Insolvency and Bankruptcy Code 2016 (IBC, 2016) is a forum which oversees all insolvency and liquidation and financial proceedings for individuals, SMEs and Corporates.
The Code set out the following objectives to resolve insolvency and bankruptcy:
This will result in shorter recovery timeframes and better recovery, and greater certainty on lenders’ rights, leading to the development of a robust corporate debt market and unlocking the flow of capital.
Corporate bankruptcy and insolvency was covered in a complex of multiple laws, some for collective action and some for debt recovery. These were:
To begin the process of insolvency default should be minimum of Rs One Lakh. The Bankruptcy code proposes two independent stages:
The Insolvency Resolution Process (IRP)
It’s a collective mechanism under which lenders deal with the overall distressed position of a corporate debtor. The onus to initiate reorganization lies with the debtor and the lenders can pursue actions for recovery, security enforcement and debt restructuring. Following are the steps in IRP:
Under this process a financial creditor initiates an IRP against a corporate debtor at the National company law tribunal (NCLT). The defaulters can also initiate voluntary insolvency proceedings.
NCLT orders a moratorium i.e. ‘a calm period’. During this period, no judicial proceedings takes place against the debtors. It gives time to the stakeholders to arrive at a common resolution rather than running independent processes.
NCLT appoints the resolution professional. The major objective of the resolution professional is to collect all the information relating to the assets, finance of the corporate debtor to determine his financial position.
The resolution professional after evaluating all claims constitutes a creditors committee. The committee consists of financial creditors of the corporate debtor excluding party creditors. The committee considers a proposal and decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days).
Liquidation is triggered in case of following cases:
Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor.
Creditors (both financial and operational), debtors, authorised members, person in charge of managing the operations and who has control and supervision of the debtor
Classification of creditors:
The resolution process to complete within 180 (+90) days – failing which company liquidates compulsorily – 2 years timeline for liquidation.
Moratorium is effective till expiry of 180 days on institution/ continuance of proceedings, security enforcement, termination of contracts for utilities, etc.
The resolution professional (RP) under supervision of a committee of financial creditors including control over all bank accounts of the corporate debtors – will run the company on a “going concern” basis
In case of liquidation, the creditor can choose to realize his security and receive proceeds from the Sale of secured assets in first priority. If the creditor wants to enforce their claims outside the liquidation excess proceeds needs to be contributed to the liquidation trust. Furthermore, in case of any shortfall in recovery the secured creditors will be junior to the unsecured creditors to the extent of shortfall.
You may also like to read the following quiz on Insolvency and Bankruptcy Code:
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