Insolvency and Bankruptcy Code 2016 (IBC) is one of the much needed biggest economic reforms speedily rolled-out and being implemented in India.
This is a one-stop solution which addresses all insolvencies in a time-bound and economically viable manner. This law has significantly helped India in achieving the historic 30-spot jump in the ease of doing business rankings.
Recent press reports of Vedanta acquiring bankrupt Electrosteel Steels, which made a loan default of Rs 10,273 crore, for Rs 5,320 crore under the IBC. Last month, Tata Steel bought bankrupt Bhushan Steel for Rs 35,500 crore. Bhushan Steel had a loan default of Rs 44,478 crore to banks. The two companies were among the RBI’s list of 12 corporate borrowers which account for 1/4th of Indian banking industry NPAs.
The fear of insolvency action has helped creditors, and lending banks to recover Rs 1.1 lack crore from loan defaulters who were earlier unwilling to clear dues and losing control.
What is the Insolvency and Bankruptcy Code 2016?
IBC 2016 lays the insolvency processes for individuals, companies and partnership firms. The law has brought a significant change in the power-sharing equation between creditors and debtors by giving both of them the power to initiate proceedings against each other.
Insolvency Resolution: The code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start-ups (other than partnership firms), small companies and other companies (with asset less than Rs 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
Insolvency regulator: The code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process. They would play a key role in the efficient working of the bankruptcy process.
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies: (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships.
When a company makes a payment default of at least Rs. 1 lakh, an insolvency application can be made either by the company’s creditors or debtors to the NCLT.
Then, the NCLT appoints an interim insolvency resolution professional (IRP), placing the company under a moratorium.
Upon the appointment of IRP, the board of the company gets suspended till the completion of the resolution process.
IRP then creates a committee of creditors of the company, which appoints the final insolvency resolution professional (IP).
IP drafts a resolution plan which requires the approval of the committee of creditors within 180 days, with a grace period of another 90 days, and the final approval of the NCLT.
If the plan doesn’t get approved in 270 days, the company goes into liquidation.
Individuals
In case of individuals, the code provides for two different methods for solving disputes, namely: a fresh start; and insolvency resolution process (IRP).
Under the fresh start process, an individual will be eligible for a debt waiver of up to Rs 35000 on fulfilling certain conditions.
In case of IRP, the parties will engage in negotiations under the supervision of the IP to make a plan for repayment of debts. Such plans will require an approval of 75% of the creditors.
Bankruptcy can be initiated only after the failure of the IRP.
An individual held to be bankrupt would be disqualified from holding public office.
Liquidation can be initiated, inter alia in the following cases:
• On the expiry of maximum period permitted for IRP;
• On rejection of the resolution plan by the adjudicating authority; or
• In the event a committee of creditors decide to liquidate.
If the process cannot be resolved within the 180-day period mentioned above (or as extended) the assets of the company may be sold to repay the creditors.
Under IBC, the proceeds of liquidation are distributed in the following order of priority:
• Insolvency resolution process, liquidation costs
• Workmen’ dues pending 24 months, secured creditors
• Unpaid dues owed to employees other than workmen for 12 months
• Unsecured creditors
• Any amount due to the Central government and the State government
• Any remaining debts/dues
• Preference shareholders
Penalties
The code provides penalties for offences committed by a corporate entity under corporate insolvency.
Officers of the company can be penalized for not declaring assets and property owned by it or for willfully concealing any property.
In such cases, the officer shall be penalised with imprisonment of up to 5 (five) years or with a fine of up to Rs 1 crore or both. However, he shall not be punished if it is proved that he had no intent to defraud.
The code also penalises individuals for offences including the provision of incorrect information and the punishment will vary based on the offence committed by an individual.
The legislation is expected to bring the long-awaited respite to the Indian banking industry, plagued with at least Rs 8.41 lakh crore bad loans.
The passing of this code and implementation of the same has given a big boost to Ease of Doing Business in India.
