31,August 2024
An individual or business files for bankruptcy when they are unable to fulfill their debts or other commitments. It provides a new beginning for those who are unable to pay their bills. The bankruptcy procedure is initiated by a petition filed by the debtor. Every asset owned by the debtor is assessed and valued, and some of the assets may be utilized to settle some of the existing debt.
Formation of Insolvency and Bankruptcy Code, 2016
The Joint Committee was tasked with reviewing the Insolvency and Bankruptcy Code, 2015 following its promulgation in the Lok Sabha on December 21, 2015. The Committee had submitted its recommendations and a revised Bill on the basis of such a referral. The Insolvency and Bankruptcy Code of 2016 was passed by both Houses of Parliament in May of that year. This economic reform's primary goal is to concentrate on creditor-driven insolvency resolution.
Key Provisions
Insolvency Resolution: Different procedures for resolving insolvencies for individuals, businesses, and partnership firms are outlined in the Code. Either the debtors or the creditors may start the procedure. For both corporations and individuals, a maximum time restriction has been established for the insolvency resolution process' completion. Firms will have 180 days to finish the process; if most creditors agree, that time can be expanded by 90 days. The resolution procedure will be finished for startups (apart from partnership firms), small businesses, and other corporations (with assets under Rs. 1 Cr.) within 90 days of the request's inception, with a 45-day extension possible.
Insolvency Regulator: The bankruptcy and Bankruptcy Board of India is established by the Code to supervise the nation's bankruptcy processes and manage the entities that are registered under it. The RBI, the Ministries of Law and Finance, and other officials will be among the ten members of the Board.
Insolvency Professionals: Professionals with the necessary licenses will oversee the insolvency procedure. Throughout the insolvency procedure, these experts will also have control over the debtor's assets.
Bankruptcy and Insolvency Adjudicator: The National Company Law Tribunal for Companies and Limited Liability Partnership firms, and the Debt Recovery Tribunal for Individuals and Partnerships, are the two distinct courts that the Code intends to govern the insolvency resolution process for both businesses and individuals.
Changing the Current "Debtor in Possession" Regime to a "Creditor in Control"
In India, one advanced step towards resolving the legal framework of financial losses and bankruptcy is the Insolvency and Bankruptcy Code, 2016. In the event that an individual or company becomes insolvent, the code offers a simple and quick departure strategy. This makes it valuable to all parties involved, including government regulators. The enactment of this Code has eliminated redundant provisions found in other laws.
- The 1985 Act Concerning Sick Industrial Companies (Special Provisions)
- Act of 1993 Concerning the Recovery of Debts Due to Banks and Financial Institutions
- The Security Interest Enforcement and Securitization and Reconstruction of Financial Assets Act of 2002
- The 2013 Companies Act
Prior to the passage of this Code, a number of agencies handled cases involving debt, defaults, and bankruptcy, which typically caused delays, complexity, and increased expenses in the process of resolving insolvencies. For struggling industrial enterprises, the "Board for Industrial and Financial Reconstruction (BIFR)"—one of the insolvency regulators—has been a mirage. With an additional 90 days, the Insolvency and Bankruptcy Code, 2016 is predicted to expedite long-pending cases and settle them in 180 days.
Applicability of the Code
Each of the following entities' insolvency, bankruptcy, voluntarily dissolution, or liquidation will be subject to the Code's provisions:
- Any other company governed by any special act now in force, with the exception of any instances in which the aforementioned clause conflicts with the terms of such Special Act
- Any company incorporated under the Companies Act, 2013 or under any prior law
- Any Limited Liability Company as defined by the LLP Act of 2008
- Partnership firms and individuals
- Any other body being established under any other law already in effect, as defined by the Central Government in this regard
Furthermore, this code will only be applicable if the default's minimum value is one lakh rupees. The Central Government may, however, establish a minimal amount of default of higher value, which shall not exceed Rs. 1 crore, by publishing an announcement in the Official Gazette.
Exceptions: There is a restriction on the Code's relevance: corporate entities that are licensed to provide financial services, such as –
- Financial Institutions
- Banks
- Insurance companies
Objectives of the Code
A strong bankruptcy legal framework is necessary to accomplish the following goals:
Better resolution of disputes between the debtor and creditors
It can alleviate issues with common property and knowledge asymmetry for all parties involved in the economy by bringing procedural certainty to the negotiating process.
Establish a boundary between wrongdoing and company collapse
Additionally, it can give parties the freedom they need to reach the best compromise and optimize value during talks. A forum for negotiations between creditors and outside financiers will be established by the bankruptcy law, potentially opening the door to such restructurings.
Losses from macroeconomic downturns must be distributed
The common perception of "rich promoters of defaulting entities" is created by an infirm bankruptcy regime, giving rise to theories like:
- All of the defaults that have occurred are the result of wrongdoing;
- The promoters should bear personal and monetary responsibility for the defaults of the companies that they manage.
Macroeconomic downturns losses to be allocated
A clear bankruptcy structure leads to a clear distribution of these losses. The common tactics of loss allocation include taxes, inflation, and devaluation of currency, confiscation, and suppression of wages or consumption. Foreign creditors, investors of small businesses, savers, and employees, owners of financial as well as non-monetary assets, importers, and exporters may all be impacted by these.
Key Objectives of the Code
- The desire of all parties involved in the business to benefit from the availability of finance
- The potential damage incurred by a creditor due to default
- The following is a list of the 2016
Insolvency and Bankruptcy Code's objectives:
- To combine and modify the legislation pertaining to corporate reformation and partnership companies and individual insolvency resolution.
- To establish deadlines for the law's execution in a time-bound insolvency resolution (e.g., 180 days).
- To increase the worth of interested parties' assets.
- To encourage self-employment
- To make credit more widely available.
- To address international insolvency.
- To create an Insolvency and Bankruptcy Board of India to serve as the country's bankruptcy and insolvency law regulatory authority.
- To weigh the interests of each stakeholder, including modification. The remaining amount must be paid in the order that government obligations are due.
- To create more debt financing at higher levels for a range of debt instruments.
- To give entities a painless means of reviving.
- To build a database of defaulters in order to address India's bad debt issue.
Conclusion
India's legal system for handling insolvency and bankruptcy has undergone a substantial revision with the passage of the Insolvency and Bankruptcy Code, 2016 (IBC). The IBC attempts to give insolvent firms a methodical and time-bound resolution process by combining and changing different current regulations, therefore fostering financial stability and creditor confidence. The IBC emphasizes the significance of creditor-driven insolvency resolution by signaling a change from a debtor-in-possession framework to a creditor-in-control paradigm.
The Code creates definite procedures and deadlines for the settlement of insolvency that apply to people, businesses, and partnership entities. It also creates regulatory organizations such as the Insolvency and Bankruptcy Board of India and specialized adjudication tribunals. The provisions of the IBC are intended to increase asset value, enhance credit availability, and encourage entrepreneurship by offering a formalized process for addressing financial difficulties.
Through the resolution of insolvency and bankruptcy proceedings in a timely and equitable manner, the IBC seeks to promote a stronger economic climate by tackling the inefficiency and inefficiencies of the previous regime. This all-encompassing framework is advantageous to both creditors and debtors, and it also supports the country's economy as a whole.