The Insolvency and Bankruptcy Code (IBC): Key Developments & What’s Next

The Insolvency and Bankruptcy Code [‘IBC/Code’] represents a transformative shift in India's approach to tackle the growing concerns of non-performing assets (NPAs), streamline the resolution process for distressed companies, and create a more efficient framework for the resolution of debt and provide speedy respite to creditors. Over the years, the IBC has undergone several amendments and judicial interpretations that have shaped its current form.

Inception and Framework of the IBC

Prior to enactment of IBC, India faced numerous challenges in handling insolvencies, with infeasible laws like the Sick Industrial Companies (Special Provisions) Act (SICA) and the Companies Act, 1956, which were inefficient and provided delayed resolutions of disputes between the creditors and debtors. The IBC was introduced with an aim to consolidate various laws related to insolvency and bankruptcy and provided a time-bound process to resolve corporate insolvencies and personal bankruptcies.

Under the IBC, the process was designed to be creditor-driven, allowing stakeholders to take control of the resolution process. The Code outlines a clear mechanism for the resolution of distressed companies through a Corporate Insolvency Resolution Process [‘CIRP’], with a focus on value maximization and keeping the company as a going concern.

The law mandates the completion of the resolution process within 180 days, extendable by 90 days.

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Establishment of the Insolvency and Bankruptcy Board of India

A significant development was the establishment of the Insolvency and Bankruptcy Board of India [‘IBBI’], the regulatory authority responsible for overseeing the implementation of the Code. The IBBI plays a crucial role in ensuring that insolvency professionals, creditors, and other stakeholders adhere to the provisions of the IBC. The IBBI has also been responsible for creating and enforcing a regulatory framework for insolvency professionals, insolvency agencies, and information utilities, which are essential for the functioning of the insolvency process.

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Amendments and Strengthening of the IBC

Since its enactment, the IBC has undergone several amendments to address emerging challenges and strengthen the resolution framework. Some of the most important amendments include:

• The Insolvency and Bankruptcy Code (Amendment) Act, 2017: The first significant amendment focused on clarifying the scope of the Code and introducing provisions for the initiation of CIRP against personal guarantors to corporate debtors. It also provided clearer guidelines on the role of the Committee of Creditors and the operational creditors’ rights.

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• The Insolvency and Bankruptcy Code (Amendment) Act, 2018: This amendment provided significant changes to the law, such as the imposition of restrictions on the eligibility of promoters to submit resolution plans. Promoters who had defaulted on loans were excluded from submitting proposals to revive their companies. It also allowed for the resolution of companies in sectors such as power and steel, where previous regulations had hindered progress.

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• The Insolvency and Bankruptcy Code (Amendment) Act, 2019: One of the key features of this amendment was the introduction of a time-bound process for the resolution of insolvency, with a maximum duration of 330 days (including extensions). It also included provisions to speed up the insolvency resolution process, minimize delays, and improve the transparency of the process. Additionally, this amendment clarified that homebuyers would be considered financial creditors, granting them a seat on the Committee of Creditors in real estate insolvencies.

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• The Insolvency and Bankruptcy Code (Amendment) Act, 2020: This amendment was particularly significant in light of the COVID-19 pandemic. It temporarily suspended the initiation of CIRP for defaults of less than Rs 1 crore, aimed at preventing a surge in insolvency filings during the economic slowdown. It also introduced provisions for the fast-tracking of corporate insolvencies to benefit MSMEs (Micro, Small, and Medium Enterprises), allowing a simplified resolution process.

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• The Insolvency and Bankruptcy Code (Amendment) Act, 2021: This amendment focused on improving the resolution framework, particularly for MSMEs. It allowed for a more flexible approach to resolve distressed MSMEs, providing them with a simplified insolvency resolution process (SIRP). It also enhanced the role of the Resolution Professionals in the CIRP process to ensure that resolution is carried out in a timely manner.

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4. The Role of Judicial Interpretation and Case Law

The judiciary has played a critical role in shaping the application and interpretation of the IBC. Several landmark judgments have clarified key aspects of the law, leading to significant developments. Notable decisions include:

• Swiss Ribbons Pvt. Ltd. v. Union of India (2019): This case upheld the constitutional validity of the IBC, affirming its framework as a creditor-driven process. It also emphasized the importance of timely resolution of insolvencies, ensuring that the rights of creditors are protected while also allowing for a fair process for debtors.

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• Innoventive Industries Ltd. v. ICICI Bank (2018): In this case, the Supreme Court ruled that once the corporate debtor defaults on its payment obligations, the operational creditors can initiate the CIRP. This decision helped clarify the legal standing of operational creditors in the insolvency process.

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• Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019): This judgment was pivotal in determining the rights of creditors when it comes to the acceptance of resolution plans. The Supreme Court ruled that the Committee of Creditors has the final say in approving a resolution plan, emphasizing the importance of maximizing the value for creditors.

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Challenges and Future Directions

Despite the successes, the IBC still faces challenges. The resolution process is often delayed due to judicial backlogs, and the involvement of various stakeholders can sometimes complicate the process. Additionally, the lack of infrastructure for the resolution of personal insolvencies, as well as the inconsistent interpretation of the law by different benches, has created gaps in the system.

Going forward, the IBC will need further reforms to address these challenges. Key areas for future attention include improving the transparency of the insolvency process, strengthening the role of insolvency professionals, and ensuring that the law is applied uniformly across different cases. Moreover, enhancing the capacity for the resolution of personal bankruptcies and consumer debts could help address systemic issues related to over-indebtedness.

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Conclusion

The Insolvency and Bankruptcy Code has been a significant step in reforming India’s insolvency and bankruptcy landscape. Through its creditor-driven framework, timely resolution processes, and regulatory reforms, the IBC has improved corporate governance, facilitated the resolution of NPAs, and streamlined procedures to maximise the value while also keep the company as a going concern. While challenges remain, the IBC’s evolution reflects India’s commitment to creating a more resilient and transparent financial system. As the law continues to develop, it is likely to play an even more critical role in ensuring the efficient resolution of corporate distress and contributing to the broader economic stability of the country.

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