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Brief Analysis of Insolvency and Bankruptcy Code (2016)


Introduction


Have you ever given a thought to what happens when a company or an individual fails to repay its debts?

When an entity (individual, or a company) fails to pay back their lenders on time they are said to become insolvent. In other words, an individual or a company whose assets fall short to pay off the existing liabilities and when a legal declaration of one’s inability to pay their debts is passed on filing a petition in the court, it is called bankruptcy.

Before the commencement of Insolvency and bankruptcy code of 2016 (IBC), getting your money back was a complex process. But the lawsuits did not lead to speedy recovery due to a huge backlog of cases. As of April 2016, approximately 72,841 cases were pending in the country’s 33 Debt Recovery Tribunals.

As per the records of the World Bank, the time taken for insolvency resolution in India is approx. 4.3 years, which is higher than other countries like the United Kingdom which takes 1 year and the United States of America which takes 1.5 years.


The act “Insolvency and Bankruptcy Code” received the assent of the president on 28th May 2016. The law was created to reduce the huge pile-up of non-performing assets of banks and delay in debt resolution.



Various Institutions under the Code


The Code created various institutions for facilitating the resolution of insolvency, these are as follows-


  • Insolvency Professionals

  • Insolvency Professional Agencies

  • Information Utilities

  • Adjudicating authorities

  • Insolvency and Bankruptcy Board

Among these, The Insolvency and Bankruptcy Board of India (IBBI) consisting of 10 members is the key pillar responsible for the implementation of the Code. It has been appointed as a regulator which can oversee the proceedings and acts as a watchdog for other institutions established under the code.

IBC is applied to partnerships, companies and individuals. Its key feature is that it provides a time-bound process to resolve insolvency. Under IBC, companies have to complete the entire insolvency process within 180 days. This deadline may be extended only if the creditors do not raise objections against the extension. Whereas, the smaller companies including startups having annual turnover of Rs 1 crore or less have to complete their process of insolvency in 90 days but it can be extended by 45 days.



Resolution Process When Default Happens


When a default occurs, the resolution process may be initiated by the debtor or the creditor.

Once the process is initiated it is then administered by the insolvency professional. The professional provides financial information of the debtor to the creditor and manages the debtor’s assets. This process is carried on for 180 days and during this period any legal action against the debtor is prohibited. The proceedings of the resolution process are adjudicated by the Debt Recovery Tribunal (DRT) for individuals and by the National Companies Law Tribunal (NCLT) for companies. If the process is not completed or the debt resolution doesn’t happen, the company is liquidated.


In liquidation, the corporation or incorporated entity is winded up under the supervision of a person known as “liquidator” and they are empowered under the law for such operation, for distribution of proceeds to the various creditors as per an agreed formula.

The proceeds from the sale of the debtor’s assets are distributed in the following order of precedence-


  1. insolvency resolution costs (which includes remuneration to the insolvency professional)

  2. secured creditors

  3. workers and other employees

  4. unsecured creditors

  5. dues to the government

  6. priority shareholders

  7. equity shareholders

Conclusion


The major reason for the success of IBC is that it provides additional powers to the NCLT to enable them to deal with insolvency and bankruptcy proceedings of corporates and this expansion of functions has transmuted the NCLT from a pure judicial forum to a hybrid one with some executive powers. Since NCLTs are established under the Companies Act (2013) and not under IBC, the executive powers given to NCLT have made it follow an inquisitorial system in practice.

IBC conquering the long-drawn process of insolvency and bankruptcy does not mean that it does not have flaws. one of the major shortcomings of IBC is that it did not take into account the Indian possibility that promoters (and others) will try to game the system in many different ways. Though the new legal regime followed under IBC had a positive outcome, yet it needs to be more stringent so that such an event should not recur in future.


ABOUT THE AUTHOR

Rashneet Singh is currently pursuing BA.LLB at Lloyd Law College.

They can be contacted at sanamssd@gmail.com or http://linkedin.com/in/rashneet-singh-676907163

Edited By: Swathi. Ashok. Nair.

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