INSOLVENCY AND BANKRUPTCY

Why in the News? 

Implementation of the Insolvency and Bankruptcy Code is facing at the adjudicatory level. 

1. Background 

• The term insolvency is used for individuals, partnerships or companies. 
• While insolvency is a situation where a customer's inability to pay off the debts. 
• Bankruptcy is a situation wherein an application is made to an authority declaring insolvency and seeking to be declared bankrupt. 

2. About insolvency and bankruptcy code 2016 (IBC) 

• This code was introduced for the liquidation of assets of the company after its inability to pay the debt and to overcome the challenges of the earlier SARFAESI Act. 
• The process of liquidation can be initiated by either the debtor or the creditors. 
• The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country. 

3. Resolution under IBC 

• When a company is unable to repay its debt. 
• Then the company's account is declared as a Non-performing Asset by the bank. 
• Now the insolvency process can be initiated by either the debtor or the creditors by approaching the National Company Law Tribunal. 
• The National Company Law Tribunal grants a moratorium and an insolvency professional starts the liquidation plan for the company. 
• The Resolution plan so made should be approved by the majority of creditors by voting. 
• An insolvency professional will liquidate the assets of the company and recover the dues. 

4. Appeal Structure Of Insolvency and Bankruptcy

5. Limitations under IBC-2016 

• Insolvency and Bankruptcy Code 2016 is not applicable in the case of the willful defaulter. Insolvency and Bankruptcy Code 2016 is not applicable for Incapable defaulters ( A borrower whose loan account is NPA for more than a year ). 

6. Wilful defaulter. 

• According to the Reserve Bank of India a wilful defaulter is an entity (legal/natural) that has not repaid the loan amount despite its financial ability to repay it. 

6.1. Classification of wilful defaulter by RBI 

• The unit has defaulted in meeting its payment/repayment obligations to the lender even when it can honour the said obligations. 
• The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed but has diverted the funds for other purposes. 
• The unit has defaulted in meeting itspayment/repaymentt obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. 
• The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given to secure a term loan without the knowledge of the bank/lender. 

7 . View of Supreme Court

• The Supreme Court upheld the government's move to allow lenders to initiate insolvency proceedings against personal guarantors( One who has provided surety of the loan taken by the lender). 
• the apex court decides to boostbanks's recovery efforts regarding bad loans 
• This clause has left no escape clause for personal guarantors.