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:
- Low time to resolution
- Higher recovery
- Higher levels of Debt financing across a wide variety of debt instruments
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:
- Companies Act, 2013
- Companies Act, 1956
- Sick Industrial Companies Act (SICA), 1985
- To Reduce the time taken to resolve insolvency
- Develop investor confidence
- Eliminate confusion caused by a complex judicial framework
- Address the NPA situation decisively
- Develop the credit and bond market
To begin the process of insolvency default should be minimum of Rs One Lakh. The Bankruptcy code proposes two independent stages:
- Insolvency Resolution Process– Under this the financial creditors assess the viability of the debtors and think of options to revive the firm or institution.
- Liquidation – If the insolvency resolution process fails the financial creditors decides to wind down the company and distribute assets to the vendor.
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.
- Appointment of Resolution Professional
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.
- Creditors Committee and Revival Plan
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:
- Resolution plan does not meet the minimum required guidelines
- Creditor’s committee does not reach the agreement within 180 days or any extended period.
- Creditor’s committee decide to proceed with liquidation
- Corporate debtor fails to adhere to the terms of the approved resolution plan
Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor.
Who can apply?
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:
- Financial creditors (‘persons to whom financial debt is due’)
- Operational creditors (Trade creditors, employees etc.)
Minimum Amount of default eligible for proceedings under IBC, 2016?
- Upon payment default of a minimum of Rs 1 Lakh or
- Central Government prescribed amount upto Rs 1 Crore or
- “Statutory” cross-default for financial 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.
Who has control?
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
- Fraudulent/ Malicious initiation of CIRP/Liquidation is Punishable with a minimum penalty of Rs. 1 Lakh up to Rs. 1 Crore
- Deliberate contravention of CIRP provisions by IP – Punishable with imprisonment upto 6 months or a minimum penalty of Rs. 1 Lakh up to Rs. 5 Lakhs or both
Ecosystem of IBC
- IBBI – apex body for promoting transparency & governance in the administration of the Code; will be involved in setting up the infrastructure and accrediting IPs and IUs
- IUs – centralized repository of nancial and credit information of borrowers; would validate the information and claims of creditors vis-à-vis borrowers, as needed
- IPAs – professional bodies registered by the Board to promote and regulate the insolvency profession; these bodies will enrol IPs
- IPs – licensed professionals regulated by the IBBI; will conduct resolution process; to act as liquidator; appointed by CoC and will assume the powers of board of directors
- Adjudicating Authority (AA) – would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/reject resolution plans and decide in respect of claims or matters of law/ facts thereof
- CoC – consists of Fnancial creditors who will appoint and supervise the actions of IPs; need to approve the resolution plan
Priority of claims
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.
- A Liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon into the Corporate Voluntary Liquidation Account before submission of an application for dissolution of the corporate person.
You may also like to read the following quiz on Insolvency and Bankruptcy Code:
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