What is IBC?
Insolvency and Bankruptcy Code 2016 is one of the biggest step undertaken by India towards much required economic reform of country. That’s why Government has rolled out such a code in a very speedy manner for its implementation.
History Line of IBC:-
Difference between Insolvency and Bankruptcy?
Going forward to understand what is Insolvency and Bankruptcy Code 2016. It is important to understand basic difference between Insolvency and Bankruptcy:-
Why Insolvency and bankruptcy code is so important?
Thus Insolvency and Bankruptcy Code 2016 is a one stop solution for resolving insolvencies which at present is a cumbersome and a long process which is not by any means economically viable arrangement. In a developing country like India, where new and growing business entities are propelling the economic growth in the country, it is one of the most essential business supporting element to bring in a mechanism which could ease down their business transactions by settling defaulting or struggling or bankrupt entities without causing damage to any contributor in the economy. Continuation of Non Performing assets in any economy not only leads to locking of funds and assets of such entities, it also locks up these business entities for solutions in courts which hampers the business of the lender who has given financial assistance to the NPA business entity. The World Bank says that it takes more than 4 years in India and the average recovery is 25 cents to the dollar. Government came up with sick industrial companies act SICA and the Board of Industrial Financial Reconstruction BIFR which failed to fulfil the objective of speedily revive or liquidate companies and recover assets and so Government has proposed a New Bankruptcy Code.
THE INSOLVENCY AND BANKRUPTCY CODE, 2016- ARRANGEMENT OF SECTIONS
Basic structure of the Code contains 255 sections, 11 schedules, 5 parts and 21 chapters under IBC.
FIVE PARTS OF THE CODE
- Part I – Preliminary –Section 1 to 3
- Part II – Insolvency resolution and liquidation for corporate bodies – Section 4 to 77 with 7 chapters
- Part III – Insolvency resolution and bankruptcy for individuals and partnership firms – section 78 to 187 with 7 chapters
- Part IV – Regulation of Insolvency Professionals, agencies and information utilities – section 188 to 223 with 7 chapters
- Part V – Miscellaneous
AGENCIES AND INTERMEDIARIES INVOLVED UNDER AN INSOLVENCY AND BANKRUPTCY PROCESS:
- Insolvency and Bankruptcy Board (IBB)
- Insolvency Professional Agency (IPA)
- Information Utilities (IUs)
- Insolvency Professionals (IPs)
- Adjudicatory authorities (NCLT/DRT)
Duties, powers and responsibilities of every intermediary has been precisely mentioned in the code.
Who is the Adjudicating Authority under the code?
- NCL shall deal with the matters relating to corporate insolvency, LLP and personal guarantees given in relation to corporate debtors.
- DRT shall deal with individual insolvency and partnership firms, however still the law if insolvency of individual insolvency and partnership firms is not effective as on date. Therefore the point that- who shall be adjudicating authority in case of individual insolvency and partnership firms, shall be more cleared only when the law shall be made effective.
- Adjucating authority would have exclusive jurisdiction to deal with insolvency related matters, no injuction shall be granted by any court, tribunal or authority in respect of any proceeding, in pursuance of any power/action conferred on the NCLT/DRT.
PROCEDURE OF INSOLVENCY RESOLUTION PROCESS (IRP) UNDER THE CODE:
The code has shifted the responsibility on the shoulders of the creditor to initiate the insolvency resolution process (IRP) against the corporate debtor. It has given power to all class of the creditors (secured, unsecured lenders, employees and trade creditors, regulatory authorities) to initiate a resolution process in case of non-payment of genuine creditor. The code not only provides for immediate withdrawal of the core management including board of directors and promoters but also enables a period which provides stakeholders time to facilitate discussion and arrive at a common resolution rather than running independent process.
Key points to understand before initiation of Insolvency Resolution Process
- IRP cannot be initiated unless there is a default which is beyond the Minimum threshold.
- IRP cannot be initiated against the financial service provider.
Who cannot apply for IRP (Section 11)?
- a corporate debtor undergoing a corporate insolvency resolution process; or
- a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application;
- a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
- a corporate debtor in respect of whom a liquidation order has been made
Who can initiate/apply for IRP:
- Financial Creditor
- Operational Creditor
- Corporate Applicant
INSOLVENCY RESOLUTION PROCESS UNDER THE CODE
- A financial creditor (himself or jointly with other financial creditors), an operational creditor or the corporate debtor (through Corporate applicant i.e. corporate debtor itself; or an authorized member, partner of corporate debtor; or a person who has financial affairs under his control and supervision) may initiate corporate insolvency resolution process in case a default is committed by corporate debtor. An application can be made before the National Company Law Tribunal (NCLT) for the resolution process. Operational creditor needs to give demand notice of 10 days to corporate debtor and If corporate debtor fails to repay any dues to operational creditor or show no case of existing dispute or arbitration, then the operational creditor can approach NCLT.
- Corporate insolvency process shall be completed within 180 days of admission of application by NCLT. Upon admission of application by NCLT, Creditors’ claims will be frozen for 180 days, during which time NCLT will hear proposals for revival and decide on the future course of action. And thereupon, no other coercive proceedings can be launched against the corporate debtor in any other law, until approval of resolution plan or until initiation of liquidation process.
- NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the Insolvency and Bankruptcy Board (hereinafter, “the Board”) within 14 days of acceptance of application. Interim IP holds office for 30 days only. Interim IP takes control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities.
- NCLT causes public announcement to be made of the initiation of corporate insolvency process and calls for submission of claims by any other creditors.
- After receiving claims pursuant to public announcement, interim IP constitutes the creditors’ committee. All financial creditors shall be part of creditors’ committee and if any financial creditor is related party of corporate debtor, then such financial creditor will not have any right of representation, participation or voting. Operational creditors should be part of Creditors’ Committee (without voting right) if their aggregate dues are not less than 10% of the debt.
- Creditors’ committee shall meet first within seven days of its constitution and decide by 66% of votes either to replace or confirm interim IP as Resolution Professional. Thereupon, Resolution Professional is appointed by the NCLT with confirmation by the Board. The creditors’ committee can change Resolution Professional any time, with a majority of 66% votes.
- The creditors’ committee has to then take decisions regarding insolvency resolution by a 66% majority voting.
- If three-fourths of the financial creditors consider the case complex and require extension of time beyond 180 days, the NCLT can grant a one-time extension of up to 90 days.
- Resolution Professional to conduct entire corporate insolvency resolution process and manage the corporate debtor during the period.
- Resolution Professional shall prepare information memorandum for the purpose of enabling resolution applicant to prepare resolution plan. A resolution applicant means the person who proposes the resolution plan to the resolution professional. And upon receipt of such resolution plans, Resolution Professional shall place for approval before the creditors’ committee.
- Once a resolution is passed, the creditors’ committee has to decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company. If no decision is made during the said process, the assets of debtor will be liquidated to repay the debt.
- The resolution plan will be sent to NCLT for final approval, and implemented once approved.
Disclaimer:–The article is intended for the awareness and education of the readers, if any of reader is intended to use above in any legal work, it is advisable that before placing their reliance on it they reconfirm it from the legal experts.
ABOUT AUTHOR:- Rajul Jain (CA, MCOM, LLB, MBA, CNPO, CPFA, NCFM) is Chartered Accountant and Legal Consultant, academically he is highly qualified and have gone through various certifications. He extensively speaks and writes on finance, taxation and legal matters. The author can be reached at email@example.com