Insolvency and bankruptcy in India are governed by a comprehensive legal framework designed to address financial distress among individuals and businesses. The primary legislation for insolvency and bankruptcy in India is the Insolvency and Bankruptcy Code (IBC), 2016.
Insolvency and Bankruptcy Code (IBC), 2016
1. Overview:
- The Insolvency and Bankruptcy Code (IBC) was enacted to consolidate and streamline the laws related to insolvency and bankruptcy in India. It aims to provide a time-bound and efficient process for resolving insolvency, promoting ease of doing business, and improving the recovery rate for creditors.
2. Objectives:
- Resolution of Insolvency: Facilitate the timely resolution of insolvency and bankruptcy cases.
- Maximize Recovery: Ensure the maximization of asset value and recovery for creditors.
- Promote Entrepreneurship: Provide a fresh start for entrepreneurs and businesses by offering a structured insolvency process.
Key Components of the IBC
1. Corporate Insolvency Resolution Process (CIRP):
- Initiation: The CIRP can be initiated by a financial creditor, operational creditor, or the corporate debtor itself. The application must be filed with the National Company Law Tribunal (NCLT).
- Admission: The NCLT examines the application and, if admitted, the CIRP commences. A moratorium is imposed, which prevents creditors from initiating or continuing any legal proceedings against the debtor.
- Resolution Professional (RP): An RP is appointed to manage the affairs of the company, oversee the resolution process, and prepare a resolution plan.
- Committee of Creditors (CoC): A CoC, consisting of financial creditors, is formed to evaluate and approve the resolution plan.
- Resolution Plan: The RP prepares a resolution plan based on the inputs from the CoC. The plan must be approved by at least 66% of the CoC members.
- Approval: The approved resolution plan is submitted to the NCLT for approval. If approved, the plan is implemented, and the company continues its operations.
- Liquidation: If a resolution plan is not approved within the prescribed period (usually 180 days, extendable by 90 days), the company enters liquidation.
2. Liquidation Process:
- Commencement: Liquidation begins if the CIRP fails or if the company is deemed unviable. The NCLT appoints a liquidator to oversee the process.
- Asset Sale: The liquidator is responsible for selling the assets of the company, settling claims, and distributing proceeds among creditors.
- Distribution: Proceeds from the sale of assets are distributed according to the priority of claims as defined by the IBC. Secured creditors are paid first, followed by unsecured creditors and other stakeholders.
- Closure: Once all assets are liquidated and claims are settled, the company is dissolved.
3. Personal Insolvency and Bankruptcy:
- Individual Insolvency: The IBC also provides a framework for the insolvency and bankruptcy of individuals and partnership firms. The process is similar to corporate insolvency but tailored for individuals.
- Bankruptcy Petition: Individuals facing financial distress can file a bankruptcy petition with the Debt Recovery Tribunal (DRT). The DRT assesses the petition and may appoint a bankruptcy trustee to manage the proceedings.
- Fresh Start: The bankruptcy process provides individuals with a fresh start by discharging their liabilities upon completion of the process.
4. Adjudicating Authorities:
- National Company Law Tribunal (NCLT): Handles corporate insolvency and bankruptcy cases, including the admission of CIRP applications, approval of resolution plans, and liquidation.
- National Company Law Appellate Tribunal (NCLAT): Handles appeals against the decisions of the NCLT.
- Debt Recovery Tribunals (DRTs): Handle personal insolvency and bankruptcy cases for individuals and partnership firms.
5. Insolvency and Bankruptcy Board of India (IBBI):
- Regulator: The IBBI is the regulatory body overseeing the implementation of the IBC. It regulates insolvency professionals, insolvency professional agencies, and information utilities.
- Function: The IBBI formulates rules, regulations, and guidelines related to insolvency and bankruptcy and ensures compliance with the IBC.
Impact of the IBC
1. Efficient Resolution:
- The IBC provides a structured and time-bound process for resolving insolvency, which enhances the efficiency of the resolution process compared to previous frameworks.
2. Improved Recovery Rates:
- By promoting the resolution of distressed assets, the IBC aims to maximize recoveries for creditors and reduce the burden of non-performing assets.
3. Encouragement of Entrepreneurship:
- The fresh start mechanism under the IBC helps entrepreneurs who have faced financial distress to restart their businesses, fostering a more entrepreneurial environment.
4. Legal Framework:
- The IBC consolidates various insolvency laws into a single comprehensive code, providing clarity and consistency in the insolvency and bankruptcy process.
Summary
The Insolvency and Bankruptcy Code (IBC), 2016, represents a significant reform in the insolvency and bankruptcy landscape in India. It provides a streamlined and efficient process for resolving insolvency, enhancing recovery for creditors, and promoting entrepreneurship. The IBC covers both corporate and personal insolvency, with a robust regulatory framework and adjudicating authorities to ensure effective implementation.
