India took the longest time to resolve insolvency compared to other countries, where most bankruptcy resolutions happened in 1-1.5 years. Moreover, several non-performing bank loans were pending with delays in debt resolution. Better and faster resolution of cases was the need of the hour. That’s when the Government introduced the bill in the Lok Sabha in 2015. The Lok Sabha cleared the bill, and the President gave his nod to the Insolvency and Bankruptcy Code in May 2016.
IBC code 2016
The IBC Code 2016 is -an act to combine and modify laws that deal with reorganization and insolvency resolution of the corporate, partnership firms, and individuals in a time-bound manner. The code aims to -maximize the value of assets, promote entrepreneurship, credit availability, balance the interests of all the stakeholders and modify the order of priority of payment of Government dues, establish an Insolvency and Bankruptcy Board of India (IBBI), and deal with any other matters related to insolvency.
The bankruptcy code 2016 is a one-stop solution to resolving insolvencies now. The resolutions earlier were time-consuming and not economically viable as the creditors gained control over the debtors’ assets in case of a default in repayment. But, the new law aims to protect the interests of small investors to make the process of doing business simple. Under this code, both the creditor and debtor can start the recovery process against each other. The IBC has 255 sections and 11 Schedules to tackle the bad loans issues affecting the banking system.
The IBC code 2016 applies to
(a) Any company incorporated under the Companies Act, 2013 or under any previous company law;
(b) Any other company governed by any special Act for the time being in force, as long as the said provisions are inconsistent with the provisions of such special Act;
(c) Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;
(d) A body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and
(e) Partnership firms and individuals who are part of the insolvency, liquidation, or bankruptcy, depending on the case.
Time limit for bankruptcy process
As per section 12 of the code, the Companies must complete the resolution process within 180 days of applying for insolvency. The resolution professional can send an application to the Adjudicating Authority to extend the period. This extension is possible only if the creditor’s committee passes a resolution with a 75% majority. The companies can get an extension only once, not exceeding 90 days. Smaller companies and startups with an annual turnover of Rs. 1crore must complete the insolvency process within 90 days. They get a 45-days extension if needed.
Regulators of the code
The Insolvency and Bankruptcy Board of India oversees the bankruptcy cases. The board has its head office in Mumbai. The Board has a Chairperson, three members from Central Government’s Ministry of Finance, Corporate Affairs and Law, one member the RBI nominates, and five members the Central Government nominates.
Facilitator of insolvency
A licensed professional manages the resolution process, the assets of the debtors while sharing information with the creditors to help then decide.
Arbitrators of the process
The National Companies Law Tribunal (NCLT) for companies and Debt Recovery Tribunal (DRT) for individuals are the arbitrators under the IBC 2016 code. The IBBI controls the insolvency professional agencies, the professionals, and the information services under the code.
Changes to the Code
The IBC Code 2016 has undergone several changes and amendments over the year. The most recent amendment was in August 2021. The latest amendment to the code aims to simplify the process, saving time and money for small businesses. The Government introduced an ordinance that offered a pre-packaged or pre-pack resolution scheme. This scheme was an informal way to resolve issues where tribunal approval will be sought later. The August amendment bill aims to replace this ordinance.
Under this amendment
The proprietors or major shareholders of a small business retain operational control of the business instead of creditors once the pre-pack insolvency scheme starts. This feature ensures the business is not disrupted while the insolvency process is on. This amendment aims to provide quick, economic and value-maximizing results for all the stakeholders without disrupting business continuity.
Over 60% of the 13-lakh active companies in India are eligible for the pre-pack bankruptcy resolution scheme. Most functional companies fall under the MSMEs incorporated; however, proprietorship firms are not eligible for this scheme.
The process is simple. An MSME that cannot pay its debt of 10 lakh can initiate the pre-pack bankruptcy resolution scheme with lender approval or lenders with 66% of the debt can start the insolvency process. The promoters can submit their plan for revival, which is exposed to Swiss value maximization challenge. The creditors have the right to ask for another plan from a new investor and promoters till they can’t raise their bid anymore.
Though the demand for the pre-pack insolvency scheme for large companies is increasing, the government may not widen its scope so soon.
While we learnt all about IBC Code let’s look at how the code has fared since it was enacted first in 2016.
- The code has been able to bring down the average days of resolution from 1500 to 380 days.
- The IBBI states, the code has helped financial creditors realize 191% compared to the liquidation value.
- Over 250 companies have been revived till date. Of the 4008 companies that filed for insolvency, 277 have been resolved under CIRPs while 1025 companies were liquidated.
- The total financial realization was Rs. 1.90 lakh-crore till September 2020.
However, the best benefit of the code has been the revival of businesses, offering thousands of operational creditors a lifeline. The code has prevented job losses, NPAs, and huge monetary losses to the economy. It has even helped India move up the ranks in the global ease of doing business index from 130th to 63rd in 2020.
That’s it for IBC today. Do read the next in the series where we take up a popular case study for insolvency.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.