What is the Insolvency and Bankruptcy Code (IBC)?

The Insolvency and Bankruptcy Code, 2016 (IBC), is a comprehensive and consolidated framework enacted by the Government of India to address insolvency and bankruptcy issues in a time-bound and efficient manner. Before IBC, insolvency laws in India were scattered across multiple legislations, leading to delays, inefficiencies, and uncertainties for creditors, businesses, and other stakeholders. IBC was introduced to simplify and streamline the process, ensuring that creditors’ rights are protected while providing a lifeline for businesses to revive, if possible.

The primary objectives of the IBC include:

  1. Resolution over Liquidation: Focus on rescuing viable businesses rather than liquidation.
  2. Time-Bound Process: Establish clear timelines to resolve insolvency matters efficiently.
  3. Maximizing Asset Value: Preserve the value of the debtor’s assets and minimize losses to stakeholders.
  4. Ease of Doing Business: Provide a robust framework for creditors and investors to foster trust in the Indian business environment.

IBC applies to corporate entities, and personal guarantors to corporate entities. It is implemented through a well-defined institutional framework, including the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), the Insolvency and Bankruptcy Board of India (IBBI), and licensed Insolvency Professionals (IPs) who facilitate the process.

Who Can File an Application Under IBC?

Under the IBC, different stakeholders are empowered to initiate insolvency proceedings based on their relationship with the debtor. Here’s a breakdown of who can file applications:

  1. Financial Creditors (Section 7)

Financial creditors are entities or individuals to whom a financial debt is owed. This includes banks, financial institutions, debenture holders, or any person who has provided a loan to the corporate debtor.

  • Examples: Banks recovering unpaid loans, bondholders claiming defaulted repayments.
  • Purpose: To recover financial debts exceeding the threshold limit (currently Rs. 1 crore).
  1. Operational Creditors (Section 9)

Operational creditors are those who have provided goods or services to the corporate debtor and have unpaid dues. It includes vendors, suppliers, employees, or contractors.

  • Examples: An unpaid supplier of raw materials or an employee claiming unpaid wages.
  • Pre-requisite: Operational creditors must first send a demand notice to the corporate debtor before filing an application.
  1. Corporate Applicants (Section 10)

The corporate debtor itself can voluntarily initiate insolvency proceedings if it is unable to meet its liabilities.

  • Examples: Companies facing severe financial distress and seeking resolution to restructure their debts.
  • Objective: To provide an opportunity for companies to restructure and revive their operations.
  1. Personal Guarantors (Sections 94 & 95)

In cases where individuals have acted as guarantors for corporate debts, creditors can initiate insolvency against such personal guarantors. Alternatively, the guarantors themselves may seek insolvency resolution to restructure their obligations.

  • Examples: Promoters who have personally guaranteed corporate loans.

5. Voluntary Liquidation (Section 59)

Voluntary liquidation under Section 59 of the IBC allows a solvent corporate entity to wind up its affairs voluntarily. This process can only be initiated if the company has no outstanding debts or has made provisions to repay them fully.

  • Pre-requisites:
    • The company must pass a special resolution in a general meeting.
    • The declaration of solvency by the majority of directors stating that the entity is solvent and capable of paying its debts.
    • The liquidator appointed oversees the process and ensures compliance with the IBC.
  • Objective: To provide a structured mechanism for solvent entities to exit operations, ensuring transparency and compliance with legal provisions.

Why IBC?

The IBC stands out as a landmark legislation in India’s economic and legal landscape, offering numerous advantages over the previous fragmented framework. Here’s why the IBC has become a preferred mechanism:

  1. Time-Bound Resolution

One of the most significant features of IBC is its emphasis on resolving insolvency cases within a strict timeline. The resolution process is designed to conclude within 180 days or by maximum by 330 days, including any litigation period. This ensures faster recovery for creditors and quicker decision-making for businesses.

  1. Maximization of Value

By preserving the corporate debtor as a going concern, IBC helps maximize the value of the entity’s assets, benefiting creditors and other stakeholders. The emphasis is on rescuing viable businesses, which contributes to economic growth and job retention.

  1. Clear Hierarchy for Debt Resolution

IBC introduces a structured waterfall mechanism for debt recovery during liquidation, prioritizing secured creditors, workmen, and employees while ensuring fairness in the distribution of proceeds.

  1. Reducing Non-Performing Assets (NPAs)

IBC has been instrumental in addressing the issue of rising NPAs in India’s banking sector. By providing a reliable recovery mechanism, it enhances the confidence of lenders and investors.

  1. Empowering Creditors

Unlike earlier frameworks where debtors often held the upper hand, IBC shifts the balance in favor of creditors. Financial creditors, through the Committee of Creditors (CoC), now play a pivotal role in deciding the future of the debtor.

  1. Boosting Ease of Doing Business

IBC’s transparent and predictable framework has significantly improved India’s ranking in the Ease of Doing Business index, attracting foreign and domestic investments.

  1. Comprehensive Coverage

IBC caters not only to large corporates but also to MSMEs, individuals, and partnership firms, making it a holistic framework for insolvency and bankruptcy resolution.

  1. Promoting Discipline and Accountability

IBC’s provisions, including penalties for fraudulent and wilful defaults, promote financial discipline among businesses and discourage mismanagement.

Conclusion

The Insolvency and Bankruptcy Code, 2016, empowers creditors by ensuring time-bound resolutions, transparency, and fairness in debt recovery processes. It has transformed the insolvency framework in India, creating a creditor-friendly environment while balancing the interests of debtors and other stakeholders. By encouraging financial discipline and reducing systemic risks, IBC continues to play a pivotal role in strengthening India’s credit ecosystem.

– Article by Akhila Bolla Advocate & Insolvency Professional