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THINGS TO KNOW BEFORE YOU REGISTER- Insolvency and Bankruptcy Code, 2016

The legal and institutional framework in India did not support lenders effectively or on time to recover or restructure defaulted assets due to multiple overlapping laws and adjudicating forums that dealt with financial failure and insolvency of companies, individuals, partnerships, and other entities in the country, causing undue strain on the credit system. The Insolvency and Bankruptcy Code, which was passed by Parliament in 2016, updated the old structure. While remaining focused on creditor-driven insolvency remedies, this Code sets the stage for necessary improvements. The essential elements and provisions of The Insolvency and Bankruptcy Code of 2016 are discussed in this article.

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The legal and institutional framework in India did not support lenders effectively or on time to recover or restructure defaulted assets due to multiple overlapping laws and adjudicating forums that dealt with financial failure and insolvency of companies, individuals, partnerships, and other entities in the country, causing undue strain on the credit system. The Insolvency and Bankruptcy Code, which was passed by Parliament in 2016, updated the old structure. While remaining focused on creditor-driven insolvency remedies, this Code sets the stage for necessary improvements. The essential elements and provisions of The Insolvency and Bankruptcy Code of 2016 are discussed in this article.


Insolvency vs Bankruptcy

Insolvency and bankruptcy are two distinct concepts that have different meanings. Insolvency is a circumstance in which a person is facing financial ruin as a result of a lack of cash. Bankruptcy is a court order that specifies how an insolvent borrower should handle his or her obligations and/or have resources set aside to pay creditors. As a result, the Insolvency and Bankruptcy Code was enacted. strives to provide comprehensive assistance to all parties concerned in an insolvent person's or entity's financial affairs.


The Code

After recognising the need for essential reforms in the bankruptcy and insolvency regime, as well as to improve the business environment and alleviate distressed credit markets, the Government of India introduced and implemented The Insolvency and Bankruptcy Code, 2016 by passing the bill in November of 2015. The Code was passed by both chambers of Parliament after a wide consultation process and recommendations from a joint committee of the Parliament. The impact of this Code will be felt in due time as institutional infrastructure and implementing rules, as envisioned in the Code, are put in place. With the exception of financial firms, the Bankruptcy & Bankruptcy Code offers a standard and comprehensive insolvency legislation that applies to all companies, individuals, and partnerships. The government has been working on a plan for a distinct bankruptcy resolution structure for failing banks and financial institutions. One of the Code's most important features is that it allows creditors to analyse an individual debtor's viability for a business decision and to finalise a strategy for its effective resurrection or rapid liquidation. The Code's adoption developed a new institutional structure that includes a regulator, information utilities, insolvency experts, and adjudicatory mechanisms to allow a formal and time-bound liquidation and insolvency resolution process.


Purpose of the Act

The Act aims to achieve the following goals:
a) In a time-bound way, combine and alter the laws governing corporate restructuring and bankruptcy resolution, as well as the rules governing partnership firms and individuals.
b) To increase the value of such people's assets.
c) To encourage people to start businesses.
d) Credit availability.
e) Protect the interests of all stakeholders, including a change in the priority order in which government dues are paid.
f) To successfully launch India's Insolvency and Bankruptcy Board.

Key Highlights
Insolvency for Corporate Debtors

Insolvency Resolution Process: During this step, financial creditors determine if the debtor's firm is viable enough to continue and what other options are available for its revival and rescue.
This is started when the bankruptcy resolution procedure fails or when the financial creditors feel that winding down and distributing the debtor's assets is the best option moving ahead.

Procedure to Insolvency of the company

Step - 1 : Insolvency Resolution Process (IRP)

The Insolvency Resolution Process provides a collective method for numerous lenders to deal with a corporate debtor's overall troubled situation. This is a significant departure from the current legal structure, which places the primary responsibility for initiating a reorganisation procedure on the debtor, and allows lenders to undertake separate recovery, security enforcement, and debt restructuring actions. To carry out an IRP, the Insolvency and Bankruptcy Code specifies the stages below


Step - 2 : Commencement of the Insolvency Resolution Process

An operational creditor (for an unpaid operational obligation) or a financial creditor (for a defaulted financial debt) can file an insolvency petition with the NCLT or the National Company Law Tribunal against a corporate debtor. A voluntary insolvency process can be initiated by the defaulting corporate debtor, its employees, and shareholders.


Step - 3 : Moratorium

For the duration of the Insolvency Resolution Process, the National Company Law Tribunal has issued a moratorium on a debtor's operations. This usually refers to a period of calm during which no legal proceedings for debt recovery, asset sale or transfer, security interest enforcement, or the cancellation of important contracts can be initiated against the debtor.


Step - 4 : Appointment of a Resolution Professional

To manage the Insolvency Resolution Process, the National Company Law Tribunal would designate an insolvency professional or a resolution professional. The major responsibility of the professional is to assume control of the corporate borrower and run its business as a going concern under the supervision of a committee of creditors. This is fairly similar to the insolvency laws of the United Kingdom, but differs from the "debtor in possession" scenario, in which the debtor's management keeps control of the business but the bankruptcy professional has the authority to oversee it to prevent asset stripping by the promoters. As a result, the Code permits a transfer of control from a defaulting debtor's management to its creditors. The creditors are in charge of the defaulter debtor's business, and the Resolution Professional serves as their agent.

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Step - 5 : Creditors Committee and Revival Plans

The financial creditors would be identified by a Resolution Professional, who would then organise a creditors committee. Any operation creditor with a balance of more than a specific amount would be permitted to attend committee meetings, but they would not be allowed to vote. The creditors committee would need a 75 percent majority vote to make any decisions. The creditors committee's decisions would bind the corporate debtor and all of its creditors. The creditors would consider the creditors' proposals for the defaulting debtor's rescue and rebirth. Within 180 days, the committee would decide whether to proceed with the revival plan or liquidate the organisation. A 90-day extension of the time period could be granted once. Any individual may make a revival proposal, but it must include provisions for settlement of operating debts to the amount of the liquidation waterfall. The Code is silent on the many forms of revival plans that may be used. New financing, asset sales, or management changes are all examples of revival strategies.


Step - 6 : Liquidation

A corporate debtor may be placed in liquidation under the Insolvency and Bankruptcy Code in the following conditions. • When a majority of the creditors' committee decides to liquidate the corporate debtor at any point during the bankruptcy resolution procedure. • When the creditor's committee fails to accept a resolution plan within the prescribed time limit of 180 days or the extended time limit of 90 days. • When the NCLT disagrees with the presented resolution plan and rejects it on technical grounds. • When a debtor violates a previously agreed-upon resolution plan, and an affected individual files a petition with the NCLT to liquidate the corporate debtor. A moratorium on legal procedures against the corporate debtor is imposed once the National Company Law Tribunal sanctions and issues an order of liquidation of the corporate debtor. The corporate debtor's assets, including the proceeds of the liquidation, vest in the liquidation estate.


Step - 7 : Priority of Claims

The priority waterfall for the distribution of liquidation funds has changed significantly as a result of the Code. After the costs of the insolvency settlement, which includes any temporary finance, secured debt and labour dues for the previous 24 months would be ranked highest in priority. After secured creditors' claims, employee dues, workmen's dues, and other unsecured financial creditors' claims, the Central and State Government dues are given priority. Under the previous regime, the government's obligations took precedence over secured creditors' and workers' claims. Upon liquidation, a secured creditor might choose to realise his security and receive money from the sale of the secured assets in first priority. If a secured creditor enforces his rights outside of the liquidation, he must donate any excess proceeds to the liquidation trust. In the event of a shortage in payments, the secured creditor will be a junior to unsecured creditors.


Step - 8 : Insolvency Resolution Process for Individuals/ Unlimited Partnerships

For individuals and unlimited partnerships, the Code applies to all circumstances where the minimum default amount is INR 1000 or above. The government has the option of raising the default minimum amount to a greater level. In the event of insolvencies, the Code allows for two distinct approaches. An Automatic Fresh Start or an Insolvency Resolution are the two options. • Automatic Fresh Start: Under this method, debtors who are eligible based on gross income can petition to the Debt Recovery Tribunal (DRT) for discharge from specific obligations that do not exceed a certain threshold, allowing them to start over. • Insolvency Resolution: This procedure entails the debtor preparing a repayment plan for the creditors' approval

Step - 9 : Insolvency Resolution Process for Institutional Infrastructure

The Office of the Insolvency Regulator The Insolvency and Bankruptcy Code of 2016 mandates the formation of the Insolvency and Bankruptcy Board of India, a new insolvency regulator (Board). The Board's key responsibilities are listed below. • To ensure that insolvency professionals and other insolvency intermediaries, such as insolvency professional agencies and information sources, are operating properly. • To control the insolvency process.


Step - 10 : Insolvency Resolution Professionals

Insolvency professionals who operate as intermediaries are covered under the Code. These professionals would be critical to the smooth operation of the bankruptcy procedure. Insolvency professionals, according to the Code, are a type of private and regulated professionals who must adhere to certain ethical and professional norms. The insolvency expert verifies the creditors' claims during the resolution process. The expert also forms a creditors committee, manages the debtor's business during the moratorium, and assists the creditors in reaching an agreement on an appropriate revival plan. The insolvency professional serves as both a liquidator and a trustee in bankruptcy.


Step - 11 : Information Trustee

The creation of information utilities to gather, aggregate, validate, and disseminate diverse financial information of debtors in a centralised electronic database is a significant component of the Code. As a provision of the Code, creditors must report debtors' financial information to multiple utilities on a regular basis.Other creditors, resolution specialists, liquidators, and other parties in the insolvency and bankruptcy proceedings would have access to this information. The fundamental goal of doing this is to eliminate any information asymmetry and reliance on a debtor's management for critical information needed to quickly resolve insolvency.


Step - 12 : Adjudicatory Authorities

For corporate insolvency and liquidation, the National Company Law Tribunal is the adjudicating authority. Appeals filed with the NCLT will be heard by the National Company Law Appellate Tribunal before being transferred to the Supreme Court of India for a ruling.The Debt Recovery Tribunal is the adjudicating body, with appeals to the Debt Recovery Appellate Tribunal and thereafter to the Supreme Court of India.The adjudicating authorities are limited to guaranteeing due process rather than adjudicating on the merits of an insolvency resolution, in keeping with the overarching notion that an insolvency resolution must be professionally and commercially driven rather than being court-driven.


Step - 13 : Insolvency and Bankruptcy Board of India (IBBI)

The Insolvency and Bankruptcy Board of India (IBBI) was established to regulate all elements of corporate, company, and individual insolvency and bankruptcy. The Insolvency and Bankruptcy Board of India (IBBI) is a one-of-a-kind regulator in that it has the authority to supervise both insolvency professionals and insolvency transactions. The IBBI's goal is to maximise the value of an insolvent person's assets, stimulate entrepreneurship, increase credit availability, and balance the interests of all stakeholders.



In the World Bank's rating of the ease of resolving insolvencies, India now ranks 136th out of 189 countries. The inadequate insolvency regime, severe inefficiencies, and system abuse are some of the reasons for this rating. These factors contribute to the current level of turmoil in India's credit markets. With the enactment of The Insolvency and Bankruptcy Code, there is optimism for far-reaching reforms focusing on creditor-driven insolvency resolution. It also tries to detect financial failure earlier and maximise the value of insolvent organisations' assets.The Code includes provisions for dealing with cross-border insolvencies through bilateral and reciprocal agreements with other countries. Through a single regime with the objective of a structured and time-bound process for insolvency resolution and liquidation, the Code would eventually increase debt recovery rates and revitalise the ailing Indian corporate bond markets.

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