IBC and third-party assets

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:

  1. The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:
  2. The National Company Law Tribunal for Companies and Limited Liability Partnership firms; and
  3. The Debt Recovery Tribunal for individuals and partnerships.

Syllabus: Prelims; Economy