The Insolvency and Bankruptcy Code, 2016: A Comprehensive Overview

The Insolvency and Bankruptcy Code, 2016 (IBC), is a landmark legislation in India that consolidates and amends laws relating to the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. This code aims to provide a time-bound framework for resolving insolvency, maximizing the value of assets, and promoting entrepreneurship. This article provides a comprehensive overview of the IBC, its key provisions, and its implications for various stakeholders.

Objectives of the IBC:

• To consolidate and amend laws relating to insolvency and bankruptcy.

• To provide a time-bound manner for resolving insolvency.

• To maximize the value of assets of insolvent entities.

• To promote entrepreneurship and availability of credit.

• To balance the interests of all stakeholders, including creditors, debtors, and employees.

• To establish the Insolvency and Bankruptcy Board of India (IBBI).

Key Definitions (Section 3):

• Board: The Insolvency and Bankruptcy Board of India (IBBI).

• Bench: A bench of the Adjudicating Authority.

• Bye-laws: Bye-laws made by an insolvency professional agency.

• Charge: An interest or lien created on property as security, including a mortgage.

• Chairperson: The Chairperson of the Board.

• Claim: A right to payment or remedy for breach of contract.

• Corporate Person: A company, limited liability partnership, or any other entity with limited liability.

• Corporate Debtor: A corporate person who owes a debt to any person.

• Core Services: Services provided by an information utility, including accepting, recording, authenticating, and providing access to financial information.

• Creditor: Any person to whom a debt is owed, including financial, operational, secured, and unsecured creditors.

• Debt: A liability or obligation, including financial and operational debt.

• Default: Non-payment of debt when due and payable.

• Financial Information: Records of debt, liabilities, assets, defaults, balance sheets, and cash flow statements.

• Financial Institution: A scheduled bank, a financial institution as defined in the Reserve Bank of India Act, 1934, or a public financial institution.

• Financial Product: Securities, insurance contracts, deposits, credit arrangements, retirement benefit plans, and other instruments.

• Financial Service: Services related to accepting deposits, managing assets, effecting insurance contracts, and offering financial advice.

• Financial Service Provider: A person providing financial services under authorization or registration.

• Financial Sector Regulator: An authority regulating financial services.

• Insolvency Professional: A person enrolled with an insolvency professional agency and registered with the Board.

• Insolvency Professional Agency: An agency registered with the Board.

• Information Utility: A person registered with the Board for storing financial information.

• Information Memorandum: A memorandum prepared by the resolution professional.

• Initiation Date: The date on which an application is made to the Adjudicating Authority.

• Insolvency Commencement Date: The date of admission of an application for initiating the insolvency process.

• Insolvency Resolution Process Costs: Costs incurred in raising interim finance, fees of the resolution professional, and other related expenses.

• Liquidator: An insolvency professional appointed as a liquidator.

• Liquidation Cost: Costs incurred by the liquidator during the liquidation process.

• Notification: A notification published in the Official Gazette.

• Operational Creditor: A person to whom an operational debt is owed.

• Operational Debt: A claim related to goods, services, or employment, or a debt arising under any law.

• Person: Includes individuals, Hindu Undivided Families, companies, trusts, partnerships, and limited liability partnerships.

• Person Resident in India: As defined in the Foreign Exchange Management Act, 1999.

• Person Resident Outside India: A person other than a person resident in India.

• Prescribed: Prescribed by rules made by the Central Government.

• Property: Includes money, goods, actionable claims, land, and any interest in property.

• Regulations: Regulations made by the Board.

• Related Party: A director, partner, manager, or relative of a corporate debtor or a person who controls or influences the corporate debtor.

• Resolution Applicant: A person who submits a resolution plan.

• Resolution Professional: An insolvency professional appointed to conduct the insolvency resolution process.

• Schedule: The Schedule annexed to the Code.

• Secured Creditor: A creditor in whose favor a security interest is created.

• Security Interest: A right, title, or interest in property created to secure payment or performance of an obligation.

• Transaction: An agreement for the transfer of assets, funds, goods, or services.

• Transfer: Includes sale, purchase, exchange, mortgage, pledge, gift, loan, or any other form of transfer of right, title, or possession.

• Transfer of Property: Transfer of any property, including any interest in the property and creation of any charge.

• Workman: As defined in the Industrial Disputes Act, 1947.

Application of the Code (Section 2):

The IBC applies to:

• Companies incorporated under the Companies Act, 2013, or previous company laws.

• Other companies governed by special Acts, unless inconsistent with the special Act.

• Limited Liability Partnerships (LLPs) incorporated under the LLP Act, 2008.

• Other bodies incorporated under any law, as specified by the Central Government.

• Personal guarantors to corporate debtors.

• Partnership firms and proprietorship firms.

• Individuals.

Corporate Insolvency Resolution Process (CIRP) (Part II):

• Initiation of CIRP (Section 7, 9, and 10): A financial creditor, operational creditor, or the corporate debtor itself can initiate CIRP.

• Moratorium (Section 14): On admission of an application, a moratorium is declared, prohibiting legal actions, asset transfers, and recovery of security interests.

• Public Announcement (Section 15): A public announcement is made inviting claims from creditors.

• Interim Resolution Professional (IRP) (Section 16): An IRP is appointed to manage the affairs of the corporate debtor.

• Committee of Creditors (CoC) (Section 21): A CoC is constituted, comprising financial creditors.

• Resolution Plan (Section 30): The resolution professional invites resolution plans, which are evaluated by the CoC.

• Approval of Resolution Plan (Section 31): The Adjudicating Authority approves the resolution plan if it meets the requirements of the Act.

• Liquidation (Section 33): If no resolution plan is approved, the corporate debtor goes into liquidation.

Liquidation Process (Part II, Chapter III):

• Appointment of Liquidator (Section 34): A liquidator is appointed to manage the liquidation process.

• Powers and Duties of Liquidator (Section 35): The liquidator takes control of assets, verifies claims, and sells assets for distribution.

• Liquidation Estate (Section 36): The liquidation estate includes all assets of the corporate debtor.

• Distribution of Assets (Section 53): The proceeds from the sale of assets are distributed in a specified order of priority.

Pre-packaged Insolvency Resolution Process (PIRP) (Part II, Chapter III-A):

• Eligibility (Section 54A): PIRP is available for micro, small, and medium enterprises (MSMEs) that meet certain conditions.

• Process: PIRP is a faster and more efficient process than regular CIRP.

• Base Resolution Plan: The corporate debtor submits a base resolution plan.

• Approval: The committee of creditors approves the resolution plan.

• Termination: If no plan is approved, the process is terminated.

Bankruptcy for Individuals and Partnership Firms (Part III):

• Fresh Start Process (Chapter II): Provides a mechanism for individuals with low income and assets to discharge their qualifying debts.

• Insolvency Resolution Process (Chapter III): A process for restructuring and resolving debts of individuals and partnership firms.

• Bankruptcy Process (Chapter IV): A process for declaring individuals bankrupt and distributing their assets.

Key Features of the IBC:

• Time-Bound Process: The IBC mandates a time-bound resolution process for insolvency.

• Creditor-Driven Process: The committee of creditors plays a key role in the resolution process.

• Focus on Resolution: The IBC prioritizes resolution over liquidation.

• Professional Management: The process is managed by insolvency professionals.

• Transparency and Accountability: The Act promotes transparency and accountability in the insolvency process.

• Centralized Authority: The Insolvency and Bankruptcy Board of India (IBBI) regulates insolvency professionals and agencies.

The Insolvency and Bankruptcy Code, 2016, is a comprehensive and transformative legislation that has significantly changed the landscape of insolvency resolution in India. By providing a time-bound and efficient framework for resolving financial distress, the IBC promotes economic stability and encourages entrepreneurship. The Act is essential for maintaining a healthy financial system and protecting the interests of all stakeholders.