Introduction to the Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a landmark legislation in India's financial and corporate regulatory framework. It was enacted to streamline and strengthen the insolvency resolution process for companies, individuals, and partnership firms facing financial distress. Before its introduction, India's insolvency and bankruptcy system was fragmented, inefficient, and time-consuming, making it difficult for creditors to recover dues and for businesses to exit the market in a structured manner. The IBC brought a unified legal framework that significantly improved the speed, transparency, and effectiveness of resolving insolvency cases.

The primary objective of the IBC is to ensure the timely resolution of distressed assets while balancing the interests of all stakeholders, including creditors, investors, and the economy as a whole. It provides a structured process for identifying and addressing financial distress, either through corporate restructuring or liquidation. The Insolvency and Bankruptcy Board of India (IBBI) was established as the regulatory authority to oversee the implementation of the Code, ensuring fair and efficient resolution of insolvency cases.

Need for the IBC

Before the introduction of the IBC, India had multiple laws dealing with insolvency and bankruptcy, including:

• The Sick Industrial Companies Act (SICA), 1985
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act)
• The Companies Act, 1956/2013 (winding-up provisions)
• The SARFAESI Act, 2002
• The Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 (for individual bankruptcy)

These laws lacked uniformity and efficiency, leading to delays in resolution, low recovery rates, and increased financial risks for lenders. Insolvency cases would often take several years to resolve, causing huge losses to creditors and negatively impacting economic growth. The World Bank’s Ease of Doing Business Report ranked India poorly in terms of resolving insolvency, highlighting the urgent need for a modern, time-bound, and comprehensive insolvency framework.

The IBC was introduced to replace this fragmented system with a single, comprehensive law that would ensure faster resolution, fair treatment of creditors, and improved recovery rates. It provides a clear hierarchy of creditors and a defined process for insolvency resolution, significantly reducing uncertainties in the system.

Key Features of the IBC

1. Time-Bound Process: The IBC mandates that corporate insolvency resolution must be completed within 330 days (including litigation). This ensures that assets do not lose value due to prolonged legal battles.
2. Corporate Insolvency Resolution Process (CIRP): The Code introduces a structured and time-bound resolution process for companies in distress. Once a company defaults on payments, creditors or the company itself can initiate insolvency proceedings. A resolution professional (RP) is appointed to take charge of the company's operations and assist in finding a resolution plan.
3. Creditor Control: The Committee of Creditors (CoC), primarily consisting of financial creditors, plays a crucial role in deciding the fate of the distressed company. They can either approve a restructuring plan or vote for liquidation.
4. Moratorium Period: Once insolvency proceedings begin, a moratorium period is imposed, preventing legal actions or debt recovery efforts against the company, allowing space for resolution.
5. Liquidation Process: If no resolution plan is approved within the stipulated time, the company moves into liquidation, where its assets are sold to repay creditors. The IBC provides a waterfall mechanism for distributing proceeds, prioritizing secured creditors over unsecured creditors and equity shareholders.
6. Individual and Partnership Insolvency: The IBC extends beyond companies, covering individual insolvency and bankruptcy through a separate resolution process, benefiting small businesses and individuals facing financial distress.
7. Cross-Border Insolvency Framework: The Code allows the Indian government to enter into bilateral agreements with other nations to resolve cases involving multinational corporations, ensuring seamless resolution for companies with assets and liabilities in multiple jurisdictions.

Impact of the IBC

Since its implementation, the IBC has significantly improved India’s insolvency resolution framework and has had a positive impact on the economy:

• Faster resolution of insolvency cases has helped businesses either recover through restructuring or exit the market in an orderly manner.
• Higher recovery rates for creditors have boosted investor confidence in India’s financial system.
• Reduction in Non-Performing Assets (NPAs) has strengthened the banking sector, making it easier for businesses to access credit.
• India’s ranking in the Ease of Doing Business index has improved, particularly in the "Resolving Insolvency" category.
• Promotes entrepreneurship and investor confidence by providing a clear exit strategy for failing businesses.

The IBC has transformed India’s financial landscape, making it more business-friendly, efficient, and aligned with global best practices. It has ensured that corporate failures do not drag on for years, enabling swift resolution, better resource allocation, and a healthier economic environment.

CA Kush Tapas Aditya Sawant CA Manish Kumar Krutika Kulkarni Muskan Taunk Hemant Raibole

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