How does one handle financial distress and insolvency in India? What is the Insolvency and Bankruptcy Code 2016 (IBC) 2016? The Insolvency and Bankruptcy Code 2016 (IBC) of India was introduced to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.
Before the IBC was enacted, India’s insolvency and bankruptcy processes were dispersed across various laws leading to inefficiency and delays. The IBC provided a unified and quick-redressal framework for resolving insolvency, which helps stressed businesses to either recover or exit the market effectively, thus unlocking capital and boosting investor confidence.
Consolidating insolvency proceedings into a single forum has reduced legal complexities and hastened resolution times, significantly lowering the burden of non-performing assets.
Benefits of Insolvency and Bankruptcy Code 2016
The Benefits of the Insolvency and Bankruptcy Code 2016 are numerous. It represents a vital transformation in India’s approach to corporate insolvency resolution. This comprehensive legislation emphasises on transparency, efficiency and creditor empowerment indicating a new era of economic stability and growth.
Following are the benefits of the Insolvency and Bankruptcy Code 2016:
1. Speedy Resolution
Before the enactment of the IBC, the insolvency resolution process was governed by multiple laws and was scattered across various judicial forums, leading to inconsistent and prolonged resolution timelines. Typically, the resolution of insolvency cases extended over several years, with the World Bank data indicating an average duration of around 4.3 years[1]. This time frame resulted in the erosion of the debtor’s asset value, which in turn reduced the potential recovery for creditors.
Section 12 of the IBC, mandated a structured and time-bound approach to the insolvency resolution process, setting a strict timeline of 180 days, extendable by another 90 days, making the total maximum allowable time 270 days. The extension beyond 180 days is only permissible once and requires the consensus of the Committee of Creditors (CoC) and the approval of the adjudicating authority, ensuring that extensions are granted only when absolutely necessary and under justified circumstances.
This reduction in resolution time has led to better preservation of asset value, resulting in higher recovery rates for creditors and a boost in investor confidence.
2. Cross-Border Insolvency
While there were limited provisions in previous laws, such as the Companies Act, 1956, and the Sick Industrial Companies Act, 1985 (SICA), to address international aspects of insolvency, they were inadequate to effectively deal with the complexities of cross-border insolvency cases. These acts did not provide any clear guidelines or regulations for cooperation between Indian and foreign courts leading to inefficiencies in resolving multinational insolvency cases.
Section 234 of the IBC allows the Central Government to enter into bilateral agreements with foreign countries for resolution of cross-border insolvency cases. By facilitating cooperation between Indian and foreign courts, the IBC has streamlined the resolution process for multinational companies.
3. Corporate Insolvency Resolution
Under SICA, the imposition of a moratorium was upon the discretion of the Board for Industrial and Financial Reconstruction (BIFR) who intended to provide distressed companies a period of relief to restructure and recover. This provision became a tool for companies to avoid creditor actions and prolong the resolution process.
In the IBC, under section 14, as soon as the insolvency proceedings against a defaulting corporation commence, an immediate moratorium is imposed, halting all legal actions, enforcement of security interests and execution of any judgment against the corporate debtor. This ensures that the assets of the debtor are preserved during the insolvency resolution process and prevents further depletion of the corporate debtor’s value.
4. Structured and Uniform Framework
Under SICA, the process for rehabilitating a sick company was not standardized, which led to inconsistencies and unpredictability. The decision to appoint an operating agency for the revival of a sick company was at the discretion of the BIFR, and this ad-hoc approach meant that each case could be handled very differently, leading to a lack of clarity and uniformity in the process.
The IBC mandates the formation of a Committee of Creditors (CoC), which consists of representatives from the lenders and plays a crucial role in the decision-making during the resolution process. This ensures that the process is more systematic.
5. Appointment of Insolvency Professionals
In previous laws insolvency resolution process was managed by various authorities or committees which were not even the professionals. This led to delays and inefficiencies in the resolution process. There was a lack of standardised qualifications and professional standards before IBC.
The appointment of licensed Insolvency Professionals (IPs) under IBC represents a significant step towards professionalism during the insolvency process. IP’s are specifically trained and qualified to handle complex insolvency cases and ensure that the resolution process is managed by individuals with a deep understanding of insolvency laws.
6. Aims to Rehabilitate Distressed Companies
Primarily, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) focused on only the recovery of secured loans by banks and financial institutions without court intervention. This empowers lenders to take possession of the secured assets and auction them off to recover outstanding debt. This process allows for quicker realisation of security and helps lenders reduce losses. But SARFAESI is limited to this scope of secured loans only.
IBC has a wider scope which includes issues of insolvency and debt restructuring. It aims to rehabilitate distressed companies and maximise value for all creditors not only focusing on the recovery of loans.
7. Prevents fraudulent activities by debtors
Before the IBC, debtors used to have control over their business activities as well as assets during insolvency proceedings. This allowed debtors to engage in fraudulent activities with creditors, employees and other stakeholders. Debtors could delay proceedings by engaging in endless litigation, exploiting loopholes in the legal system and disposing of assets to avoid repayment obligations.
IBC 2016 shifts control by transferring management of the debtor’s assets and business activities to an insolvency professional as soon as the insolvency application is admitted by the adjudicating authority. This measure prevents debtors from continuing to manipulate assets or engage in fraudulent activities during the resolution process.
8. Enhanced Recovery Rates
With a clear and structured framework for insolvency resolution creditors have a higher chance of recovering their dues compared to the earlier fragmented and time-consuming processes. This leads to higher recovery rates and reduces the burden on financial institutions.
Some renowned companies like Jet Airways, Essar Steel, Bhushan Power & Steels and more have achieved resolutions for huge recovery amounts after the introduction of IBC 2016 which ensures the positive result of the introduction of IBC 2016.
Frequently Asked Questions
1. What are the key benefits of the Insolvency and Bankruptcy Code 2016 for businesses in India?
The IBC 2016 is a landmark legislation in India that offers numerous advantages for businesses in India:-
- Timely resolution
- Investor confidence
- Clear legal framework
- Improved Governance
- Global Competitiveness
- Credit Access
2. How does the IBC 2016 improve the insolvency resolution process over previous laws?
The IBC 2016 represents a substantial improvement in India’s insolvency resolution process compared to previous laws as follows:
- Ensures quick resolutions within a defined timeframe.
- Empowers creditors and prioritises business improvement over liquidation.
- Its transparent and professional approach fosters confidence and stability in facilitating economic growth.
- By promoting out-of-court settlements the IBC helps reduce litigation related to insolvency cases and saves time.
3. In what ways does the IBC 2016 shift the power dynamics between debtors and creditors?
The IBC 2016 marks a significant shift in power dynamics between debtors and creditors. By providing creditors with a formal mechanism to initiate insolvency proceedings against defaulting debtors. This shift from a debtor-in-possession to a creditor-in-control framework ensures greater creditor involvement and influence over the resolution process. Overall, the IBC aims to rebalance the power dynamics, promoting creditor rights and efficiency in the insolvency resolution process.
4. How are creditor’s rights protected in cross-border insolvency?
In cross-border insolvency, creditor’s rights are protected through mechanisms like recognition of foreign proceedings, coordination between jurisdictions and equitable distribution of assets. The IBC 2016 aligns with international best practices ensuring fair treatment for creditors across borders.
5. How does the Insolvency and Bankruptcy Code 2016 contribute to India’s economic stability?
The IBC 2016 significantly supports India’s economic stability in a number of ways.
Firstly, the IBC 2016 streamlines the insolvency resolution process, allowing for quicker resolution of distressed assets.
Secondly, by promoting a transparent and predictable insolvency framework, the IBC bring up a credit culture, encouraging responsible borrowing and reducing financial risks.
Thirdly, by streamlining the resolution process, the IBC 2016 improves the ease of doing business further fueling economic stability and growth.
6. What impact has the IBC 2016 on entrepreneurship and new business growth in India?
The IBC has encouraged entrepreneurship by offering a clearer, faster and more predictable process for the resolution of insolvency, which was not the case before its implementation.
One of the major impacts of the IBC on entrepreneurship is the shift in the balance of power from debtors to creditors. The World Bank’s report noted that India’s ranking in ‘Ease of Doing Business’ significantly improved due to reforms such as the IBC, jumping from 130 in 2016 to 63 in 2020, highlighting substantial improvements particularly in resolving insolvency.
The IBC has further facilitated the recovery of significant amounts of bad debt, aiding in the clean-up of the banking system’s balance sheets and improving the availability of credit.
7. How has the implementation of the IBC 2016 influenced India’s standing in the global economy and international business relations?
The IBC 2016 has contributed to putting India in the global economy by enhancing investor confidence and fostering a more predictable business environment. This has influenced increased foreign investment and strengthened international business relations, positioning India as an attractive destination for global commerce.
Final Thoughts
The IBC 2016 has transformed India’s financial landscape contributing towards the empowerment of individuals and businesses to overcome financial hurdles and grow in the long run. The introduction of a structured framework that aims to rehabilitate distressed companies thus enhancing the recovery rates of pending cases plays a pivotal role in contributing to the economic growth of India. Overall a uniform insolvency framework enhances India’s reputation as a reliable and stable investment country, further giving confidence among international investors.
Leveraging IBC 2016 for Business Excellence
By understanding and leveraging the provisions of the IBC, businesses can navigate financial challenges with confidence. At A Agarwalla, we provide personlised guidance and support to our clients on understanding the power of the IBC for improved financial and business outcomes. We provide tailored solutions relating to bankruptcy and insolvency issues to navigate problems and get the best solution that can arise in the dynamic nature of business.