Table of Contents
Insolvency and Bankruptcy Code (IBC)
- The Insolvency and Bankruptcy Code (IBC) was introduced to overhaul the corporate distress resolution regime in India and consolidate existing laws to create a time-bound mechanism for debt resolution.
- Insolvency and Bankruptcy Code (IBC) works with a creditor-in-control model as opposed to the debtor-in-possession system. The creditor-in-control model provides control of the debtor to its creditors and relies upon the managerial skills of a newly appointed management to take over an ailing company and ensure business continuance.
- Objectives:
- Resolution of debts through restructuring, mergers, change in ownership and other methods.
- Maximize the asset value of the corporate debtor.
- Promote entrepreneurship, availability of credit, and balancing the interests of stakeholders.
- Triggering Insolvency and Bankruptcy Code (IBC): When the Insolvency and Bankruptcy Code (IBC) is triggered, two outcomes are possible:
- Attempts are made to resolve the insolvency by either coming up with a restructuring or new ownership plan
- If resolution plans fail, the company’s assets are liquidated.
Process under Insolvency and Bankruptcy Code (IBC)
- Initiation: When a corporate debtor (CD) defaults on its loan repayment, either the creditor (lender of credit) or the debtor can apply for initiating Corporate Insolvency Resolution Process (CIRP) under Section 6 of the Insolvency and Bankruptcy Code (IBC).
- Amount of default: Previously, the minimum amount of default after which the creditor or debtor could apply for insolvency was Rs 1 lakh.
- The amount was raised to Rs 1 crore, considering the stress on companies amid the pandemic.
- Authority: For initiating insolvency process, creditor/debtor has to approach a stipulated adjudicating authority (AA) under the Insolvency and Bankruptcy Code (IBC).
- The benches of National Company Law Tribunal (NCLT) across India act as AAs.
- Time-period: The Tribunal has 14 days to accept or reject the application. It has to provide a reason if the admission is delayed.
- The resolution process has to be compulsorily completed within 330 days.
- Committee of Creditors: The CoC decides whether the defaulting company is good enough to be restructured and given a fresh start, or needs to be liquidated.
- The CoC appoints an insolvency professional (IP), who looks after the operations of the company during the resolution process.
- Resolution plan: The IP invites and examines proposals for a resolution plan for a company and submits eligible plans to the CoC. The plan goes ahead if it receives 66% of the voting share of committee members.
- In case no resolution plan is approved, the company goes for liquidation.
- Submission to the tribunal: If a plan is approved, the CoC submits it to the Tribunal. The tribunal then approves the plan which the debtor has to implement. The tribunal has powers to reject the plan.
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Challenges for the Insolvency and Bankruptcy Code (IBC)
- Increase in liquidation: The major objective of Insolvency and Bankruptcy Code (IBC) is to ensure resolution of debt. However, data shows that in the last six years, more than 50% of the cases ended in liquidation.
- Time period: The main feature of Insolvency and Bankruptcy Code (IBC) regime was time-bound mechanism. However, in the last few years, the time taken to resolve cases has gone beyond the 330 days deadline.
- Narrowing gap between resolution and liquidation: The value of company through resolution should be more than that of liquidation. The gap between these two values has been narrowing in recent times.
- Haircuts: A haircut is the part of the debt given up by the lender. Data shows that lender had to bear an 80% haircut in more than 70% of the cases.
- Giving up a major part of credit in form of haircut affects the business and profitability of lending entity.
Insolvency and Bankruptcy Code: Way forward
- Addressing delays: Adjudicating tribunal must not take more than 30 days after filing, to admit the insolvency application and transfer control of the company to a resolution process.
- Dedicated benches of NCLT have to be set up for Insolvency and Bankruptcy Code (IBC) cases. There are suggestions to extend the pre-packs option to all corporates after review.
- Determining haircuts: New yardstick has to be used to determine haircuts. It should be seen as a difference between what the company brings along when it enters Insolvency and Bankruptcy Code (IBC) and the value realised.
Insolvency and Bankruptcy Board of India (IBBI)
- IBBI is a statutory body in charge of overseeing insolvency proceedings and entities such as Insolvency Professional Agencies, Insolvency Professionals, and Information Utilities in India.
- It aims to simplify the process of insolvency and bankruptcy proceedings, using tribunals like NCLT (National company law tribunal) and Debt recovery tribunal.
- The governing board of IBBI consists of 10 members, including representatives from the Ministries of Finance, Law and corporate affairs, and the Reserve Bank of India.