What is the meaning of Insolvency and Bankruptcy code?

Though the presiding Modi Government of India has taken several bold steps during its tenure, one major step taken by the government was the introduction of Insolvency and Bankruptcy Code. There was no much awareness of bankruptcy in Indian capitalism and it was largely considered a shameful act. This is absolutely wrong as failures are also part of businesses and there is a strong need to admit it willingly.

The above statement is not just vague but backed by certain facts. One example to note that the world’s most powerful man, Mr. Donald Trump went bankrupt 4 times. 

There was a time between the year 2008 and 2014 when banks lent the money open handedly. This caused a great accumulation of Non Profitable Assets (NPAs) which were brought to light by asset value evaluators of the Reserve Bank of India. This is when the Government of India put in place the ‘Joint Committee of Parliament’ in 2016, which recommended the formation of IBC in a report released in 2015.

An Introduction to Insolvency and Bankruptcy Code, 2016

The first and foremost objective behind the introduction of insolvency and bankruptcy code (IBC), 2016 was to improve the relations between the money lenders and the borrowers. The Lok Sabha approved the arrival of Insolvency and Bankruptcy Code on May 05, 2016 and the Rajya Sabha gave its clearance of May 11, 2016.

The bill got the approval of the President of India and the new guidelines became active after six months. The National Company Law Tribunal (NCLT) and its appellate body was established by the government under Companies Act, 2013 in 2016. The purpose was to deal with the issues pertaining to businesses and limited liability partnerships emerging under this act. In regard to people and partnerships, the judging authority would be governed by Debt Recovery Tribunal (DRT), established under Recovery of debts due to Banks and Financial Institution Act, 1993.  

It is important to note that insolvency can be filed by both the individuals as well as businesses. The difference in both types of application lies in its perception. For example, it would be called bankruptcy in the case of individuals while it will be termed business insolvency if done by a business. This situation can be defined as when a business or person is unable to pay the borrowed amount in the present or coming months. This makes the worth of held assets less then liability. 

The Insolvency and Bankruptcy Code was put in place to combine the presiding laws dealing with bankruptcy and insolvency. Insolvency can be defined as a situation when a business finds itself incapable of carrying out its business activities. 

Different types of reforms were required to curtail the load on the surging non-performing assets. This was brought the introduction of the Insolvency and Bankruptcy Code. Hence,, Bankruptcy Law Reforms Committee (BLRC) was established in 2014 under the leadership of Mr. T.K. Viswanathan, former Union Law Secretary, in accordance with the Indian Bankruptcy Code to replace the running related to both to non-financial businesses and people. The initial draft of Insolvency and Bankruptcy Code was brought in 2015.

Major Elements of The Insolvency and Bankruptcy Code (IBC)

Arbitrating authority

Two distinctive units were constituted in a judicial manner – NCLT and DRT with a purpose to arbitrate the resolution of issues concerned to bankruptcy and insolvency. The National Company Law Tribunal (NCLT) petitions are forwarded to the National Company Law Appellate Tribunal (NCLAT) and after NCLAT, the petitioner can go to the Supreme Court of India. However, in the case of DRT, the petitions are made to the Debt Recovery Appellate Tribunal followed by the Supreme Court of India. It is necessary to note that both these tribunals are different from each other.

Committee of Creditors

Committee of Creditors (COC) is highlighted under the section 21 of the Insolvency and Bankruptcy Code, 2016. This committee can only be made up of financial creditors. The first and foremost task of this committee is to agree and disagree with the perseverance strategy suggested by the domain experts in Corporate Insolvency Resolution Process (CIRP). The minimum vote share that is needed to get the approval is 75% during the meeting of COC. Working creditors can choose to get involved in the meeting of the committee of creditors, however, they can’t vote. 

Insolvency Experts

There are two types of insolvency experts – interim solvency experts and insolvency experts. Interim insolvency experts are chosen by the arbitrating authority within a week from the day when the application was submitted by the arbitrating authority. On the other hand, insolvency experts are chosen by the creditors committee with a majority vote share of 75% during the initial discussion of the COC. If the responses made by the chosen interim insolvency experts are not satisfactory, it is up to them to substitute them by submitting an application before the arbitrating authority.

The arbitrating authority moves the list to the Insolvency and Bankruptcy Board of India (IBBI) to seek the approval on the list. If the body doesn’t respond within 10 days of the receipt of the application, the arbitrating expert asks the interim insolvency expert to carry on the insolvency resolution process till the time the board confirms the list of insolvency professionals. 

Insolvency and Bankruptcy Board of India (IBBI)

Insolvency and Bankruptcy Board of India (IBBI) was brought to action on 1st of Oct 2016 with a purpose to control and tackle different types of Insolvency and Bankruptcy issues highlighted by financial and operational creditors. These cases are mostly in associated with home buyers and banks across the country. The IBBI comes under the purview of the Insolvency and Bankruptcy Code, 2016.

Information resources, bodies specializing in bankruptcy, and the insolvency resolution procedure are all controlled by IBBI. IBBI can be held accountable for approving the list of resolution professionals. In accordance with the 2016 Insolvency and Bankruptcy Code, it also establishes and enforces regulations for resolving corporate insolvency, corporate liquidation, individual insolvency, and individual bankruptcy. IBBI participates in the process of adding new code amendments.

Who are eligible to apply for business insolvency resolution?

Financial Creditors

According to the sec. 5(7) of IBC 2016, money lenders refer to typical creditors who lend funds to the promoters. Home buyers, banks, etc. are understood promotional creditors. The below-given procedure is followed by debtors for all default cases.

• The adjudicating authority may get an application from the financial creditors. 
• The adjudicating body has 14 days from the date of information providing to determine if there has been a default, at which point the application is allowed.
• The application is denied if there has been no default. 
• The corporate insolvency resolution process then begins once the adjudicating body notifies the financial creditors that the application has been admitted within seven days of the admission.

Operational Creditor

As per the guidelines defined under sec. 5(20) of IBC 2016, operational creditors refer to creditors that don’t just lend the promoters but they supply products and services to the promoters. 

• The operational creditor drafts and forwards a demand notification to corporate debtor in the case of a default.
• Debtor notifies the creditor within 10 days of notice of repayment of the pending operational or notice of prevalence of underlying issues.
• If the payment issue doesn’t get cleared within 10 days within the application submission of the adjudicating authority.
• Next, operational creditors draft a resolution expert proposal, and the adjudicating body can pay it in a span of 14 days.

Start of insolvency resolution process

Corporate debtor

According to the sec. 5(a) of IBC 2016, corporate debtors mean the promoters who obtains loans from financial creditors or products or services from operational creditors in the form a debt. The procedure is defined below: 

• In the case of default, the corporate debtor submit an application to the arbitrating authority.
• Once the relevant details are furnished, the arbitrating body releases an order within 14 days on whether to approve or reject the decision.
• If it gets approved, then insolvency resolution process starts while if it gets disapproved, a notice will be sent by the adjudicating authority for the rectification of the underlying issues.

Moratorium

Once the application of corporate insolvency resolution takes place, the NCLT releases a moratorium order regarding the debtor’s activities for a period of 6 months. This is called a ‘calm period’ in which no legal activities such as enforcement of security interest, recovery, sale of assets, or adjudication of necessary contractors take place against the party in debt. 

Liquidation

In case the resolution procedure doesn’t lead to a resolution for the corporate debtor within the set time period or the COC does not accept the proposed resolution strategy with a winning margin, the liquidation process commences.

Once the arbitrating authority discharges an order under section 33 of the Code, the debtor gets liquidated. In such a case, the resolution expert chosen for the Corporate Insolvency Resolution Process will look after the liquidation process, given the filing of a written consent to the Adjudicatory Authority.

Major Achievements of IBC So Far

Since its inception in the year 2016, the Insolvency and Bankruptcy Code, 2016 has attain several remarkable achievements that aided in the building of country’s economy. A few of them are highlighted below:

• Till date, IBC has found a resolution for Rs. 3.16 lakh crore of debt involved in 800+ cases in seven years, as per the data released by CRISIL.
• IBC worked hard to resolve a considerable amount of strained assets with improved recovery rates in comparison to the erstwhile debt recovery strategies such as the Debt Recovery Tribunal, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Lok Adalat.
• IBC is known to have better debt recovery rates, with creditors comprehending 32% of acknowledged claims on average and 169% of the liquidation worth.  On the other hand,  other instruments were having recovery rates hovering between 5 and 20%.
• IBC’s preventive impact is evident as borrowers, suspecting the downfall of businesses, have proactively realized more than Rs. 9 lakh crore in debt prior to the cases being sent to the insolvency process.

Insolvency and Bankruptcy Code Amendment in 2021

• The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 was brought in the Lok Sabha for significant changes and suggest a prepackaged resolution procedure for stressed Micro, Small and Medium Enterprises.
• The bill is expected to swap the ordinance that was broadcasted in the month of April in 2021. It projected ‘pre-packs as an insolvency resolution instrument for MSMEs.
• The main purpose of relying on this mechanism is to let major stakeholders such as creditors and shareholders join hands to determine a prospective buyer and discuss rather than count on public bidding mechanism.

Requirements of the Amendments:

• It stipulates a minimum limit of less than Rs 1 crore for the commencement of the pre-clubbed insolvency resolution process
• It sets the ground for the removal of concurrent submissions for the commencement of the insolvency resolution process and pre-packaged insolvency resolution process, undecided against the similar corporate debtor.
• Penalties for initiating a pre-packaged bankruptcy resolution procedure dishonestly, maliciously, or with the intention of defrauding others, as well as for manipulating the corporate debtor during the process.
• Penalties for transgressions pertaining to the pre-packaged insolvency resolution procedure.

The Conclusion

The introduction of the Insolvency and Bankruptcy Code, 2016 brought a significant change in the debt resolution mechanism by making it more flexible and effective. There was a time when India was ranked 136 among 189 countries by the World Bank in regard to the ease of resolving bankruptcy and insolvency related issues. However, in 2019, the same ranking was improved to 63 which is quite remarkable. 

Before the launch of the Insolvency and Bankruptcy Code, the debt recovery rate was 26% and the debt resolution period was 4 years. The suggestions and recommendations made by the IBC helped the government improve this recovery rate substantially by bringing it to 43% for financial creditors and 49% for operational creditors. 

When the COVID pandemic was on peak, a large number of people and businesses were unable to pay their loans which led to an increase in the number of NPAs. In such a situation, IBC played a prominent role by safeguarding the interest of both the creditors and the debtors. At present, there are several laws and bodies that handle financial mishaps related to bankruptcy and insolvency. However, the introduction of the Insolvency and Bankruptcy Code is one of the big and better steps taken by the current government.

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