With the passing of the Insolvency and Bankruptcy Code, 2016 (IBC), India's financial system underwent a major change. Fixing insolvency used to take a long time and be done in pieces before this law. With the IBC, there is now a streamlined and time-limited way to handle corporate insolvency, individual bankruptcy, and liquidation. Creditors now have more power, doing business is easier and the laws that protect financial stability have been strengthened. This article outlines the salient features of insolvency and bankruptcy code in a simple and comprehensive manner.
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1. Unified Law for Insolvency and Bankruptcy
Before IBC, multiple laws like the Companies Act, Sick Industrial Companies Act (SICA), and Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) governed insolvency in India, causing confusion and inefficiencies.
The IBC brought together all of these different laws into a single, complete code. This made the insolvency process the same and consistent across all sectors.
2. Time-Bound Resolution Process
One of the major objectives of IBC is to provide quick resolution of insolvency cases.
The law mandates that insolvency proceedings for corporate debtors must be completed within 180 days, extendable by a maximum of 90 days in special cases.
For startups and small companies, a fast-track resolution is available with a shorter timeline of 90 days (extendable by 45 days).
This time-bound approach ensures that value is preserved, delays are minimized, and businesses can be revived quickly or closed efficiently.
3. Corporate Insolvency Resolution Process (CIRP)
The Corporate Insolvency Resolution Process is the heart of the IBC for companies facing financial distress.
It is initiated when a company defaults on debt repayment of more than ₹1 crore. A creditor (financial or operational) or the debtor itself can trigger the process by applying to the National Company Law Tribunal (NCLT).
Once the application is admitted:
A moratorium is imposed (a legal stay on all suits, recovery actions, or enforcement).
The powers of the Board of Directors are suspended.
A professional called the Interim Resolution Professional (IRP) takes over the management.
A Committee of Creditors (CoC) is formed to evaluate and vote on resolution plans.
4. Committee of Creditors (CoC) and Decision Making
The CoC plays a central role in the insolvency resolution of corporate entities.
It is composed mainly of financial creditors (e.g., banks).
It has the authority to approve or reject resolution plans.
Decisions are taken with a 66% voting threshold.
This system for making decisions as a group makes things clear and looks out for creditors' best interests.
5. Role of Insolvency Professionals
Insolvency Professionals (IPs) are registered with the Insolvency and Bankruptcy Board of India (IBBI) and are responsible for managing the insolvency process.
Their duties include:
Taking over the management of the debtor’s company.
Collecting and verifying claims from creditors.
Managing the assets of the debtor.
Ensuring fair conduct of the resolution or liquidation process.
Their independent and neutral role strengthens the integrity of the insolvency ecosystem.
6. Moratorium Provision
As soon as the CIRP is initiated the NCLT declares a moratorium. This means
No new or pending legal proceedings can be initiated against the debtor.
The company’s assets cannot be sold or transferred.
Recovery actions by secured creditors are stayed.
The moratorium protects the corporate debtor from harassment and provides breathing space to restructure its operations or settle liabilities.
7. Priority in Payment (Waterfall Mechanism)
In case of liquidation, the IBC prescribes a priority list (called the waterfall mechanism) for distributing the proceeds of the sale of assets:
Insolvency process costs and liquidation expenses.
Secured creditors and workmen’s dues.
Unsecured creditors.
Government dues.
Shareholders and equity holders (at the bottom).
This clear ranking improves predictability for lenders and investors.
8. Cross-Border Insolvency (Framework Under Development)
Currently, IBC does not comprehensively address cross-border insolvency, but Section 234 and 235 provide some powers to make bilateral agreements with other countries.
A detailed cross-border insolvency framework, based on the UNCITRAL Model Law, is under consideration, which will enhance India’s ability to deal with multinational insolvency cases.
9. Applicability to Individuals and Partnerships
Though most discussions revolve around corporate insolvency, the IBC also applies to:
Individual insolvency.
Partnership firms.
For such cases, the Debt Recovery Tribunal (DRT) is the adjudicating authority. The provisions related to individuals are being implemented in a phased manner.
10. Regulatory Oversight by IBBI
The Insolvency and Bankruptcy Board of India (IBBI) is the regulator under the IBC.
Its responsibilities include:
Registering and regulating Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs), and Information Utilities (IUs).
Specifying standards and monitoring performance.
Issuing guidelines and disciplinary action against misconduct.
The IBBI ensures that the insolvency ecosystem functions efficiently and ethically.
11. Role of Information Utilities (IUs)
IUs are electronic databases that store financial information about debtors, including defaults.
They help verify claims.
Reduce information asymmetry.
Speed up the resolution process.
This improves transparency and ensures that only genuine claims are entertained during proceedings.
12. Promoting Ease of Doing Business
After the IBC was put in place, India's global ranking in the Ease of Doing Business Index went up a lot, especially in the "Resolving Insolvency" parameter.
Because it makes the insolvency process easier and faster, the IBC has increased investor confidence and made the world a better place for business.
Summary
India's economy and law have changed a lot because of the Insolvency and Bankruptcy Code (IBC). It has overcome many of the challenges that beset the previous system by adding a structured, creditor-driven, and time-bound mechanism. The IBC is changing, but there are still some challenges, like delays in some cases and limited application in the area of individual insolvency. It is slowly becoming a strong framework for debt resolution and financial discipline as it is constantly updated and interpreted by the courts. Understanding the IBC is essential for surviving today's financial and business world for students, professionals and entrepreneurs alike.
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FAQs on Salient Features of Insolvency and Bankruptcy Code
Q1. What is the Insolvency and Bankruptcy Code (IBC)?
IBC is a legal framework in India introduced in 2016 to handle insolvency and bankruptcy cases in a time-bound and efficient manner.
Q2. Who can initiate the insolvency process under IBC?
A financial creditor, an operational creditor, or the defaulting company (debtor) itself can initiate the process.
Q3. What is the time limit for resolving a corporate insolvency?
The IBC sets a 180-day limit for resolving cases, extendable by 90 days in special cases.
Q4. What is a moratorium under IBC?
A moratorium is a temporary legal stay on all recovery and legal actions against the company once the insolvency process starts.
Q5. What is the role of the Committee of Creditors (CoC)?
The CoC, mainly consisting of financial creditors, decides whether to approve or reject resolution plans.
Q6. What happens if a resolution plan is not approved?
If no plan is approved within the allowed time, the company goes into liquidation.
