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Insolvency And Bankruptcy Code, 2016: A Critical Analysis

The article is about the critical analysis of Insolvency And Bankruptcy Code, 2016 (IBC) under which its basic structure, its effect on legislation, impact on the Indian debt market, objective of IBC and key aspects with major challenges it faced are mention.

The insolvency and Bankruptcy code , 2016 (IBC) is the bankruptcy law in India and whose aim is to consolidate the existing framework by creating a single law for insolvency and bankruptcy and amend the laws relating to the entities in India with the time being enforce. The consolidation of laws in India is not a new concept like GST is framed by consolidation 17 laws into one. This code was introduced in Lok Sabha in December 2015. It was passes by Lok Sabha on 5 May 2016[1].

This code deals with only four entities namely individuals, partnership firms, limited liability partnership (LLP) and companies. This code doesn't apply to any other entities like societies trust boards etc other than four aforesaid. This code deals with insolvency, bankruptcy, and liquidation, where insolvency and bankruptcy are the terms which seems to be same but the actual meaning is different, insolvency means the situation where the liabilities of the entities are more than its assets and unable to meets its debts where bankruptcy refers to a situation or a legal process where a court of competent jurisdiction has declared the entity insolvent on the application made by that entity to declare itself. In short, Bankruptcy is a legal condition; Insolvency may or may not lead to bankruptcy.

This code is also applied at the time of liquidation of companies or at time of voluntary winding up of the companies. Besides the consolidation and amendment of the laws, the necessary changes can also be made as per the requirement of the laws under IBC.

Effects of IBC on various Legislations:

This code repeals three legislative acts namely, Presidency Towns Insolvency Act, 1989, Provincial Insolvency Act, 1920 (which deals with the insolvency of individuals only) and Sick Industrial Companies (Special Provisions) Act, 1985 are repealed and consolidated into IBC. Companies which are healthy are governed under Companies Act, 2013 and sick companies was governed under the Sick Industrial companies Act, 1985 (the SICA) and now the IBC deals with sick companies as SICA is repealed.

The following acts are amended with the introduction of IBC ; Indian Partnership Act, 1932, L.L.P Act,2008, Companies Act, 2013 are amended as these acts deals with the working as well as insolvency of the entities but after the introduction of this code these laws amended by putting the insolvency provision under IBC, 2016; other acts, Recovery of Debt Due to Banks & Financial Institutions Act, 1993 (the “Recovery Act”), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), Payment & Settlement System Act, 2007, Finance Act, 1994, Income Tax Act, 1961, Central Excise act, 1944, Customs Act, 1962, laws of insolvency are amended after the introduction of IBC.

In short, the motive of this code is to consolidate and amend the laws relating to reorganization and insolvency resolution of individuals, partnership firms, LLP, companies in a time bound manner by creating authorities and agencies that will specifically deal with insolvency processes framed under the code.

Need of Bankruptcy code in India:

One of the basic objective for the introduction of IBC is to promote the entrepreneurship in India, as it provide the security against the private properties by establishing LLPs i.e. only invested capital and assets of the entity are used for repayment of the debts claimed; During the winding up of the companies when creditors demand their money back it provides an opportunity to other companies to acquire by proving its resolution plans in order to satisfy the creditors; the company, comes under IBC , it is easy to get credit as other companies are interested in paying off the debts of the creditors with the motive to acquire it; balancing the interest of stakeholders by satisfying their claims. So this new code streamlines and consolidates all insolvency laws of the said entities to make the process simpler.

After the implementation of this code, it consolidate and amend the all existing insolvency laws for the companies on which it applies; it protect the interest of the stakeholders and the creditors of the company, and set up the Insolvency And Bankruptcy Board Of India.

Salient Features of Insolvency and Bankruptcy Code, 2016:

This code contains the speedy mechanism so as to identify the early financial adversity and initiate the revival or winding up of the company as per the circumstances.

The creditors submit an insolvency plea to the National Company Law Tribunal (in case of companies), the adjudicating authority in other cases.

Timeline:If the plea is accepted, then IRP (Insolvency resolution professional)/IP (Insolvency Professional) is appointed. The IP have to drafts an insolvency resolution plan within 180 days, with an extension of a further 90 days given in exceptional cases only with the consent of the creditors, and this period of 180 days or 270 days, as case may be, termed as Moratorium Period.

Insolvency resolution Plan:

It means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with part II.[2][3]As per section 30,the Insolvency Resolution Professional (IRP) within the prescribed time, required to submit his Resolution Plan to Adjudicating Authority (NCLT) prepared by him on the basis of information memorandum. The Resolution Plan should provide for: Payment of insolvency resolution costs; Repayment of the debts to operational creditors; Management of affairs of the Company after approval of the resolution plan; Implementation and supervision of the resolution plan; Does not contravene provisions of the law for the time being in force; and Conforms to such other requirement as may be specified by the Board.

The insolvency resolution plan has to be approved by 75% of the creditors; if the plan is approved by creditors then adjudicating authority will give the sanction or if creditors do not approve the plan, then adjudicating authority or NCLT as the case may be, pass the order for the liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs):

The IPs are the member of insolvency professional agencies and registered with IPAs as well as with Insolvency and Bankruptcy Board of India(IBBI). They are the professionals who are authorized to act on the behalf and involved in the dissolution process of the entities comes under the IBC, 2016, and plays a vital role in liquidating the entity’s assets and other settlement processes. IPs analyze the financial statement of the entity, conduct formal discussion with debtors or creditors to manage the settlement process and their one of the main duty is to check and agrees on the creditors’ claims as per the available funds, they have to submit the resolution plan within 75 days of the commencement of the process by the insolvency.
IPAs means any agency registered with the IBBI under section 201 of IBC, 2016 referred as an IPA. There are three agencies of IPAs namely, Institute of Company secretaries of India(ICSI), The Institute of Chartered Accountants of India (ICAI), Institute of Cost and management Accountants (ICMA) , and applied for registration of respective agency with IBBI as IPAs.

The IPAs grants membership to IPs and conduct examinations to certify them, enforce a code of conduct for their performance, safeguard rights, privileges and interests and suspend member or cancel membership, enquire grievances of members and take steps to resolve it; shall be required to register with the board[4]and obtain a certificate of registration to be able to carry on its activity as an agency.

The Insolvency and Bankruptcy Board of India (Board)[5]:

The code establishes the IBBI; it is a Regulatory Authority which regulates the laws and registered entities under it i.e. IPs, IPAs and Information Utilities (IUs) and to bring rules and regulations, notifications and amendments in the code. It makes bye laws for regulating IPs and IPAs and decides the eligibility criteria for their registration; decide the fees and charges for examination of IPs; carry out the inspection and investigations and monitor the performance of IPS and their agencies. The board will consists of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate affairs and Law.

Information Utilities[6]:

Information Utilities will be established with the main motive to collect, collates, authenticate and disseminate financial information of debtors in Centralized electronic database. The code requires creditors to provide financial information of debtors and would be available to the IRPs, creditors, liquidators and other stakeholders in insolvency and bankruptcy proceedings.

Bankruptcy and Insolvency Adjudicators:

The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals where the National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies.

Fast Track Corporate Insolvency Resolution Process[7]:

The fast track corporate resolution process has been given under the code and shall be completed within 90 days from the insolvency commencement date, with only 45 days of extension period. The adjudicating authority has the power to extend the process only, after the consent of creditors, by an application made by IRPs.

Indian Insolvency compared with other countries[8]:

In the WB Ease of Doing Business Report, when it comes to resolving insolvency Japan, Finland and US rank first three respectively while India’s rank is 108. Japan ranks number one in the world for resolving insolvency, with procedures taking as little as six months and costing a mere 4% of the value of company. The recovery rate is over 90% compared to the OECD average of 70%. India’s recovery rate fluctuates 25% to 45% for different cases and may reach 50% in near future, whereas time period of resolving insolvency is around 4.3 years.

Objective of the IBC, 2016:

One of the basic objective to introduce the IBC is that in India there are so many laws which govern the insolvency and conflict with the other related provisions, so it consolidate or unified the laws and amend all existing laws deals with insolvency of the said entities.[9]It provides the procedural certainty of the process of negotiation, so as to reduce the problems of common property between the debtor and the creditor and reduce the information asymmetry for all the economic participants (creditors and debtors); helps the company to revive in a time bound manner, and resolve India’s bad debt problem by creating a database of defaulters, provide a justified balance between the interest of stakeholders of the company, so that they can enjoy the availability of credit and the loss that a creditor might have to bear on account of the default; deals with the cross border insolvency, and provides flexibility for parties to arrive at the most efficient solution to maximize value during negotiations and the bankruptcy law will create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.

Impact of IBC on Indian Debt Market:

After the introduction of IBC, 2016 several foreign investors begin to seek India as a legible place for the investment as they can now use a flexible exit strategy. When the company goes to insolvent, IBC focus on to generate the maximum value of the assets which in turn becomes a boon for the investor.[10]According to World Bank’s Doing Business 2016 report, on average, secured creditors in India recover only 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings. This contrasts poorly with the OECD countries where creditors recover 72.3 cents, the whole insolvency process takes 4.3 years to conclude in India whereas it takes just 1.7 years in OECD countries. Thus India ranks an abysmal 136 out of 189 countries with respect to “resolving insolvency”.

Offences and Punishment[11]:
The man who has a conscience suffers whilst acknowledging his sin. That is his punishment.- Fyodor Dostoyevsky

The code imposes penalties and punishment for offence committed by the debtor under corporate insolvency like concealment of the property of a corporate debtor; undergoing into the transactions to defraud the debtors; misconduct during the insolvency process; falsification of the books, papers, securities; for willful and material omission from statements relating to corporate debtor; misrepresentation to creditors etc. shall be punished with imprisonment of not less than three years but which may extent to five years, or with fine of not less than one lakh rupees, but which may extend to one crore rupees, or with both. For offences committed under individual insolvency (such as providing false information), the imprisonment varies based on the offence.

Benefits to Indian Market under IBC:

The Insolvency and Bankruptcy Code (IBC) would be known in due course, green shoots had already emerged and some significant benefits of the IBC were visible; the threat of promoters losing control of the company or protracted legal proceedings is forcing many corporate defaulters to pay off their debt even before insolvency can be started; till March 31, 2019, the corporate insolvency resolution process yielded a resolution of 94 cases, which has resulted in the settlement of claims of financial creditors totaling Rs 1.73 trillion; these cases include six out of 12 large accounts where insolvency resolution was initiated by banks, according to the directions of the RBI in 2017; the overall recovery in case of resolved cases is nearly 43 per cent, which is 194 per cent of the liquidation value; real estate was the top sector, with 20 per cent of the insolvency cases being registered; Manufacturing, which includes steel, power and chemicals, comprised 40 per cent; a large number of firms also opted for voluntary liquidation and one of the objectives of the Code was to give companies a chance to exit if they did not carry out any business or if the business itself was unviable[12].

With the introduction of IBC it leads to the ease of doing business in India, which also leads to the development of innovation and entrepreneurship in India; It also attracts the foreign investment through FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment), as with the introduction of IBC insolvency laws are unified which leads to the more clarity; helps Indian position by moving from weak insolvency regime to the strong insolvency regime.

It is also beneficial for the banks as they can take the advantage of the IBC to clean up their balance sheets. It would also leads to the better flow of capital in the Indian economy and also makes the entry of the new companies and exit of the sick companies. It would also enable the financially strong companies to grow by proving the opportunity to acquire the company comes under the IBC, 2016.

Critical Analysis of the code (IBC, 2016):

This code focus on Insolvency Utility (IU) but it does not specify that full information about a company will be accessible through a single query from any IU; it may lead to financial information being scattered across these IUs; IPAs, regulated by the Board, will be created for regulating the functioning of IPs, this approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals; requiring a high value of performance bond may deter the formation of IPAs; time-bound insolvency resolution will require establishment of several new entities; also the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role; the Code provides an order of priority to distribute assets during liquidation but it is unclear why , the secured creditors will receive their entire outstanding amount, rather than up to their collateral value, unsecured creditors have priority over trade creditors, and government dues will be repaid after unsecured creditors; the Code creates an Insolvency and Bankruptcy Fund but it does not specify the manner in which the Fund will be used[13].

Due to delay in the resolution cases, it increases the litigation costs of banks which are already reeling with stresses assets. IBC allows a maximum of 270 days for lenders to clear a rescue plan, failing which the defaulting company will go into liquidation, but some cases like Essar Steel or Bhushan Power and Steel cases have been under the IBC process for over 500 days and in over 30% of cases the 270-day timeline has been breached[14].Because of the absence of the jurisprudence and precedents different NCLTs are giving different rulings.

Because of the introduction of IBC, it makes the doing business in India easy after the unification of several insolvency law. It promotes to entrepreneurship and tries to balance the interest of the various stakeholders. Its introduction is really a revolutionary step as it provides the benefit to Indian capital market. And government should try to develop more its key players namely, IBBI, IPAs, IPRs, and IUs.

  1. Insolvency And Bankruptcy Code, 2016
  2. Section 5(26) Insolvency and Bankruptcy Code,2016.
  3. Dhaval123, what is resolution plan? , critical issues in IBC, 2016,
  4. Insolvency and Bankruptcy Board Of India (IBBI)
  5. Section 188 of IBC, 2016
  6. Section 3(20) of IBC,2016
  7. Chapter IV of Part II of IBC, 2016
  8. ForumIAS, Indian insolvency with other countries, 7pm I Insolvency and Bankruptcy code(IBC), (January, 28, 2019)
  9. Reference :
  10. Iastoppers, Insolvency and Bankruptcy code,
  11. Part II chapter VII of the IBC, 2016
  12. Veena Mani, Financial creditors recover more under IBC, Business standard, (July,05,2019 , 01:46 IST)
  13. Reference: Indian Express, The Hindu, Iastoppers, supra, 10
  14. Forumias, supra, 8

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