The Insolvency and Bankruptcy Code

What is the Insolvency and Bankruptcy Code

• The Insolvency and Bankruptcy Code (IBC) 2016 is a comprehensive legal framework introduced by the Indian government.
• The IBC aims to promptly consolidate and amend the reorganisation and insolvency resolution laws of corporate entities, partnership firms, and individuals.
• The primary objective of the IBC is to maximise the value of such a person’s assets, promote entrepreneurship, and ensure credit availability.
• The IBC also aims to balance the interests of all stakeholders, including altering the order of priority of payment of government dues.
• Before the enactment of IBC, India’s insolvency and bankruptcy process was fragmented across multiple legislations and handled by different forums.
• Multiple legislations often led to inefficient and lengthy processes for resolving insolvencies, adversely affecting the interests of lenders and investors and significantly dragging on the economy.
• The IBC introduces a paradigm shift by offering a unified law dealing with insolvency and bankruptcy matters.
• It provides a time-bound process for resolving insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets.
• Creditors must decide to resolve insolvency within 180 days (extendable by 90 days).
• The process is overseen by a qualified insolvency professional (IP) and the National Company Law Tribunal (NCLT) or the Debt Recovery Tribunal (DRT), depending on the debtor’s nature.

Key features of the IBC include:

• Insolvency Resolution: The Code outlines a process for initiating insolvency resolution proceedings by either the debtor or the creditors. The process aims to resolve insolvency through a corporate insolvency resolution process (CIRP) or fast-track insolvency resolution process.
• Liquidation: If the insolvency resolution process fails to approve a resolution plan within the specified timeframe, the entity becomes liquidated.
• Insolvency Professionals: The Code establishes the concept of insolvency professionals (IPs) who manage the process of insolvency resolution. IPs are registered and regulated by the Insolvency and Bankruptcy Board of India (IBBI).
• Information Utilities: The IBC provides for the creation of information utilities to collect, collate, authenticate, and disseminate financial information to facilitate insolvency resolution.
• Adjudicating Authorities: The NCLT and DRT are designated adjudicating authorities for corporate entities and individuals/firms. They have jurisdiction over insolvency resolution and liquidation for corporate debtors and bankruptcy and insolvency resolution for individuals and partnerships.
• Cross-border Insolvency: While the Code initially did not include provisions for cross-border insolvency, amendments and proposals are being considered to incorporate such frameworks.

IBC Amendment Bill 2021

The IBC Amendment Bill 2021, officially known as The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, introduced several fundamental changes to the Insolvency and Bankruptcy Code, 2016 (IBC) to address specific challenges and gaps identified in the original framework since its enactment. This amendment aimed to streamline further and enhance the effectiveness of the insolvency resolution process. Here are some of the significant features and objectives of the IBC Amendment Bill 2021:

Pre-packaged Insolvency Resolution Process (PIRP)

• The Amendment Bill has introduced the Pre-packaged Insolvency Resolution Process (PIRP) for Micro, Small, and Medium Enterprises (MSMEs).
• PIRP is a hybrid model that blends elements of formal and informal insolvency proceedings.
• This model allows the debtor and creditors to work on an insolvency resolution plan before initiating formal insolvency proceedings.
• The process will be faster and less costly than the traditional Corporate Insolvency Resolution Process (CIRP).
• PIRP ensures maximum value for the debtor’s assets and allows the debtor to retain control of their business while restructuring it.
• The process aims to balance the interests of the debtor and the creditors by providing a fair and transparent mechanism for resolving insolvency issues.
• PIRP will also help MSMEs avoid liquidation and stay afloat, which is crucial for the sector’s growth and development.

Emphasis on MSMEs

• The Amendment Bill recognises the critical role played by MSMEs in the Indian economy.
• The Bill aims to make the insolvency process more accessible and less burdensome for MSMEs.
• The introduction of the PIRP framework is a step towards achieving this objective.
• PIRP is specifically designed to address the unique challenges faced by MSMEs.
• The framework aims to provide greater flexibility to MSMEs regarding debt restructuring and resolution.
• The objective is to ensure that MSMEs recover from financial distress and continue contributing to the economy.

Streamlined Corporate Insolvency Resolution Process (CIRP)

• The Amendment Bill aims to streamline the Corporate Insolvency Resolution Process (CIRP).
• The changes proposed in the Bill are designed to make the process more efficient and time-bound.
• The Bill seeks to specify timelines for specific processes involved in the CIRP.
• The proposed changes will clarify the roles and responsibilities of the Committee of Creditors (CoC) and the insolvency professionals.
• The Bill intends to clarify the eligibility criteria for resolution applicants.
• It also proposes to empower the resolution professional to manage the affairs of the corporate debtor as a going concern during the resolution process.
• The Amendment Bill aims to balance the interests of all stakeholders, including financial and operational creditors, and prevent the misuse of the CIRP process.

Resolution Plan and Unresolved Claims

• The Bill has provisions to address the treatment of claims not covered by a resolution plan.
• The main objective of these provisions is to ensure that such claims are not left stranded and there is clarity on the recourse available to creditors and claimants.
• The provisions aim to provide a separate mechanism for dealing with such claims independent of the resolution plan.
• The Bill seeks to ensure that the interests of all stakeholders are protected and that the resolution process is fair and transparent.
• The Bill aims to encourage more participation from creditors and claimants in the resolution process by clarifying the treatment of such claims.

Enhancing the Efficiency of Liquidation Process

• The Amendment Bill is focused on introducing changes to the liquidation process.
• The bill’s main objective is to expedite the resolution of pending liquidation cases.
• It aims to simplify the procedures involved in the liquidation process.
• The Amendment Bill intends to reduce timelines associated with the liquidation process.
• Through the proposed changes, the bill seeks to maximise the realisation of assets.
• The bill primarily aims to benefit creditors by ensuring they can recover their dues as quickly and efficiently as possible.

Strengthening the Framework

• The Bill proposes several procedural changes to strengthen the overall insolvency framework.
• It includes clarifications and amendments to prevent IBC misuse (Insolvency and Bankruptcy Code).
• The objective is to enhance transparency and ensure the timely resolution of insolvency cases.
• The bill also aims to streamline the insolvency resolution process and reduce the time taken to resolve it.
• It introduces a pre-packaged insolvency resolution process for corporate debtors, which will help achieve faster resolution.
• The Bill proposes to allow the government to notify financial service providers to initiate insolvency proceedings against a debtor.
• It also provides a unique framework for micro, small, and medium enterprises (MSMEs) to facilitate timely resolution.

Conclusion

Overall, the Insolvency and Bankruptcy Code, 2016 and its amendments represent a progressive reform in India’s insolvency and bankruptcy landscape. They have contributed to improving the country’s credit culture, enhancing creditor rights, and laying a robust foundation for resolving financial distress and promoting economic stability. The success of the IBC in improving the resolution process and its ongoing refinement through amendments underscore India’s commitment to maintaining a dynamic and responsive legal framework for insolvency and bankruptcy.
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