact of the IBC on the Indian Economy

The IBC has had a significant impact on the Indian economy, bringing about several positive changes:

1. Improved Insolvency Resolution: The IBC has significantly improved the efficiency and effectiveness of insolvency resolution in India. By providing a time-bound process, the IBC has reduced the average duration of insolvency proceedings and increased the recovery rates for creditors.
2. Enhanced Creditor Confidence: The IBC has strengthened the rights of creditors, enhancing their confidence in the insolvency resolution process. This has led to improved credit availability and lower borrowing costs for businesses.
3. Reduction in NPAs: The IBC has played a crucial role in addressing the issue of non-performing assets (NPAs) in the banking sector. By providing a clear framework for resolving distressed assets, the IBC has facilitated the cleaning up of bank balance sheets.
4. Promoting Entrepreneurship: The IBC has encouraged entrepreneurship by providing a clear exit route for failed businesses and reducing the stigma associated with insolvency. This has fostered a more dynamic and resilient business environment.
5. Strengthening Corporate Governance: The IBC has emphasized the importance of good corporate governance and accountability. The threat of insolvency proceedings has incentivized companies to adopt better financial practices and adhere to their obligations.
6. Attracting Foreign Investment: The IBC has improved India’s investment climate by providing a predictable and transparent framework for insolvency resolution. This has attracted foreign investors seeking to invest in Indian businesses.

Challenges and Criticisms

Despite its successes, the IBC has faced several challenges and criticisms:

1. Delays in Resolution: While the IBC mandates a time-bound process, delays still occur due to judicial backlogs, complex cases, and procedural inefficiencies. These delays can undermine the effectiveness of the resolution process.
2. Operational Challenges: The implementation of the IBC has revealed operational challenges, including a shortage of insolvency professionals, lack of infrastructure, and varying interpretations of the Code by different NCLT benches.
3. Disputes over Valuation: Disputes over the valuation of distressed assets have been a contentious issue in several insolvency cases. Inconsistent valuation practices can affect the fairness and transparency of the resolution process.
4. Limited Success in MSME Sector: The IBC has been less effective in addressing the insolvency issues faced by micro, small, and medium enterprises (MSMEs). Tailored solutions are needed to address the unique challenges of the MSME sector.
5. Cross-border Insolvency: The IBC’s provisions for cross-border insolvency are still evolving. The lack of a comprehensive framework for cross-border insolvency can pose challenges for resolving cases involving multinational companies.

Future Prospects and Reforms

To further enhance the effectiveness of the IBC, several reforms and measures are being considered:

1. Strengthening Judicial Infrastructure: Improving the capacity and infrastructure of NCLT benches and appellate tribunals can help reduce delays and enhance the efficiency of the resolution process.
2. Enhancing the Role of Insolvency Professionals: Providing better training and resources for insolvency professionals can improve the quality of resolution plans and ensure fair and transparent processes.
3. Addressing Sector-specific Challenges: Tailored solutions and frameworks for different sectors, such as MSMEs and cross-border insolvency, can address specific challenges and improve the effectiveness of the IBC.
4. Streamlining Valuation Practices: Developing standardized valuation practices and guidelines can reduce disputes over asset valuation and ensure consistency and fairness in the resolution process.
5. Promoting Pre-packaged Insolvency: Introducing pre-packaged insolvency schemes can provide a faster and more efficient resolution process, especially for smaller businesses and MSMEs.

Conclusion

The Insolvency and Bankruptcy Code (IBC) has been a transformative reform in India’s insolvency and bankruptcy framework.

Contributed By: Aakash Jaggia (Intern)

O. P. Jindal Global University, Jindal Global Law School.