What is Insolvency?
- Insolvency is a term for when an individual or company can no longer meet their financial obligations to lenders as debts become due.
Insolvency and Bankruptcy Code (IBC) 2016
- Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament. It got Presidential assent in May 2016.
- The law was necessitated due to huge pile-up of non-performing loans of banks and delay in debt resolution.
- Insolvency resolution in India took 4.3 years on an average against other countries such as United Kingdom (1 year) and United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.
What does the IBC aim to do?
- IBC applies to companies, partnerships and individuals.
- 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.
What is the timeframe for completion of the exercise under the Code?
- 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.
Who regulates the IBC proceedings?
- Insolvency and Bankruptcy Board of India has been appointed as a regulator and it can oversee these proceedings.
- IBBI has 10 members; from Finance Ministry and Law Ministry the Reserve Bank of India.
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 (DRT) for individuals.
- The courts approve initiating the resolution process, appointing the insolvency professional and giving nod to the final decision of creditors.
- The Insolvency and Bankruptcy Board regulates insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
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 manage the debtor’s assets.
- This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
Recent Amendments
Context: Parliament has passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, which provides that insolvency proceedings against defaulting companies will not be initiated for at least six months starting from March 25.
Background
- Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
- About Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
- The IBC’s invocation was first suspended for a period of six months in view of the emergent stress on balance sheets due to the COVID-19 pandemic and the national lockdown announced in March.
- The government had issued an ordinance to amend the IBC in June 2020 to enable the suspension of the Code’s provisions for firms committing defaults after March 25. The ordinance permits the government to extend the suspension of insolvency invocation for up to one year, and was passed as a legislation by Parliament this week.
About the Amendment
- Insolvency and Bankruptcy Code (Second Amendment) Bill amends the Insolvency and Bankruptcy Code, 2016.
- Main Objective of the Bill seeks is to temporarily suspend initiation of the corporate insolvency resolution process (CIRP) under the Code.
Amendments under the bill
- Prohibition on the initiation of CIRP for certain defaults
- The Bill provides that for defaults arising during the six months from March 25, 2020, CIRP can never be initiated by either the company or its creditors. The central government may extend this period to one year through notification. The Bill clarifies that during this period, CIRP can still be initiated for any defaults arising before March 25, 2020.
- Liabilities for wrongful trading:
- The Bill prohibits the Resolution Professional from filing an application in relation to the defaults for which initiation of CIRP has been prohibited.
Significance of the suspension
- The extension of the suspension of sections 7, 9 and 10 of the IBC reinforces the government’s commitment to protecting businesses.
- It will give companies breathing time to recover from financial stress
- The extension will help the stakeholders to build consensus on resolving the stress created on account of COVID-19 to avoid further build-up of stress at the end of the period.