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What is The Insolvency and Bankruptcy Code (IBC) ?
Resolution of distressed assets depends on a structure for insolvency resolution that is effective. India made a significant advancement in this area in 2016 with the adoption of the Insolvency and Bankruptcy Code, 2016, a strong, contemporary, and complex insolvency framework. The IBC is the first comprehensive law in the country to address both corporate and individual insolvency.
Before the Insolvency and Bankruptcy Code, 2016, the legislative framework in India that dealt with the insolvency and restructuring procedures of corporate organisations, partnership businesses, and individuals was exceedingly complex and fragmented across various legislations such as the Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, etc. The existence of several laws, forums, and complications led to delays in the prompt resolution of distressed entities, partnership firms, or people, which further led to the devaluation of the borrower’s assets and rendered insolvency negotiations unnecessary. However, the advent of IBC led to the creation of a time bound mechanism that also used a “creditor in control” model as opposed to the “debtor in possession” type of system.
How does The Restructuring Process Operate Under IBC ?
Under the Insolvency and Bankruptcy Code, set provisions are stipulated for restructuring of Corporate Persons. When a company (Corporate Debtor / CD) has taken out a loan to run their business and subsequently default on their loan repayment, either the debtor or the creditor (which includes financial creditors or operational creditors) can initiate Corporate Insolvency Resolution Process (CIRP) under Section 6 of the Code.
A designated adjudicating authority (AA) under the IBC must be contacted in order to file an application for insolvency; these AAs are the several National Company Law Tribunal (NCLT) benches located throughout India. The Tribunal has 14 days to accept or deny the application and must give a justification if the acknowledgement of such an application is delayed. As soon as an application is approved by the AA, the CIRP or resolution process gets started (a deadline of 180 days is set for finishing the settlement procedure; after which extension of 90 days can be requested from the Tribunal). When the application is approved, the AA appoints an Interim Resolution Professional (IRP). An IRP holds a wide range of duties and responsibilities at the initial stage of the CIRP procedure. He is appointed from the list of licensed Resolution Professionals registered with the Insolvency Bankruptcy Board of India (IBBI) and enrolled with an Insolvency Professional Agency, commonly known as an IPA. Accordingly, it is safe for lenders and borrowers to interact with insolvency professionals for advising services because they operate under the watchful eyes of such regulatory organisations, who also keep an eye on their actions.
The IRP seizes possession of the defaulter’s property and business operations, gathers data regarding the company’s state from Information Utilities, and then organises the establishment of a Committee of Creditors (CoC) made up of the CD’s financial creditors. After this, the CoC may appoint a Resolution Professional (RP), either by continuing with the current IRP or replacing and appointing a new one. Now, based on the eligible resolution plans that the RP provides to the CoC after inviting and reviewing various plans, including debt restructuring, mergers, and demergers of companies, the CoC determines whether the firm is viable enough to be restructured. With 66% of the committee members voting, the CoC may approve the plan. Following this, the plan is presented to the Tribunal, which has the option of approving it before binding the CD to carry it out. If the plan violates the Code or if there is a disagreement over the plan, the AA may also reject the proposal. If the CoC rejects all the proposals, the corporation moves into liquidation.
The IBC is still a rapidly evolving piece of law that is maturing as new judgements from the Hon’ble Supreme Court, NCLAT, and NCLT are rendered and the Statute, its rules, and regulations are added to or amended. The code helps in restructuring defaults and giving better market competitors the chance to acquire insolvent companies via CIRP as clean companies and ultimately help settle NPAs and offer industries a fresh start. The application is approved, the AA appoints an Interim Resolution Professional (IRP).