The Insolvency and Bankruptcy Code (IBC), 2016, is a revolutionary Indian statute that aims to remedy the financial difficulties of both companies and individuals. It lays down a swift insolvency resolution procedure, aligns the interests of creditors and debtors, and makes business operations in India easier. Through the IBC, the Government of India eliminates a host of existing laws and facilitates quicker debt recovery.
What Is This Act About?
The IBC regulates the insolvency and bankruptcy of companies and individuals. The principal objective of IBC is to either rehabilitate distressed companies or liquidate them in an orderly manner, while safeguarding the rights of creditors and investors. The law further sets up the Insolvency and Bankruptcy Board of India (IBBI) to supervise the process.
Why Was This Act Introduced?
The IBC was launched to fix the restrictions of the existing insolvency system in India, which was a slow, complicated, and fragmented system where companies could be in the state of insolvency for years and creditors, investors, and employees would frequently be at a loss. It provided a quick, clear, and deadline-driven approach to addressing financial problems. In this way, it helps to reflect the interests of creditors and investors, offers the company a chance to reorganise or revive its business, and generally supports the overall business climate in India.
Who Does It Apply To?
IBC is applicable to:
- Indian law regulates companies and LLPs.
- Personality and partnership firms with unpaid debts.
- Banking and NBFC-type financial creditors.
- Suppliers and service providers are types of operational creditors.
- Mediators and registered bankruptcy firms.
What Are the Key Provisions?
1. Insolvency Resolution Process for Companies
In the event of a company’s failure to make payments, it is subject to the Corporate Insolvency Resolution Process (CIRP). Within a predetermined period, the procedure aims to either restore the company to a sound financial position or alter its structure.
2. Role of Resolution Professionals
The appointed resolution professional is responsible for the entire operation. They take possession of the properties, evaluate the claims, and direct the company toward a decision of either resolution or liquidation.
3. Committee of Creditors (CoC)
The CoC comprises financial creditors who will decide whether to approve or reject the resolution plans. The voting power corresponds to the amount of their claims, thus ensuring an equitable voting process.
4. Liquidation Procedures
If the resolution plan is not accepted, the company will be liquidated. The assets will be sold, and the respective creditors will be paid in accordance with the previously defined priority.
5. Time Limits for Resolution
The IBC imposes rigid deadlines:
- CIRP must be concluded within 330 days, counting litigation.
- The processes of resolution and liquidation are governed by clear timelines to prevent delays.
How Does It Work in Practice?
The IBC process is a mechanism for addressing the insolvency of companies in a systematic and timely manner.
Below is a detailed description of the process:
1. Default Occurs
If a company defaults on its debt, either the company or a creditor may file a petition with the National Company Law Tribunal (NCLT) to initiate insolvency proceedings.
2. NCLT Takes Up the Matter
If the application is acceptable, the NCLT admits the case and assigns a Resolution Professional (RP) to facilitate it.
3. Management of the Company
Right from the start, the RP is in charge of running the business and making decisions regarding its assets, while the current management’s authority is temporarily halted.
4. Formation of Committee of Creditors (CoC)
All financial creditors will collectively form a CoC, which will then evaluate and approve or reject the company’s resolution plans.
5. Resolution Plans Voting
The committee of creditors cast their votes on the submitted plans. At least 66% of the creditors (by value) have to be in favor for a plan to be ratified.
6. Resolution or Liquidation
If a resolution plan is accepted, the company undergoes restructuring, its debts are cleared under the plan, and regular business continues. If no plan is approved within the time limit, the company is liquidated, and its assets are sold to creditors in accordance with the established priority order.
7. Monitoring and Oversight
The entire process is open to monitoring by the NCLT, and appeals are directed to the NCLAT, thus ensuring that the IBC guidelines are strictly followed and transparency is maintained.
How Does This Affect Companies or Individuals?
1. For Companies
The IBC offers businesses a well-illustrated, organized way to deal with financial pressure. Debt restructuring, attracting investors, or reviving operations can be achieved through the Corporate Insolvency and Bankruptcy Process (CIRP). This minimises the chances of a closure spurt, preserves business continuity, and holds the management accountable.
2. For Individuals
A clear structure for debt resolution is an advantage of the IBC for individuals, including business owners and directors. They can negotiate repayment schemes or rearrange loans with the guidance of a professional. It also offers a legal procedure to address insolvency without damage to personal and professional image.
Example
A company that failed to pay out its debts can participate in the IBC process. The company is put under the management of an insolvency professional, and the case is submitted to NCLT. The Committee of Creditors is a group of lenders that determines the way the company can be saved. They can either restructure it and revive it or dispose of its assets to recover funds. All this normally takes 270 days.
Why This Act Is Important in NCLT / NCLAT Cases?
The Insolvency and Bankruptcy Code (IBC), 2016, is important in NCLT and NCLAT because it provides a speedy, straightforward, and time-limited procedure for managing insolvency. NCLT handles insolvency applications, and NCLAT also handles appeals, ensuring fairness. The significance of IBC is that it cushions creditors, investors, employees, and companies, minimizes long delays, and ensures directors are accountable. It is the primary insolvency law in India for resolving insolvency quickly, fairly, and efficiently.
Conclusion
The Insolvency and Bankruptcy Code (IBC), 2016, offers a quick, clear, and well-organised means to resolve the financial crises of companies and individuals. By recovering debts in a timely manner, safeguarding stakeholders, and holding management accountable, IBC has become a significant statute for effective insolvency resolution in India.
Frequently Asked Questions (FAQ)
Q1. Who will be able to present an insolvency application under IBC?
Companies, creditors (financial and operational), and individuals may seek insolvency if they default on debts.
Q2. When does the process of insolvency take place?
The Corporate Insolvency Resolution Process (CIRP) is to be finalized within 330 days, including legal approvals and litigation.
Q3. Is it possible to revoke the insolvency application?
Yes, an application may be withdrawn if the Committee of Creditors (CoC) consents to the withdrawal within 90 days of filing.
Q4. What is a resolution plan?
A resolution plan is an initiative by investors or creditors to salvage, reorganise, or write off the liabilities of a weakened company, which has been approved by the CoC.
Q5. Who is in charge of the insolvency procedure?
The Resolution Professional monitors the process, and all appeals or disputes are resolved by the NCLT and NCLAT to ensure fairness and transparency.
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