A significant turning point in India's efforts to reform its economy was the passage of the Insolvency and Bankruptcy Code (IBC) in 2016. In India, resolving insolvencies used to be a long, complicated, and inefficient process governed by many laws that often caused delays, inconsistent decisions, and poor recoveries for creditors. The IBC aimed to strengthen creditor rights, streamline and speed up the insolvency resolution process, and increase the country's business-friendly environment.
This article explains in simple and formal terms how Insolvency and Bankruptcy Code works, its key components, and its impact.
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What is Insolvency and Bankruptcy?
Before understanding the code, it's important to differentiate between insolvency and bankruptcy.
Insolvency is a financial state where an individual or entity is unable to pay its debts when they are due.
Bankruptcy is a legal process that follows when insolvency is declared by a court, and assets are distributed among creditors according to the law.
The IBC provides a legal framework to deal with both scenarios efficiently, focusing primarily on timely resolution and, where possible, revival of distressed businesses.
Objectives of the IBC
The main objectives of the Insolvency and Bankruptcy Code are:
To consolidate and amend existing laws relating to reorganization and insolvency resolution.
To provide a time-bound process for insolvency resolution of companies, partnerships, and individuals.
To maximize the value of assets of such persons.
To promote entrepreneurship and availability of credit.
To balance the interests of all stakeholders including creditors and debtors.
Key Components of the Code
There are a few important parts that make up the IBC that make sure the resolution of insolvency goes smoothly and in a structured way. All of these parts work together to keep cases running smoothly and protect everyone's interests.
1. Insolvency Professionals (IPs)
These are licensed professionals appointed to take control of the debtor’s assets and manage the resolution process. They act as intermediaries between the debtor and creditors.
2. Insolvency and Bankruptcy Board of India (IBBI)
This is the regulatory body that oversees the functioning of IPs, information utilities, and other agencies under the IBC framework.
3. Adjudicating Authorities
National Company Law Tribunal (NCLT) handles corporate insolvency.
Debt Recovery Tribunal (DRT) handles individual and partnership insolvency.
4. Information Utilities (IUs)
These are entities that store financial information about debtors and creditors to help verify claims quickly and accurately.
How Insolvency and Bankruptcy Code Works: Process
The IBC lays out a detailed and time-bound process for resolving insolvency, particularly for companies. The key steps are:
Step 1: Initiation
Insolvency can be initiated by a financial creditor, operational creditor, or the debtor itself.
The minimum default amount must be ₹1 crore (as per latest amendment).
Application is made to the NCLT.
Step 2: Admission and Moratorium
Once NCLT admits the application, a moratorium is declared. This means no legal action can be taken against the debtor during this period.
An Interim Resolution Professional (IRP) is appointed to take charge of the company’s affairs.
Step 3: Formation of Committee of Creditors (CoC)
The IRP forms a Committee of Creditors, comprising all financial creditors.
This committee makes key decisions regarding the resolution of the company.
Step 4: Resolution Plan
Interested parties (such as investors, competitors, etc.) submit resolution plans to revive the company.
The CoC evaluates the plans based on feasibility and viability.
If a plan is approved by at least 66% of the voting share it is sent to NCLT for final approval.
Step 5: Approval or Liquidation
If the NCLT approves the resolution plan, the company is revived under new management.
If no plan is accepted within the prescribed time (180 days, extendable to 330 days), the company goes into liquidation.
How Insolvency and Bankruptcy Code Works for Individual and Partnership?
Although corporate insolvency cases receive more attention, the IBC also provides mechanisms for individuals and partnership firms. The process includes:
Fresh Start Process (for individuals below a certain income and debt threshold).
Insolvency Resolution Process (for negotiation and repayment).
Bankruptcy Process (for sale of assets and distribution among creditors).
These processes are handled by the Debt Recovery Tribunal (DRT) and follow similar principles of fairness, time-bound action and creditor involvement.
Key Features and Benefits
The IBC offers a modern and impactful approach to insolvency management. Its design ensures speed, transparency and fairness, providing multiple advantages for creditors, debtors and the overall business environment in India.
Time-Bound Resolution: Most cases are expected to be resolved within 180 to 330 days.
Creditor-in-Control: Replaces the earlier system where the debtor controlled the process.
Improved Recoveries: Creditors have reported significantly better recoveries compared to the pre-IBC regime.
Boost to Business Confidence: Provides a clear and predictable legal framework for distressed business resolution.
Challenges and Criticisms
Despite its successes, the implementation of IBC faces practical and systemic hurdles. These challenges must be acknowledged and addressed to enhance the code’s effectiveness and fulfill its intended objectives fully.
Delays in NCLT: Backlog of cases often leads to extensions beyond the statutory limits.
Limited Resolution Applicants: Lack of enough qualified bidders for distressed assets.
Complexity of Plans: Some plans are complex and difficult to implement.
Resistance from Promoters: Many promoters attempt to regain control or delay proceedings.
In a nutshell,
There are big changes in how insolvency and bankruptcy are handled in India because of the Insolvency and Bankruptcy Code. It has strengthened creditor rights and made corporate governance better by making sure there is a single, clear, and time-bound process. There are still problems, but more reforms, building up the skills of the judging panels, and being clear about how things are to be done can help the IBC reach its full potential and make India a more attractive place for investors.
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FAQs on How Insolvency and Bankruptcy Code Works
Q1. What is the Insolvency and Bankruptcy Code (IBC)?
The IBC is a legal framework introduced in 2016 to consolidate insolvency laws and ensure timely resolution of financial distress for companies and individuals.
Q2. Who can initiate the insolvency process under IBC?
A financial creditor, an operational creditor, or the debtor itself can initiate the insolvency resolution process under the IBC.
Q3. What is the time limit for completing the resolution process under IBC?
The resolution process must typically be completed within 180 days, extendable to a maximum of 330 days with approvals.
Q4. What happens if no resolution plan is approved?
If no plan is approved within the time frame, the company proceeds to liquidation, and assets are sold to repay creditors.
Q5. Does IBC apply to individuals also?
Yes, the IBC covers individuals and partnership firms in addition to companies, with separate provisions for personal insolvency and bankruptcy.
