What is Insolvency and Bankruptcy Code, 2016?

About Insolvency and Bankruptcy Code, 2016

• It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• It provides for a time-bound process to resolve insolvency.
• Applicability: The provisions of the Code are applicable to companies, limited liability entities, firms, and individuals (i.e. all entities other than financial service providers).
• Timeframe for completion of the exercise:
  • Companies have to complete the entire insolvency exercise within 180 days under the IBC. The deadline may be extended if the creditors do not raise objections to the extension.
  • For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days, and the deadline can be extended by 45 days.
  • If debt resolution doesn't happen, the company goes for liquidation.
• Who regulates the IBC proceedings?
  • The Insolvency and Bankruptcy Board of India (IBBI) has been appointed as a regulator and it can oversee these proceedings.
  • IBBI has 10 members appointed by the Central Government.
  • IBBI regulates insolvency professionals, insolvency professional agencies, and information utilities set up under the Code.
• Who facilitates the insolvency resolution? A licensed professional administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision-making.
• Who adjudicates over the proceedings?
  • The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT) for companies and the Debt Recovery Tribunal for individuals.
  • The courts approve initiating the resolution process, appointing the insolvency professional, and giving nod to the final decision of creditors.
• What is the procedure to resolve insolvency under the Code?
  • When a default occurs, the resolution process may be initiated by the debtor or creditor.
  • The insolvency professional administers the process.
  • The professional provides financial information of the debtor from the information utilities to the creditor and manages the debtor’s assets.
  • This process lasts for 180 days, and any legal action against the debtor is prohibited during this period.
• What does the committee of creditors do?
  • A committee consisting of the financial creditors who lent money to the debtor is formed by the insolvency professional.
  • The creditors' committee decides the future of the outstanding debt owed to them.
  • They may choose to revive the debt owed to them by changing the repayment schedule or selling the assets of the debtor to get their dues back.
  • If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
• What happens under liquidation?
  • If the debtor goes into liquidation, an insolvency professional administers the liquidation process.
  • Proceeds from the sale of the debtor’s assets are distributed in the following order: First, insolvency resolution costs, including the remuneration to the insolvency professional; second, secured creditors, whose loans are backed by collateral; and third, dues to workers, other employees; forth, unsecured creditors. 

Q1) What is Insolvency and Bankruptcy ?

Insolvency is when an individual or company can no longer meet their financial obligations to lenders as debts become due. Bankruptcy is a legal process that provides protection and relief for individuals who are unable to pay off their debts. Insolvency is a financial state whereas bankruptcy is a legal declaration and process.

Source: Supreme Court upholds validity of key provisions of Insolvency and Bankruptcy Code