Practical Insights into Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) is a transformative legislation in India that has significantly reshaped the landscape of insolvency and bankruptcy proceedings. Enacted in 2016, the IBC aimed to provide a more efficient and time-bound resolution process for distressed businesses, thereby promoting economic growth and creditor confidence. This comprehensive law has not only streamlined the insolvency framework but has also brought about substantial changes in the way creditors, debtors, and insolvency professionals navigate the insolvency landscape.

What is the Insolvency and Bankruptcy Code (IBC)?

• The Insolvency and Bankruptcy Code 2016 is a significant economic reform in India.
• It aims to help businesses, partnerships, and individuals resolve financial problems more efficiently.
• Before the IBC, India had various scattered laws for insolvency and bankruptcy.
• These laws led to issues like delays and inefficiencies.
• Examples of previous laws include SARFAESI for asset security, RDDBFI for debt recovery, and the Companies Act for winding up companies.
• These laws often had problems with implementation, conflicting with each other and being time-consuming.
• The IBC was introduced to address these issues and provide a better solution.

Objectives of Insolvency and Bankruptcy Code (IBC)

1. Consolidation and Amendment: It brought together and improved all the existing insolvency laws in India.
2. Simplification and Speed: It aimed to make the process of handling insolvency and bankruptcy cases in India simpler and faster.
3. Protecting Creditors: The law sought to safeguard the interests of people or companies that lend money, as well as those involved with a company.
4. Company Revival: It focused on reviving struggling companies in a timely manner instead of letting them fail.
5. Encouraging Entrepreneurship: It aims to promote and support entrepreneurs and businesses.
6. Helping Creditors: By making the process more efficient, it also aimed to provide quicker relief to those who are owed money, which, in turn, would help boost the availability of credit in the economy.
7. New Recovery Procedures: It introduced better and quicker ways for banks, financial institutions, and individuals to recover the money they were owed.
8. Establishing a Regulatory Body: It created the Insolvency and Bankruptcy Board of India to oversee and manage these processes.
9. Asset Maximization: Ultimately, it was about getting the most value out of the assets of companies that were in financial trouble.

Key Features of the Insolvency and Bankruptcy Code

• Shift in Control: IBC changes the way control works. Instead of the debtor having control, it gives more power to the creditors.
• Simplifying Laws: It aims to simplify and update various laws related to insolvency, including changes in the Companies Act.
• Timely Resolutions: IBC wants to resolve financial problems faster. It sets a strict deadline of 180 days to evaluate and decide on solutions.
• Moratorium Period: A "time-out" period of 180 days (which can be extended to 270 days) is given to companies where they can't be taken to court. For startups and small companies, the resolution time is shorter, 90 days, with a possible 45-day extension.
• Insolvency Professionals: Trained experts, called Insolvency Professionals (IPs), are introduced to manage the process.
• Regulatory Bodies: It establishes the Insolvency and Bankruptcy Board to oversee the rules and Information Utilities to store important financial information.

The Insolvency and Bankruptcy Code Ecosystem

• National Company Law Tribunal (NCLT): This is the main authority for dealing with insolvency cases involving companies and similar entities. It decides on issues related to these entities, such as their financial problems and potential solutions.
• Debt Recovery Tribunal (DRT): DRT handles insolvency cases for individuals and partnership firms, except for Limited Liability Partnerships. It helps resolve financial problems for these entities.
• Insolvency and Bankruptcy Board of India (IBBI): This is the top organization responsible for ensuring transparency and good governance in the IBC process. It helps establish the necessary infrastructure and approves and regulates key players like Insolvency Professionals (IPs) and Information Utilities (IUs). The IBBI has members from the Ministry of Finance, Law, and RBI.
• Information Utilities (IUs): IUs are like central databases that store important financial and credit information about borrowers. They gather, verify, and make this data available to creditors, helping them make informed decisions.
• Insolvency Professionals (IPs): These are individuals authorized to manage the insolvency resolution process. They act as liquidators or trustees in bankruptcy cases. Creditors appoint them, and they have the authority to override a company's board of directors. They can also provide performance bonds equal to the assets of the company under insolvency resolution.
• Adjudicating Authority (AA): This is the decision-maker in insolvency cases. For corporate insolvencies, NCLT acts as the AA. It handles insolvency applications, approves or rejects resolution plans, and makes decisions on claims and legal matters related to the case.

What are the Achievements of IBC?

1. Faster Resolution: Before the IBC, it used to take an average of 4-6 years to resolve such cases. After the IBC was enacted, this time decreased significantly to around 317 days.
2. Higher Recoveries: The IBC has led to better recovery of funds. The recovery rate increased from 22% before the IBC to 43% after its implementation.
3. Encouraging Payment: The IBC has encouraged many struggling businesses to pay their debts before being declared insolvent. This is because they see that the IBC can lead to quicker and fairer resolutions.
4. Increased Cases: The number of cases brought under the Corporate Insolvency Resolution Process (CIRP) has steadily risen.
5. Case Outcomes: As of March 2019, 1,858 cases had been admitted for resolution. Out of these, 152 were appealed, reviewed, or settled, 91 were withdrawn, 378 ended in liquidation, and 94 were successfully resolved through approval of resolution plans.

What are the Challenges of IBC?

1. Lack of NCLT Benches: Despite plans to establish more National Company Law Tribunal (NCLT) benches in different cities, many of them are either not operational or not fully equipped due to the lack of infrastructure and support staff.
2. Low Approval Rates: Out of over 2,500 corporate insolvency cases filed from December 2016 to September 2019, only about 15% ended with approved resolution plans. This means that a majority of cases didn't reach a satisfactory solution.
3. High Liquidations: The IBC's primary goal is to resolve bankruptcy situations, but there is a concern because a significant number of cases end up in liquidation. This goes against the core objective of the IBC.
4. Slow Judicial Process: India's legal system can be slow, and this delay affects the resolution process under the IBC, just as it did under previous laws like SICA and RDDB. This delay can hinder the timely recovery of debts and the revival of struggling businesses.

Amendments in Insolvency and Bankruptcy Code (IBC)

• Homebuyers Recognized as Financial Creditors: This means that people who have bought homes and are waiting for their delivery are now considered as important as banks and other financial institutions when it comes to deciding what happens to a troubled company. They have a say in making decisions about the company's future.
• Special Rules for Small Businesses (MSMEs): The changes now allow the owners of small and medium-sized businesses (MSMEs) to try to buy back their companies if they are not responsible for the financial problems the company is facing. Before this, they were not allowed to do this if the company was in trouble. This change corrects that rule.