The enactment of the Insolvency and Bankruptcy Code, 2016 in May 2016 was a watershed development and it has far-reaching implications for the banking sector in India.  The fulcrum of a robust and resilient banking sector is a comprehensive bankruptcy regime. It enables a sound debtor-creditor relationship by protecting the rights of both, by promoting predictability and by ensuring efficient resolution of indebtedness.

In India, the extant legal and institutional machinery for dealing with debt default, either through the Indian Contract Act, 1872 or through special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 has not been utilised well by banks.

Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have neither aided prompt recovery by lenders nor swift restructuring of indebted firms.

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 11 May, 2016. The IBC Code received the assent of the President of India on 28 May, 2016.

The bankruptcy code is a one stop solution for resolving insolvencies which, earlier was a long drawn process and did not offer an economically viable arrangement. A strong insolvency framework where the cost and the time incurred is minimised in attaining liquidation has been long overdue in India.

The Insolvency and Bankruptcy Code, 2016 (IBC) deals with insolvency and bankruptcy by consolidating and amending various laws relating to re-organisation and insolvency resolution. The IBC covers individuals, companies, limited liability partnerships, partnership firms and other legal entities as may be notified (except financial service providers) and is aimed at creating an overarching framework to facilitate the winding up of business or engineering a turnaround or exit. The IBC aims at insolvency resolution in a time-bound manner (180 days, extendable by another 90 days under certain circumstances) undertaken by insolvency professionals.

Salient Features of Insolvency and Bankruptcy Code, 2016 (IBC)

Under the provisions of the Code, insolvency resolution can be triggered at the first instance of default and the process of insolvency resolution has to be completed within the stipulated time limit. The institutional infrastructure under the IBC, 2016 rests on four pillars, namely:The first pillar of institutional infrastructure is a class of regulated persons – the ‘Insolvency Professionals’. They assist in the completion of insolvency resolution, liquidation and bankruptcy proceedings and are governed by ‘Insolvency Professional Agencies’, who will develop professional standards and code of ethics as first level regulators.

The second pillar of institutional infrastructure are ‘Information Utilities’, which would collect, collate, authenticate and disseminate financial information. They would maintain electronic databases on lenders and terms of lending, thereby eliminating delays and disputes when a default actually takes place.

The third pillar of the institutional infrastructure is adjudication. The NCLT is the forum where cases relating to insolvency of corporate persons will be heard, while DRTs are the forum for insolvency proceedings related to individuals and partnership firms. These institutions, along with their Appellate bodies, viz., the National Company Law Appellate Tribunal (NCLAT) and the Debt Recovery Appellate Tribunal (DRAT), respectively, will seek to achieve smooth functioning of the bankruptcy process.

The fourth pillar is the regulator‘The Insolvency and Bankruptcy Board of India’. This body has regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.

For individuals, the Code provides for two distinct processes, namely, “Fresh Start” and “Insolvency Resolution”, and lays down the eligibility criteria for these processes. The Code also establishes a fund (the Insolvency and Bankruptcy Fund of India) for the purposes of insolvency resolution, liquidation and bankruptcy of persons. A default-based test for entry into the insolvency resolution process permits quick intervention when the corporate debtor shows early signs of financial distress.

On the distribution of proceeds from the sale of assets, the first priority is accorded to the costs of insolvency resolution and liquidation, followed by the secured debt together with workmen’s dues for the preceding 24 months. Central and State Governments’ dues are ranked lower in priority. The code proposes a paradigm shift from the existing ‘debtor in possession’ to a ‘creditor in control’ regime. Priority accorded to secured creditors is advantageous for entities such as banks.

When a firm defaults on its debt, control shifts from the shareholders / promoters to a Committee of Creditors to evaluate proposals from various players about resuscitating the company or taking it into liquidation. This is a complete departure from the experience under the Sick Industrial Companies Act under which delays led to erosion in the value of the firm.

Empirical evidence shows that a conducive institutional environment and an appropriate insolvency regime are key factors in recovery of stressed assets, apart from loan characteristics.

In order to further strengthen the insolvency resolution process, the Government has notified The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 on November 23, 2017. The Ordinance provides for prohibition of certain persons from submitting a resolution plan and specifies certain additional requirements for submission and consideration of the resolution plan before its approval by the committee of creditors.

These are excerpts of the few pages of ebook – Legal & Regulatory Aspects Of Banking by N K Gupta.

Read the complete chapter on IBC Code in Book – Legal & Regulatory Aspects Of Banking by N K Gupta.