Insolvency and Bankruptcy Code (IBC) 2016

Insolvency and Bankruptcy Code (IBC) 2016

Why in news:

• Recently, the Reserve Bank of India, in a controversial circular, reversed its long­standing policy of not allowing banks to arrive at compromise settlements with wilful defaulters or holders of fraudulent accounts.
• A wilful defaulter is defined as “a borrower who refuses to repay loans despite having the capacity to pay up,” and, a fraudster as “one who intentionally cheats the bank with false documents/information and misappropriates the money.”
• Since the perpetrators of these criminal offences are clearly aiming to cheat banks of their money, they need to be proceeded under the law and their assets expropriated to give banks as much as the sums due to them as possible.
• A compromise settlement, on the other hand, is a negotiation­based agreement in which banks agree to forego a part of the sums legitimately due to them, in order to obtain some of the expected receipts and close the account at a loss.
• The Insolvency and Bankruptcy Code, 2016(IBC) is an Indian law which creates a consolidated framework that governs insolvency and bankruptcy proceedings for companies, partnership firms, and individuals.

Key provisions under the act:

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 Bankruptey 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:
  1. the National Company Law Tribunal for Companies and Limited Liability Partnership firms;  and
  2. (ii) the Debt Recovery Tribunal for individuals and partnerships.

Procedure and Time Limit:

Time Limit:

• The IBC envisions that the entire CIRP process must take place within 180 days of the admission of the application.
• A CIRP must be mandatorily completed within 330 days, including any extension or litigation period.

Initiating the CIRP:

• In the case of a corporate debtor, an application for insolvency proceedings must be submitted to the Adjudicating Authority (AA), which is the NCLT.
• The application may be filed by a financial creditor (Section 7), an operational creditor (Section 9), or the corporate debtor (Section 10) itself.
• Section 11 enumerates the persons not entitled to make an application, such as corporate debtor who was in a CIRP at the time of the application, or had been in one recently.
• The maximum time allowed to consider the application is 14 days.
• If the application is allowed, the AA:
• (i) declares a moratorium;
• (ii) causes a public announcement of the CIRP process and calls for the submission of claims; and
• (iii) appoints an Interim Resolution Professional (IRP).
• 2017 Amendment prohibits certain persons from submitting a resolution plan in case of defaults.
• These include: (i) wilful defaulters, (ii) promoters or management of the company if it has an outstanding non-performing debt for over a year, and (iii) disqualified directors, among others.
• Further, it bars the sale of property of a defaulter to such persons during liquidation.

Syllabus: Prelims + Mains; GS III – Economy