It was the year 2016 when the entire national shook economically. It was the year when the IBC Code was introduced. Short for insolvency and bankruptcy code 2016, its introduction changed everything. While the previous insolvency laws were present to protect the company or person who has gone bankrupt, the new laws kept the needs of the creditors are the forefront. Through this article, you are going to know all there is to know about Insolvency and Bankruptcy code in India: Its introduction and is amendments.
Introduction of Insolvency and Bankruptcy Code (IBC Code 2016)
Back in 1992, when foreign investors finally realized the value of India’s business landscape, there was an idea. It was geared towards creating a new set of Insolvency laws. However, the idea was too bold, mostly because the pre-established insolvency laws in India were there to help the bankrupt. Why? It was because the bankrupt entities were seen as the ones who need help; the ones who are ignored, the ones that need salvation from bankruptcy. However, it led to the insolvency proceedings to be slow, for about decades. The bankruptcy of the person or a company didn’t fade, nor did their creditors get paid. It was the point that the government realized the need for Insolvency and Bankruptcy Code in India. However, it took around 24 years to give actual form to this idea and in 2016, the IBC code was introduced.
Purpose of the Insolvency and Bankruptcy Code
During the second decade of 2000’s, several companies that started coming in the country. They are excited about the innovation and the manpower the country has to offer. Therefore, they also helped the local start-ups by acting as their venture capitalists. However, there was an issue. If the company were to fail, the Insolvency laws that existed at the time could easily give the company a clean slate. However, the venture would still have lost a lot of money. As a result, many foreign investors started to lose interest in the country, as it was not easy to do business here. However, it all changed with the introduction of the Insolvency code.
The new bankruptcy and insolvency laws were established under the new insolvency code of India. All of them were to:
- Increase India’s stature in the international market.
- Make India a place it is easy to do business in.
- Attract foreign investors to the country.
- Make the insolvency laws more creditor-centric.
- Ensure debt repayment in a proper and excavated manner.
- Provide a better Insolvency resolution process.
To fulfill the above-mentioned goals, the bankruptcy code 2016 in India provided several pillars of Insolvency laws.
Pillars of Insolvency and Bankruptcy Code (IBC Code)
As we have already stated, there are several goals of the bankruptcy code India. In order to achieve these goals, the IBC code is built upon 5 foundations. Following is the explanation of those 5 foundations.
- A central body to oversee the proceedings of insolvency resolution: This central body is known as the Insolvency and Bankruptcy Board of India or the IBBI.
- A proper insolvency resolution process: Insolvency resolution process is a process to resolve the insolvency state of the defaulters. It means enabling a way for the defaulter to repay its debts. The new insolvency resolution process under the IBC code added a time limitation. Now, the insolvency proceedings shall last for 270 days at max.
- Insolvency resolution professionals: The Insolvency resolution professionals or IP are the officials that conduct the insolvency resolution proceedings.
- Information utility: A central information utility that contains all the financial information about the companies and it controlled by the MCA.
- Separate tribunals: If the company has gone bankrupt, the tribunal is NCLT. If a person has gone bankrupt, the tribunal is DRT.
The above mentioned 5 pillars of IBC code India have been instrumental in resolving several cases of insolvency. However, they also end up showing some limitations.
Limitations of the Insolvency and Bankruptcy Code
The intent of Insolvency and Bankruptcy Code India is pure. It is simply to resolve the insolvency in a time defined manner and ensuring repayment to the financial and operational creditors. However, as more insolvency cases emerged, the limitations of the code started to be in sight:
- The bankruptcy code is biased towards financial creditors like banks
- The IBC code ignored operational like suppliers or employees
- The approval percentage of COC is not proportional
- The insolvency code is way too uniform with no exceptions for MSMEs that can fail
- Despite the 270 days limit, most cases of insolvency have taken much longer.
All these limitations made it necessary to introduce bankruptcy Code amendment or amendments. They are focused towards dealing with some of the limitations of the code.
Introduction of Insolvency and Bankruptcy Code (IBC) 2018
To counter the limitations of the code, it was time to introduce the Insolvency and bankruptcy code amendment. It has been 3 years since the introduction of the code, and since there, there have been two major amendments to it.
However, the amendments that came in 2018 were so significant that code pretty much became insolvency and bankruptcy code 2018.
- The first amendment was introduced in 2017 and it introduced the following changes to the IBC code:
- Defaulters were prohibited to bid on their own assets.
- Companies or people controlling non-performing assets were banned from bidding.
- 75% approval rate from the committee of creditors was necessary to move forward with the insolvency plan.
- The second amendment was insolvency and bankruptcy amendment act 2018 and introduced extremely major changes to make the code more flexible and more accessible.
- Creditors are now allowed to withdraw their insolvency petition within 30 days of filing it
- MSMEs can bid on their own assets if they are going insolvent
- Home buyers are now counted among financial creditors
- 66% approval rate from the committee of creditors is necessary to move forward with the insolvency plan.
- Financial creditors related to defaulters who have not invested in the defaulter’s company are now allowed to bid.
These are the points of insolvency and Bankruptcy code (IBC Code) India that you know. If you have any other query, you can reach out to our experts.
Also, know the procedure to file insolvency petition.
