The resolution mechanisms established by the Insolvency and Bankruptcy Code (IBC), 2016, enable potential crises in a time-bound manner and effectively bring viable enterprises to life while maintaining an equitable approach to creditors and stakeholders. This includes the Corporate Insolvency Resolution Process (CIRP) for a company, the Insolvency Resolution for Individuals and Partnerships, and the Liquidation Proceedings, which streamline all emergent processes under the IBC. An intensive focus on creditor-centric approaches rather than the mere distribution of claims to enhance asset value and economic stability may go a long way toward creating incentive alignment among debtors and creditors, as well as building an environment for economic transparency, accountability and financial discipline within the resolution framework.
Process of Insolvency And Bankruptcy Resolution
A proper and systematic, time-bound process was implemented regarding individuals, entities, or a partnership’s insolvency and bankruptcy problem, and it was given through the IBC. Therefore, the landscape of insolvency and bankruptcy resolution cases across India has immensely undergone alterations into totally novel lines as an equally and far better, apt procedure speaks towards larger scale transparency and responsibility.
The Insolvency and Bankruptcy Code of 2016 is well-structured, providing a time-bound process concerning any insolvency and bankruptcy issues tied to individuals, entities and partners. So, it has really revamped the picture regarding insolvency in India because it brings into action a process that is all the more effective in its promises of transparency and accountability. As illustrated below, the IBC outlines a detailed procedure for insolvency and bankruptcy resolution, particularly when applied to companies in terms of the Corporate Insolvency Resolution Process (CIRP).
- Application for Insolvency: This process starts with an inapplication to the National Company Law Tribunal (NCLT) by – a financial creditor who is a lender or other entity having outstanding debts from which the corporate debtor has defaulted, an operational creditor-supplier or service provider holding operational debts owed by the corporate debtor or the company itself may voluntarily file to become insolvent if it cannot fulfil its debt obligations. The applicant must prove default worth at least ₹1 crore.
- Admission of the Application by NCLT: After the submission of the application, NCLT would check the terms against provisions of default and whether an application meets all statutory parameters. Satisfied with that finding, the tribunal admits an application and with it, a moratorium period under Section 14 of IBC. This means that there cannot be any legal proceedings and recovery against the corporate debtor during the moratorium. Neither can the assets of the corporate debtor be transferred, encumbered or sold. This variation continues when NCLT appoints an Interim Resolution Professional (IRP) to take the process forward.
- Appoint an Interim Resolution Professional: An Interim Resolution Professional will manage operations of the corporate debtor and attend to its financial matters. Functions of this IRP include taking possession of assets, financial books, and the debtor’s operational activities. An IRP needs to also make a list of creditors whose claims must be verified.
- Forming the Committee of Creditors: The IRP should within a period of 30 days establish a Committee of Creditors (CoC) comprising solely of financial creditors. In this stage of his term, the IRP will stay in office until the CoC approves the appointment of a permanent Resolution Professional to oversee the resolution process. The members of this committee are collectively the weighty decision-makers for the CIRP and include financial creditors of the corporate debtor. The CoC would, therefore, decide the freezing position of the corporate debtor financially. Such decisions depend on the fate of the appointment of the RP and endorsement of the resolution plan, as well as the CoC’s guidance to the RP throughout the resolution. Any decision made within the CoC must be passed by a majority of 66%.
- Public Notice and Call for Resolution Plans: The CoC, after approving the RP, shall carry out public announcements to collect letters of interest (EOI) for resolution proposals from interested persons. The persons interested in this purpose may be entities or persons who can undertake the corporate debtor’s reinvigoration. Prior to such access, an information memorandum is prepared so that interested parties can get access to the corporate debtor’s financial information as well.
- Submission and Review of Resolution Plans: The resolution applicants submit a proposal outlining how the firm would revive the corporate debtor while servicing the claims to creditors. Section 30 of the IBC further mandates that the plan conforms to the principles enshrined in that provision whereby operational creditors must receive prior payments. Section 53 mandates that the RP abide by the hierarchy in dispensing payments. Each and every plan is, with utmost scrutiny, vetted for its viability and viability before it is presented to the CoC.
- Approval of Resolution Plan: The CoC examines the resolution plans, and then voting among all the plans presented is undertaken. Resolution plans which acquire votes from at least 66% of the CoC members are sent for final approval to NCLT. The NCLT checks overall compliance with the law and the amendments that would be beneficial for all stakeholders concerned. With this approval, all conclusive considerations of an applicant made by the corporate debtor will now stop, and CIRP will be closed, too. If the approved CIRP resolution plan is within the stipulated timeline, the corporate debtor will be liquidated.
- Liquidation in Case of Non-Resolution: If CIRP becomes ineffective and the Company needs to be liquidated, the NCLT would order for the same for the corporate debtor. For this purpose, the agent for liquidation would usually be the Resolution Professional appointed by the CoC, who would carry out the liquidation process. The Liquidator sells off the assets of the corporate debtor and distributes the proceeds as per the established waterfall procedure. This gives priority to the creditors in the following sequence – (i) Insolvency resolution costs. (ii) Secured creditors and employee dues. (iii) Unsecured creditors. (iv) Subordinated debt and (v) equity shareholders as the last priority. At the end of such liquidation, the corporate debtor gets dissolved.
Insolvency and Bankruptcy Board of India
The Insolvency and Bankruptcy Board of India, or IBBI, acts as the supervisory and regulatory body that enforces the provisions described in the Insolvency and Bankruptcy Code, 2016, or IBC. The IBBI offers a robust regulatory structure that ensures the effective, transparent, and accountable performance of insolvency practitioners, insolvency agencies, and other parties concerned with the insolvency and bankruptcy resolution processes in India. The organisation was formed on the 1st of October, 2016, and charged with the responsibility of ensuring that all insolvencies in the country would be regulated around the world by organising oneself in the Ministry of Corporate Affairs, creating a structured framework to settle insolvencies faster, in the interests of economic stability and fiscal accountability. The institutional framework within which the IBBI operates includes:
1. Governing Board
The governing board of IBBI draws up its policy and regulatory framework. There are eight members in total that are part of this governing board, which comprises the Chairperson appointed by the Central Government, ex-officio members from Reserve Bank of India, Ministry of Finance and Ministry of Corporate Affairs, respectively, and five independent members chosen by the Central Government where three of those independent members are women as well.
2. Sub Committees
The IBBI establishes special subcommittees to manage different functions, ranging from the development of regulations to professional education and specific industry supervision.
Essentially, the concrete foundation of India’s bankruptcy resolution system is The Insolvency and Bankruptcy Board of India. Its main purpose is to bring into implementation the complete and effective application of the Insolvency and Bankruptcy Code (IBC) in fashioning an equitable, open and efficient system to deal with insolvency and bankruptcy. This was done through professional and agency regulation, institutional frameworks, and the promotion of financial discipline for India’s economy, which made huge contributions to business and economic stability. Further, growth issues will cause new differences, which will result in high levels of changing core business practices such as the IOBI.
Under IBC, the IBBI has taken over an indeterminate spread of subject matters relating to regulation, oversight and consolidation within the insolvency ecosystem.
3. Regulatory Functions
- IBBI specifies the eligibility criteria for insolvency practitioners. IBBI carries on the examinations and licenses the resolutions for the governing process.
- Supervise and regulate IPA so as to conform with the rules laid down.
- Regulation of Information Utilities (IUs): IBBI supervises such agencies that collect, store, and disseminate financial information for transparency.
4. Supervisory Functions
It monitors the adherence of insolvency professionals, agencies and information utilities to relevant laws, rules and regulations. It conducts inspections and investigations to ensure fair practice. It imposes disciplinary action against errant entities/professionals under the Act or the regulations of the IBBI.
5. Developmental Functions
New regulations are issued or amended from time to time as developments are judged important or otherwise under consideration by the approvers. Seminars, training programs and awareness campaigns are held for stakeholders on the collaboration front to improve the insolvency process.
6. Judgment and Appeals
The IBBI is not a court of law. It supports adjudicatory functions through the National Company Law Tribunal (NCLT) and Debt Recovery Tribunals (DRTs). The IBBI receives appeals and complaints regarding insolvency professionals or agencies.
Conclusion
The Insolvency and Bankruptcy Code expressed the revolution in the financial system, which brought about changes as great as in 2016. The legislation is special in its concern with accountability, access and operation in the management of debts.
The Insolvency and Bankruptcy Code 2016 has completely revamped India’s approach to financial stress. The reforms so established have created an atmosphere defined by accountability, transparency and effective debt resolution. This framework leads to a much stronger financial system, protects stakeholders’ interests, enhances India’s image on the international business stage and walks the line of creditor-centricity and timely resolution. However, key challenges continue to plague this development, such as judicial delays and operational roadblocks. A solid foundation, however, has been laid for addresses of a systematic nature concerning insolvency and bankruptcy issues. With further amendments and continued judicial interpretation, the IBC holds great potential for the economy either in stabilising it, assisting firms in distress, or promoting growth for the Indian economy over the long term.
