INSOLVENCY AND BANKRUPTCY CODE (IBC)
1. Context
When a person undergoes IBC proceedings, a moratorium on legal action with respect to any debt kicks in. But there is little clarity on whether this moratorium covers cheque bounce. The matter has now been referred to a larger Supreme Court bench
2. About Insolvency and Bankruptcy Code (IBC)
- The Insolvency and Bankruptcy Code (IBC), 2016 is one of the most significant economic reforms introduced in India to deal with the problem of unpaid debts and financially distressed businesses.
- Before the IBC came into existence, India had multiple laws and institutions dealing with bankruptcy and debt recovery.
- This often resulted in lengthy legal battles, delays in recovering money, and a significant loss in the value of businesses. As a result, banks accumulated large amounts of bad loans, also known as Non-Performing Assets (NPAs).
- To address these issues, the Government of India enacted the IBC in 2016. The Code provides a single, comprehensive, and time-bound framework for resolving insolvency and bankruptcy cases involving companies, partnership firms, and individuals.
- In simple terms, insolvency occurs when a person or a company is unable to repay its debts on time. Under the IBC, when a company defaults on its loan obligations, either the creditor or the company itself can approach the National Company Law Tribunal (NCLT).
- Once the tribunal admits the case, the management of the company is temporarily taken away from the existing promoters and handed over to an Insolvency Resolution Professional. This professional takes control of the company's affairs and works towards finding a solution to revive the business.
- A Committee of Creditors, mainly consisting of financial creditors such as banks, is then formed. This committee evaluates various resolution plans submitted by investors or interested parties who are willing to take over or restructure the company.
- If the creditors approve a suitable plan, the company is revived and continues its operations under new management or a revised financial structure.
- However, if no viable resolution plan is approved within the prescribed period, the company proceeds to liquidation. In liquidation, the company's assets are sold, and the proceeds are distributed among creditors according to a legally defined order of priority.
- One of the most important features of the IBC is its emphasis on a time-bound process. The law aims to complete the insolvency resolution process within a specified period, thereby preventing unnecessary delays and preserving the value of the company's assets.
- The IBC is regulated by the Insolvency and Bankruptcy Board of India (IBBI), while appeals against NCLT decisions can be made before the National Company Law Appellate Tribunal (NCLAT).
- The significance of the IBC lies in the fact that it has shifted India's insolvency framework from a "debtor-in-possession" model to a "creditor-in-control" model.
- This has strengthened credit discipline, improved the recovery prospects of banks, reduced the burden of bad loans, and enhanced investor confidence in the Indian economy.
3. What is insolvency under the Bankruptcy Code?
- Under the Insolvency and Bankruptcy Code (IBC), 2016, insolvency refers to a financial situation in which a person, company, or business is unable to pay its debts when they become due.
- To understand it simply, imagine a company has borrowed money from banks and other lenders. If the company's income and cash flow become insufficient to repay its loans, interest, or other liabilities on time, the company is said to be insolvent.
- Insolvency does not necessarily mean that the company has stopped functioning or that it has no assets. It simply means that it is unable to meet its financial obligations as they fall due.
- The IBC was enacted to address precisely this situation. Rather than immediately shutting down an insolvent company, the law first attempts to rescue and revive it.
- Once a default occurs, creditors or the debtor itself can approach the tribunal to initiate the insolvency resolution process.
- During this process, efforts are made to restructure the company's debts, find new investors, or transfer ownership so that the business can continue operating and creditors can recover as much of their money as possible.
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It is important to distinguish insolvency from bankruptcy:
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4. What is the purpose of the Insolvency and Bankruptcy Code?
- The primary purpose of the Insolvency and Bankruptcy Code (IBC), 2016 is to provide a time-bound and efficient mechanism for resolving insolvency of companies, partnership firms, and individuals while maximizing the value of their assets.
- Before the IBC was enacted, India's insolvency framework was fragmented across several laws, and debt recovery often took many years.
- During these delays, businesses lost value, creditors recovered only a small portion of their money, and the banking sector accumulated large amounts of bad loans (NPAs).
- The IBC was introduced to address these problems by creating a single, comprehensive framework for insolvency resolution.
- The Code seeks to ensure that when a debtor is unable to repay its debts, the focus is first placed on resolving the financial distress and keeping the business as a going concern, rather than immediately liquidating it.
- This helps preserve jobs, maintain economic activity, and maximize the value that can be recovered by creditors.
- Another important objective of the IBC is to promote credit discipline. Since borrowers know that default may lead to loss of control over their business, they are encouraged to manage their finances responsibly.
- Similarly, lenders gain greater confidence in the legal system's ability to recover dues, which improves the overall availability of credit in the economy.
- The Code also aims to balance the interests of all stakeholders, including creditors, employees, shareholders, suppliers, and the government. By establishing a clear and transparent process, it reduces uncertainty and enhances investor confidence.
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In essence, the IBC serves four major purposes:
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6. Insolvency and Bankruptcy Code (Amendment) Bill, 2025-what are key highlights of the bill?
The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 was introduced to address delays in insolvency proceedings, improve recovery for creditors, and bring greater clarity to the insolvency resolution process. It also introduces new mechanisms for handling complex insolvency cases involving corporate groups and foreign assets.
Key Highlights of the Bill
1. Introduction of a Creditor-Initiated Insolvency Resolution Process (CIIRP)
One of the most significant reforms is the creation of an alternative insolvency resolution process that can be initiated by creditors outside the traditional tribunal-driven route. Financial creditors holding at least 51% of the outstanding debt can trigger the process, reducing dependence on the NCLT and speeding up resolutions.
2. Faster Admission of Insolvency Cases
The Bill seeks to reduce delays at the admission stage. The adjudicating authority is required to admit or reject applications within a prescribed timeline, and reasons must be recorded if there is a delay beyond 14 days. This is intended to make the commencement of insolvency proceedings more predictable.
3. Framework for Group Insolvency
Many business groups operate through multiple interconnected companies. The Bill introduces a framework to deal with insolvency of such corporate groups in a coordinated manner, helping maximize value and avoid fragmented proceedings.
4. Cross-Border Insolvency Mechanism
The Bill provides a legal framework for dealing with insolvency cases involving assets, creditors, or operations spread across different countries. This is particularly important for multinational corporations operating in India.
5. Strengthening the Role of Creditors
The powers of the Committee of Creditors (CoC) are enhanced. Creditors are given greater oversight during both resolution and liquidation processes, improving their ability to protect and recover their claims.
6. Stricter Rules for Withdrawal of Insolvency Applications
The Bill tightens the conditions under which an admitted insolvency application can be withdrawn. This is aimed at preventing misuse of the insolvency process and ensuring that withdrawals occur only with appropriate creditor approval.
7. Reforms in Liquidation Process
The liquidation framework is revised to improve asset realization and creditor recovery. The Bill also allows greater flexibility in the sale of assets and enhances creditor supervision during liquidation.
8. Greater Clarity on Rights of Different Creditors
The amendments clarify the treatment and priority of various categories of creditors, including government authorities. This reduces uncertainty and litigation over distribution of proceeds.
9. Improved Implementation of Resolution Plans
The Bill introduces provisions to ensure that approved resolution plans are implemented more effectively and within specified timelines, thereb
7. Way Forward
The Insolvency and Bankruptcy Code has reformed the Indian Insolvency Law to a great extent. The government needs to provide appropriate budgetary allocations to up skilling insolvency professionals and digitization of insolvency resolution process.
There has been a marked improvement in the recovery process which is already leading to billions of dollars being invested in the country due to the protection of creditor rights.
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Prelims question: 1. According to the IBC, which of the following is not a financial service
A.Underwriting issuance of financial support
B.Accepting of deposits
C.Operating an investment scheme
D.Payment of wages to the Employees
Mains questions:
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Previous Year Questions
1.Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (2017)
(a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government. (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties. (c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings. (d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government. Answer (b) |
Source: The Hindu
