Insolvency and Bankruptcy Code – Overview

The Insolvency and Bankruptcy Code of 2016 is an important step taken by India’s legislative mechanism towards consolidation and reform in the context of existing laws relating to insolvency and bankruptcy. The Code seeks to address the systematic and timely determination of an insolvency situation that can befall the individual or corporate or partnership firms. The key goals are enhancement of asset value, promotion of entrepreneurship, balance among stakeholders and efficient functioning of the credit market. The process of insolvency in India was fragmented and ineffective before the introduction of the IBC, and hence, it led to delayed understanding and loss of value for both creditors and debtors. From the debtor-centric approach, the Code has shifted to a creditor-centric approach that has facilitated creditors to initiate any resolution proceedings in the aftermath of defaults. It is also important because, over time, the IBC has modified India’s standing on ease of doing business on a large scale and serves as an appropriate tool to promote financial discipline and economic stability.

Aims and Objectives of Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code (IBC) of 2016 was enacted to address India’s urgent requirement for a coherent, efficient and prompt framework for bankruptcy resolution and, most of all, to procure a concrete framework that would be expeditious as well as prompt toward resolving bankruptcy affairs. Its primary aim was considered to be more on attaining economic stability, increasing investments in entrepreneurship and safeguarding the interests of all parties engaged – creditors, borrowers or investors.

1. Swift Resolution of Insolvency – The basic object of the IBC is the speedy resolution of insolvencies. It aims at capping loss in value of assets that normally occur when the time taken for any legal proceedings in connection with an insolvency event is extended by having a determined period for resolution of cases after a fixation of 330 days, including any extension or litigation.
2. Augmenting Asset Value – The Code strives to provide as early as possible assurance and creation value related to the assets of a financially distressed entity. With these timely resolutions, restructuring might restore or improve the effective realisation of assets to avoid waste and loss.
3. Fostering Entrepreneurship – This Code increases businesses under calculated risks, not fear of falling; it offers a fresh start when it comes down to significant financial distress. Thus, it even gives a chance to relive without cumbersome restrictions.
4. Recovery Rates for Creditors – The Code aims to bolster creditors’ confidence by providing a standardised framework for the efficient recovery of debts. Improved recovery rates are essential for stimulating financing and investment, which are vital for economic development.
5. Improvement in Business Environment – The IBC has streamlined India’s business environment, making its insolvency procedures less of a procedural labyrinth and shortening the timeframe for their resolution. These improvements thus result in higher clarity, predictability and transparency over cases of insolvency, bringing investments from even international sources.
6. Encouraging Resolution over Liquidation – Rehabilitation of going concern and, therefore, not liquidating viable businesses is the principle espoused in the Code. It aims for restructuring and reorganisation attempts on distressed companies so that such companies can return to their normal operations and positively affect the economy. Liquidation remains a last resort, that is, only after there are no other options or avenues for resolution.
7. Building Strong Institutional Structures – The IBC has established robust institutional arrangements, including the National Company Law Tribunal, which passes orders in insolvency matters, and the Insolvency and Bankruptcy Board of India (IBBI), which regulates insolvency professionals and agencies. These institutions are critical to the proper functioning of the insolvency resolution system.
8. Strengthening Economic Stability – The IBC helps to play a significant role in sustaining financial and economic stability by dealing with basic issues in the insolvency framework. It minimises the buildup of non-performing assets within the banking sector and fortifies the overall credit system.
9. Protecting Creditors and financial responsibility – Most characteristically, it has emerged as the most dominant legislation toward a shift from debtor-friendly to creditor-friendly laws. Banks now have law-making jurisprudence to start insolvency proceedings against non-paying borrowers. It binds a debtor to its financial condition and induces a person to avoid intentional defaults or otherwise.
10. Treating Stakeholders justly and fairly – The admission of creditors will include all the secured and unsecured creditors, equity shareholders, employees or workers through the doctrine of equal treatment of stakeholders. Any compromise plan has to incorporate the principle of fair and equitable distribution of assets, taking care of the rights of all the concerned parties.

Professional authorities, officers, and institutions should always be vigilant in cases of insolvency and bankruptcy to ensure the smooth operation of this Code. This can be made achievable through the establishment of the IBC framework that comes under the Insolvency and Bankruptcy Code, 2016. Such bodies, therefore, ensure compliance and regulation as well as equitable, transparent and efficient resolution in cases of insolvency. These entities provide a well-knit ecosystem of insolvency under the IBC, with the involvement of each of its relevant organisations bringing in their specific and complementary contribution to the aims of the Code, such as timely resolutions, maximisation of value and fair consideration of stakeholders. Some important authorities and professional officers within the IBC are mentioned below:

1. The Insolvency and Bankruptcy Board of India (IBBI)

The Insolvency and Bankruptcy Code hereby grants a balance of power under the control of the Insolvency and Bankruptcy Board of India in relation to the insolvency and bankruptcy resolution process in India. It independently has its vector for deciding upon administrative and supervisory matters in insolvencies, which makes it a very well-recognisable regulatory authority in India.

It also encompasses the regulation of the IPs, IPAs, and IUs; developing regulations on how to implement the Code; monitoring the activities of IPs, IPAs and other insolvency-related entities; establishing a framework for resolution and liquidation processes; and enforcing a code of conduct for insolvency professionals and agencies.

2. National Company Law Tribunal (NCLT)

The NCLT is an authority that hears and decides corporate insolvency resolution proceedings as provided for in the Insolvency and Bankruptcy Code (IBC). It functions to adjudicate a bankruptcy application received by financial creditors, operational creditors or the corporate debtor; approve or reject the resolution proposal of applicants; order liquidation when attempts at resolution fail; hear complaints and appeals with respect to insolvency professionals and the CIRP process. This court imposes the legal framework of IBC in matters of corporate insolvency.

3. The National Company Law Appellate Tribunal (NCLAT)

The NCLAT is the appellate authority that makes appeals from the decisions passed through the NCLT. The NCLAT functions and duties carry a bar to appeal in the measures of the NCLT, provide adjudication and examination with fairness, and then deal with appeals relating to various orders of the Insolvency and Bankruptcy Board of India (IBBI) or other regulators regarding IBC. Its importance is reflected as a higher judicial body where parties can avail some remedy for their problem issues.

4. Insolvency Professionals (IP)

Insolvency professionals are those who hold a certificate to supervise an insolvency resolution process. They act as Interim Resolution Professionals (IRPs) or Resolution Professionals (RPs) during the CIRP, handling the management and operations of the corporate debtor during the insolvency period, management of creditor claims and formulation of resolution plans, and control during liquidation, in case of the failure of resolution efforts.

5. Information Utilities (IU)

The collection, preservation and dissemination of information related to debts and defaults are the collection and utility functions related to information. It uses verified information, and thus, it recognises both stakeholder’s and business debtors’ financial transactions through a mechanism that stands out in time and accuracy for lending decisions. In that sense, importance arises with regard to bringing higher transparency and reliability to data, which helps resolve default disputes.

6. Liquidators

A liquidator is generally the Resolution Professional. Thus, if the National Company Law Tribunal (NCLT) provides for the liquidation of a company, it appoints a liquidator. The function of the liquidator is to supervise and value the assets of the debtor to liquidate those assets. Their duties also encompass the distribution of the sale proceeds to creditors based on the priority set by the law, which is the Insolvency and Bankruptcy Code (IBC). Therefore, the liquidator plays a significant role in unwinding a business that is no longer sustainable and dispersing whatever remaining assets are available to interested parties.

7. Insolvency Professional Agencies (IPA)

These agencies are appointed under the Code and operate on behalf of the Insolvency and Bankruptcy Board of India. They will oversee all the activities associated with the registered practitioners and provide oversight while facilitating access to all actions authorised for these agencies. This is how they enable the approval of activities concerning insolvency practitioners. These are the registration, monitoring, and disciplinary regimes of insolvency professionals, as well as a training and certifying agency that contributes toward the building of the capacity of the professionals. The employees here would have to strictly adhere to the code of conduct prescribed for the IBBI. The most important thing is that it provides a platform or an interface between the IBBI and insolvency practitioners to establish the professional ladder.

8. Committee of Creditors (CoC)

The financial creditors of the corporate debtor compose the committee of creditors. Such a committee plays the decisive role in the process of resolution as it is responsible for checking and finally approving any resolution plans, which would be submitted for consideration to the candidates chosen, considering whether the action to be taken against the debtor shall be a resolution or a liquidation procedure, giving directions to the Resolution Professional in the entire process. The CoC has tremendous influence in the finalisation of an insolvency resolution process and makes the entire process creditor-centric in approach.

9. Resolution Applicants

In this case, the applicant is a person or entity who proposes a plan to revive financially insolvent corporate debtors. He prepares a draft scheme for restructuring the debts of the business debtor, ensures the plan fulfils the legal provisions, safeguards the interest of stakeholders and controls the corporate debtor post-implementation of the resolution plan that the NCLT approves. Applications for resolution can resuscitate failing businesses, rejuvenate economic activities and minimise unemployment.

Benefits and Challenges Faced By Insolvency and Bankruptcy Code

Undeniably, the Insolvency and Bankruptcy Code of 2016 has transformed bankruptcy resolution architecture in India to a considerable extent with great benefits as well as some significant challenges. One of the major advantages is that it has enacted time-bound settlement processes leading to fast repayments of debts, thereby reducing the shrub of valuation of assets. This has brought forth more financial responsibility among debtors with reduced intentional defaults. Besides, the code restored power balance towards that of the creditors, especially the financial institutions, and hence a creditor-friendly environment which enhance courtesy and better recovery rates. This not only adds to economic stability and business environment in India with regard to investors as it allows businesses to deal with financial setbacks through restructuring rather than liquidation but also attends to the interests of various stakeholders, such as employees and suppliers, by making fair distributions of the way out proceeds.

However, that is the case for the ecological issues IBC has been facing. The  NCLT is burdened by the backlog of litigations, delaying the timelines for resolution. Widespread financial discontent with very low recovery rates achieved in many cases added to the overpowering dimensions of large corporate insolvency matters, complicating the resolution process further. Lastly, legal conflicts and litigation appeals by stakeholders often drag out the time period for resolution. Further, there are not enough qualified professionals to help with insolvency cases, as well as great hindrances concerning the implementation of personal insolvency frameworks. For that reason, such needs to be attended to fully to facilitate the utilisation of IBC and, in turn, fortify the insolvency architecture in India.

Conclusion

The Insolvency and Bankruptcy Code was the most radical reform in India’s financial structure since 2016. It also differed in providing an atmosphere of accountability, accessibility and efficiency in the handling of debts. The Insolvency and Bankruptcy Code of 2016 completely transformed the method by which India dealt with the financial crisis. The changes were instituted effectively to create a culture of responsibility, transparency, and efficacy in discharging debts. This law has, indeed, strengthened the financial architecture, safeguarding the interests of stakeholders and further boosted India’s reputation globally in doing business by providing a creditor-centric process and ensuring speedy solutions to the issues.