In May 2016, Indian Parliament enacted the Insolvency and Bankruptcy Code, 2016. This code covers the insolvency resolution process for individuals and corporate debtors.
Why the code is important?
In India till now corporate and firm insolvency has always been regulated and administered by multiple and sometimes overlapping laws such as
- Indian Partnership Act,1932
- Sick Industrial Companies Act, 1985
- SARFAESI Act, 2002
- Companies Act, 2013
These laws suffered many loopholes, contradictory provisions and also none of them stated the true resolution or empowered the operational creditors and entrepreneurial growth and development. Due to these mentioned laws, Insolvency and Bankruptcy Code [Herein after called as I&B code] is introduced.
HISTORY:
If we see the trend of Indian Economy,
In 1991 Indian Economy brought economic reforms such as liberalization, Privatization, Globalization. In this period Indian companies got Right to Entry in the market.
Then in2002 competition act came into force and in 2009 competition commission of India came. With this a settled frame work has made for companies to enter and compete. But one thing which was missing was Right to exit, that means if the company becomes insolvent or liquidated there is no correct way to exit as a company. To fulfil this purpose Insolvency and Bankruptcy Code came into India.
Right to Entry in 1991
In brief companies got Right to Compete in 2009
Right to Exit in 2016
KEYWORDS:-
CODE – Code is the collection of already existing laws. When there are laws are already existing in the country through means of customs or statues or precedents etc, combining them into one is called code and the process is called as codification. Code is a wider perspective than Act, Some three or four acts together becomes a code.
INSOLVENCY and BANKRUPTCY:
Insolvency refers to a state of financial distress wherein a person or enterprise is no longer able to pay the debts when they fall due for payment.
Bankruptcy is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
LIQUIDATION:
It is a process of bringing a business to an end and distributing the assets to claimants, which occurs when a company becomes insolvent.
FRAMEWORK:
Insolvency and Bankruptcy code can be divided into two parts they are:
1. Regulators :=
The four prime pillars of regulators are
- Insolvency and Bankruptcy Board of India (IBBI)
- Insolvency Resolutions Agency (IRA)
- Insolvency Professionals (IP)and
- Information Utilities (IU)
- The work of IRA is to prepare code of ethics for the entire process of liquidation.
- IP is a regulated and licensed professional responsible for managing and overseeing the process related to that particular company.
- Information Utilities are the regulated and licensed repositories of information. They collect, collate, authenticate and disseminate financial information. If any company gets the problem of insolvency and if any of the above needs to be checked then the process will happen though IUs.
- IBBI – It’s a unique regulator that regulates both the professionals involved and the transactions conducted. This code empowers the board to carry out inspections and investigations on IPs, IUs and thereafter pass such orders as may be required for compliance of provisions and regulations issued there under
02. ADJUDICATORS: =
Adjudicating authorities are the specialized tribunals tasked to ensure the insolvency, liquidation and bankruptcy process being performed as per IBC
There are two types of adjudicating authorities they are:
National Company Law Tribunal (NCLT) :- NCLT is endowed with broad residuary jurisdiction under the IBC to decide upon all questions which arise out of or in relation to the insolvency and liquidation of corporate debtors.
NCLT is for corporate entities and other limited liability entities if they are under debt
A challenge against NCLT order will go to NCLAT (appellate tribunal) and a challenge against
NCLAT order goes to Supreme Court § Debt Recovery Tribunal (DRT) := It is having jurisdiction over the cases related to non- corporate entities like individual and partnership firms other that limited liability partnership. So far as insolvency and resolution and liquidation proceedings are concerned. DRT is applicable to those whose income is below 60,000 per annum and the debt should be 35,000. A challenge to DRT order to DRAT( Appellate Tribunal) and challenge of
DRAT order to Supreme Court.
FEATURES:-
- Time Bound Process := the process of liquidation should get complete within180 days and is extended by 90 days if the process didn’t get complete. For Start-ups (with assets less than 1crore rupees) the process should be completed within 90days and extended by 45 days.
- Comprehensive law := This code covers many laws such as Indian Partnership Act, Companies Act, Sick Industrial Companies Act, SARFAESI Act etc
- No multiplicity of law := This Code provides solutions for entire problems relating to debt and insolvency in one law
- One Chain Authority := NCLT and DRT will adjudicate the insolvency resolution. It does not even allow Civil Court to interfere with the applications thereby reducing the multiplicity of litigations.
SEQUENCE OF CORPORATE INSOLVENCY RESOLUTION PROCESS : The process starts with applying to the Adjudicating Authority and ends with the order of Adjudicating Authority.
This benefits the companies when they are under a lot of debt and banks benefit as their debt is recovered.
- Examples := Companies which went through IBC and are Brought by other companies are:-
- ESSAR STEELS – Debt of 49,000cr
Applied to NCLT in June 2017 (Date of Referral)
Resolution in December 2019 Recovery amount was 42,000 Crore.
- Reliance Communications – Debt of 33,000 crore
Applied to NCLT in June 2019
Resolution in January 2020
Recovery amount was 23,000 crore
Amendments: Since from 2016 IBC has amended for two times i.e., in the year 2019 and in 2021.
Concluding Remarks : – The 2016 code is a major step taken in the right direction to provide umbrella legislation for the laws relating to bankruptcy Liquidation and insolvency resolution concerning both individuals/ firms and corporate entities.
The idea behind the 2016 code is to boost foreign direct investment in India by improving India’s score and ranking in the Ease of Doing Business.