The Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code

 

This article will give you insights about Insolvency and Bankruptcy Code, its aim, amendments, problems associated, the procedure to resolve it, the IBC bill 2016 and its amendments in 2018, 2019 and in 2020

IBC – Aims and Objectives

·        The 2016 Code provides a time-bound process to resolve insolvency. Once there is a default in repayment, creditors have power to manage the debtor’s assets and they usually make decisions to resolve the condition of insolvency within 180 days.

·        To guarantee a smooth resolution process, the Code provides additional immunity to debtors from resolution claims of creditors during this period.

·        The Code also affiliates provisions of the current legislative framework to create a balanced forum for debtors and creditors of all classes to settle financial condition.

 

 

 Authorities concerned in the insolvency resolution under the Code

 

Ø  The Insolvency Professionals: They administer the resolution protocols, manage the assets of the debtor, and supply information for creditors to help them in decision making.

 

Ø  Information Utilities: Creditors give a report of financial information of the debt owed to them by the debtor. Such reports include the records of debt, liabilities and defaults of people seeking insolvency resolution.

 

Ø  Adjudicating authorities: The proceedings of the resolution for companies will be reviewed and settled by the National Companies Law Tribunal (NCLT) and for individuals by the Debt Recovery Tribunal (DRT). The   power and duties of these authorities includes approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

 

Ø  Insolvency and Bankruptcy Board: This board is established to monitor the insolvency professionals / agencies and the utilities described under the code.

Procedure to resolve insolvency in the Code

     i.        Initiation: Once a default occurs, the resolution process may be initiated by either the debtor or the creditor. A committee consisting of the financial creditors decides a way to resolve the outstanding debt owed to them. This committee may choose to revive the debt or to sell (liquidate) the assets of the debtor to pay off the debts owed.

 

 

    ii.        Liquidation: If a decision is not taken in 180 days, the debtor’s assets go into liquidation. In this process, an insolvency professional administers the liquidation. Proceeds from the sale of the debtor’s assets are distributed in the predefined order.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

• The 2018 amendment of IBC 2016 states that the allotters within a real estate project must be treated as financial creditors.
• The voting boundary for routine decisions taken by the committee of creditors has observed a major reduction from 75% to 51%.  This boundary was further reduced to 66% for certain special cases.
• This amendment also approved the withdrawal of a resolution letter presented to the NCLT under the Code. This decision was to be taken with the approval of 90% members of the committee (COC).

Insolvency and Bankruptcy Code (Amendment) Bill 2019

• Under the Code amendment 2019, a financial creditor may file an application before the National Company Law Tribunal (NCLT) to initiate the insolvency resolution process. The NCLT must highlight the existence of default within 14 days. After that, a Committee of Creditors (CoC) consisting of financial creditors will be established to take the decision regarding insolvency resolution.
• The CoC will appoint a resolution officer who will present a resolution scheme to the CoC. If the CoC approves this scheme, the resolution process must be completed within 180 days. This may be extended to a period of 90 days if the extension is approved by NCLT.
• If the resolution plan is rejected by the CoC, then the debtor will go into liquidation. The Code provides a degree of priority for the distribution of assets which places financial creditors ahead of the operational creditors (e.g., suppliers). In Amendment 2018, homebuyers who paid advances to any developer were also considered as financial creditors.
• The Bill addressed three issues. First, it strengthened provisions related to time-limits. Second, it specified the minimum payouts to operational creditors in any resolution plan. Third, it mounted the method in which the representative of a group of financial creditors (such as home-buyers) should vote.

 

 Insolvency and Bankruptcy Code (Amendment) Bill 2020

• The Ordinance 2020  provides  two amendments:

1.   The introduction of Section 10A, suspending initiation of proceedings under the Code due to COVID 19 pandemic.

2.   The introduction of Section 66(3) now suspends the application of wrongful trade provisions under the Code if Section 10A is applicable.

• The IBC provides protocols to initiate the corporate insolvency resolution process (CIRP) of a corporate debtor.
• Section 10A declares that no such application for CIRP initiation under Sections 7, 9 and 10 of the IBC could be filed, for any default arising on or after 25th March 2020.
• This would be applicable for a period of 6 months or further period, not exceeding one year from this period, as may be notified.
• The suspension period is specified from March 25 to September 25, 2020 unless extended for another 6 months, in which case it would be till March 25, 2021.
• Section 10A is not applicable to any default committed under the said Sections before March 25, 2020.

Conclusion

There has been a remarkable improvement in the recovery process which has already leaded to billions of dollars being invested in India due to the protection of creditor rights. Compared to other markets, our achievement for this reform is also noteworthy.

In the US, for example, it took 10 years (from 1978) for the bankruptcy law to attain the required stability. The progress in India has been extraordinary by global standards.

 

– Ruchika

sources:

1. Byjus.ias
2. The Hindu