What is the bankruptcy insolvency Code in India?

Law
17-Oct-2022
blog-img

The insolvency and bankruptcy code is the most critical reform created by the government. Indian capitalism never understood Bankruptcy, and it is assumed as a shame. It is no good as a business can move smoothly or fail, but nothing is wrong.

From the period begins from 2008 to 2014, banks lent indiscriminately. That led to a very high rate of Non-Profitable Assets (NPAs), which asset quality judges of the RBI emphasized. It led to initiating action by the administration in assigning the 'Joint Committee of Parliament on April 28, 2016, which in its report of 2015, suggested by the Code. This article will discuss the Code, its aim, and its challenges.

Insolvency and Bankruptcy Code, 2016

The insolvency and Bankruptcy code 2016 is the bankruptcy law in India whose drive is to reduce the current framework by making a single law for Bankruptcy and insolvency and amending the laws relating to the commodities in India with the time being enforced. The unification of laws in India is not a unique concept like GST is framed by consolidating 17 laws into one. This Code was presented in Lok Sabha in December 2015. Lok Sabha passed it on May 5, 2016.

Applicability:

The bankruptcy insolvency Code deals with only four entities:

  • Individuals
  • Partnership firms
  • Limited Liability Partnerships (LLP)
  • Companies. 

This Code deals with Bankruptcy, Insolvency, and liquidation, where insolvency and Bankruptcy are terms that seem to be the same, but the actual meaning is different. Insolvency refers to a legal process where the liabilities of an organization/ person are more than its assets.

Bankruptcy refers to a legal process in which a court of the competent authority has stated the entity's insolvency on its application to declare itself. 

In simple words, we can say that Bankruptcy is a legal condition, whereas insolvency may or maybe not be legal.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 was passed on April 4, 2021. It revises the Bankruptcy and Insolvency Code, 2016. Insolvency is when individuals or institutions cannot refund their debt. 

Corporate Insolvency: Settling the Bankruptcy of debtors within 330 days is called the corporate insolvency resolution process. The debtor or creditors can lay for CIRP's initiation in the occurrence of a bankruptcy of one lakh rupees or more. Per the CIRP, a board of creditors is formed to determine the insolvency resolution. The board can assume a crucial plan that generally provides for debt payoff. If the board does not approve the decided plan of creditors in the listed time, the company is said to be liquidated. At that time, the company affairs are managed by the resolution professional appointed by the board of creditors.

Pre-packaged insolvency resolution: The Law presents different Bankruptcy and insolvency solutions for all enterprises. Unlike CIRP, PIRP may be formed only by debtors. The debtor must have a ground resolution plan in place. During PIRP, the direction of the firm will remain with the debtor.

Minimum default amount: Application for creating a pre-packaged insolvency resolution process can be filed in the occurrence of a default of at least one lakh rupees. The central government may increase the threshold of minimum default up to one crore rupees through a notification.

Debtors suitable for PIRP: PIRP can be created in the event of Bankruptcy by a corporate debtor classified as per the Ministry of Micro, Small & Medium Enterprises.

Development Act, 2006: Under the 2006 Act, an industry with a yearly turnover of up to Rs 250 crore and acquisition in plant and machinery up to Rs 50 crore is ranked as a Ministry of Micro, Small & Medium Enterprises. For creating PIRP, the debtor themself is needed to use authority. The judicial after that will approve or reject the application within 14 days of its permit.

Approval of financial creditors: For the pre-packaged insolvency resolution process, the debtor ought to get the approval of at least 66% of its economic creditors who are not affiliated groups of the debtor. Before pursuing consent, the debtor must feed creditors with a ground resolution plan. The debtor must propose the name of the resolution process with the application for the pre-packaged insolvency resolution process. The proposed RP must be authorized by at least 66% of the financial creditors.

Proceedings under PIRP: The debtor will submit the base resolution plan to the RP within two days of the commencement of the pre-packaged insolvency resolution process. A board of creditors must be formed within seven days of the PIRP commencement date, which will consider the base resolution plan. The committee may provide the debtor with an opportunity to revise the plan.

The RP may also invite resolution plans from other persons. Alternative resolution plans may be invited if the base plan: (i) is not approved by the committee or (ii) is unable to pay the debt of operational creditors (claims related to the provision of goods and services).

The committee must approve a resolution plan by a vote of at least 66% of the voting shares within 90 days from the commencement date of PIRP. The adjudicating authority will examine the resolution plan approved by the committee. If the committee approves no resolution plan, the RP may apply for termination of PIRP. The administration must either approve the plan or order termination of PIRP within 30 days of receipt. Termination of PIRP will result in the liquidation of the corporate debtor. 

Moratorium: During PIRP, the debtor will be provided with a moratorium under which specific actions against the debtor will be prohibited. These include filing or continuing suits, executing court orders, or recovering property.

Management of debtor during PIRP: During the PIRP, the debtor's board of directors or partners will continue to manage the debtor's affairs.

Objectives of the bankruptcy insolvency Code: 

  • Listed below are some objectives of the bankruptcy insolvency Code 
  • To reduce and amend all current insolvency laws in India.
  • To facilitate and expedite these Proceedings in India.
  • To safeguard the claim of creditors, along with the stakeholders of an organization.
  • To restore the firm in a time-bound way.
  • To encourage enterprise.
  • To get the required ease to the creditors and thus raise the credit reserve in the thrift.
  • To work out a unique and timely procedure to be embraced by the financial institution, organization, and individual.
  • To place a Bankruptcy and Insolvency Board of India.
  • Maximization of the worth of aids of corporate persons.

Challenges for IBC:

  • Lack of working National Company Law Tribunal courts: The government announced in 2019 that 25 different single and division courts of NCLT must be settled at diverse places.
  • The low acceptance rate of plans of resolution: As per data from the IBBI, it is stated that 2,542 corporate insolvency cases filed from December 1, 2016, to September 30, 2019, almost 156 have finished in consent of key plans — a very 15%.
  • A high number of removals is a significant concern as it breaks the bankruptcy insolvency Code's principal purpose of settling Bankruptcy.
  • Judicial processing in India is slow, which allows the resolution processes to drag on, as it shows slow recovery. 

Achievements of the bankruptcy insolvency Code: 

The bankruptcy insolvency Code is an advance on the two laws framed to heal bad loans —

One act was framed in 1985 -The sick Industrial Companies Act

Another act came into action in 1993- The recovery of Debts Due to Banks and Financial Institutions Act.

Speedier Resolution: Basic methods took 4-6 years before the Code. Behind the enactment of the bankruptcy insolvency Code, they came down to 317 days.

Higher Recoveries: after the IBC, the recoveries rise 43% to 22% before it.

Institution of bankruptcy insolvency Code, we had seen many businesses resulting in many cases being resolved before it was referred to NCLT.

A constant increase in permitted corporate insolvency resolution process cases.

After March 2019, 1858 cases were recognized, 152 were reviewed, 91 were withdrawn, 378 ended in liquidation, and 94 approved the resolution plans.

Conclusion:

As per the World Bank's index, India 2016 ranked 136 out of 189 on the ease of fixing insolvencies, and as of 2019, India's rank has jumped to 63rd. The debt recovery rate was about 26% before IBC's action. Due to the global pandemic, many firms fail to pay their debts, raising the number of Non-Performing Assets. Thus, IBC (amendments) will play a meaningful role in safeguarding the interest of the debtors and creditors.

Currently, multiple laws and panels deal with various financial failures and insolvency problems. To sum up, the Insolvency and Bankruptcy Code, including the file insolvency petition process, is said to be one of the best reforms by the government, given how it has been framed, which is truly admirable.

FAQ:

What are the Key Objectives of the bankruptcy insolvency Code 2016?

To reduce and amend the laws linking to re-organization and default solution of a person, firms, and individuals. To fix the time duration for implementing the rule in a time-bound compensation of insolvency of 180 days.

Why is IBC Code necessary?

This Code aims to give a global standard for the safe carriage, in bulk by sea, of harmful chemicals and toxic liquid substances. The Code defines the design, structure, and supply standards of ships.