IBC and third-party assets
Why in news:
- The initiation of insolvency proceedings against Go First has once again highlighted the issue whether third-party assets not owned by a company but held on lease can form part of the resolution process.
What is IBC?
- Insolvency and Bankruptcy Code (IBC) 2016 was implemented through an act of Parliament.
- The bankruptcy code is a one stop solution for resolving insolvencies, which previously was a long process that did not offer an economically viable arrangement.
- The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
- It provides for a time-bound process to resolve insolvency.
- When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency.
- Under IBC, debtor and creditor both can start ‘recovery’ proceedings against each other.
- Companies have to complete the entire insolvency exercise within 180 days under IBC.
- The deadline may be extended if the creditors do not raise objections on 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.
- IBC was intended to tackle the bad loan problems that were affecting the banking system.
Insolvency Resolution :
- The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.
- The process may be initiated by either the debtor or the creditors.
- A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals.
- For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
- For start-ups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
- The Insolvency and Bankruptcy Code (Amendment) Act, 2019 has increased the mandatory upper Time limit of 330 days including time spent in legal process to complete resolution process.
Insolvency regulator:
- The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it.
- The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency professionals:
- The insolvency process will be managed by licensed professionals.
- These professionals will also control the assets of the debtor during the insolvency process.
Bankruptcy and Insolvency Adjudicator:
- The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:
- The National Company Law Tribunal for Companies and Limited Liability Partnership firms; and
- The Debt Recovery Tribunal for individuals and partnerships.
Syllabus: Prelims; Economy