An Act to amend and consolidate laws related to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.
Prior to the enactment of IBC in 2016, India had a plethora of legislations, each having part jurisdiction over the process of insolvency resolution of a borrower. The Sick Industrial Companies Act (SICA) was enacted in 1985 and the Board for Industrial Financial Reconstruction (BIFR) was set up. Subsequently, DRTs were set-up under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (since rechristened as Recovery of Debts and Bankruptcy Act, 1993). In 2002, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was enacted to provide for faster enforcement of security interest without the intervention of courts.
While these laws had a positive impact on the resolution of stressed assets in the initial period after their enactment, improvements tapered off over time. Moreover, the focus of the pre-IBC resolution efforts was more towards preservation of companies and employment, sometimes even at the expense of credit discipline and production efficiency of the economy.
The Insolvency and Bankruptcy Code, 2016 (IBC) enacted on May 28, 2016, against the backdrop of mounting non-performing loans, with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner, seeks to tackle the non-performing asset (NPA) problem in two ways.
- behavioral change on part of the debtors to ensure sound business decision-making and prevent business failures is encouraged.
- It envisages a process through which financially ailing corporate entities are put through a rehabilitation process and brought back up on their feet.BER EXCL
Under the IBC, the Indian insolvency regime shifted from
‘debtor-in-possession’ to ‘creditor-in-control’. The creditorin-control model hands control of the debtor to its creditors and relies upon the managerial skills of a newly appointed management to take over an ailing company and ensure business continuance. The Apex Court in Swiss Ribbons Vs Union of India, has held that the core objective of the IBC is to ensure revival and continuation of the corporate debtor. Thus, the IBC has a larger public-welfare consideration in play.
The IBC sets out three classes of persons who can trigger the corporate insolvency resolution process (CIRP) – financial creditors, operational creditors and corporate debtors.
A big challenge is the digitisation of the IBC ecosystem. The lack of digitisation has led to the insolvency process being stymied with long delays much beyond the statutory limits. Often, the admission of cases in NCLT has proven to be a task. A Special Parliamentary Committee in its report opined that the NCLTs and the National Company Law Appellate Tribunal (NCLATs) should be digitized. There should be provision for virtual hearings to deal with the pending cases swiftly.
It is important for the key stakeholders to make their best endeavors to ensure that the power of the IBC does not diminish. The goal must be to fill the voids that are discovered and move towards a more complex legal system over time. Statistics indicate that a majority of liquidation happens in matters where the debtor’s assets erode over time during a prolonged insolvency process. However, like any other law, IBC also has areas that can witness remarkable improvement. There is a long way ahead for the Indian insolvency regime to meet the standards of other mature global jurisdictions