Decoding the insolvency and bankruptcy code 2016

Decoding the insolvency & bankruptcy code 2016

When an individual or a company is unable to pay back their debts, the situation is termed as an insolvency. Often, such situations are resolved by writing off some of the debts or selling off the company’s assets (or the individual’s collaterals, as the case may be) to raise money. However, not all bad debts are eventually repaid using one of these methods, making insolvency look less like a blip in the economy and more like the Grim Reaper it really is.

With the bad loans in Indian banks’ rising to 10.25 lakh crore as on March 2018, insolvency is one of the most serious issues plaguing the economy of the country. Legal Research shows the process of recovering debts in cases of insolvency has forever been a troublemaker for banks and other financial institutions – what with Non-Performing Assets (or NPAs) leading the pack of financial instability. Fortunately, all of this was set to change on May 11, 2016, when an iconic bill is known as the Insolvency and Bankruptcy Code 2016 (IBC) was passed by the Rajya Sabha. This is presently considered as one of the biggest reforms in the recent history of the Indian Economy, seconded only by the Goods and Services Tax, or the GST.

Brown Wooden Gavel With White Background

What is the new code?

The new code covering individuals, companies, LLCs and other firms, wipes the slates clean of all the old bankruptcy and insolvency laws and also introduces amendments for a couple of laws including The Company Act, while also aiming to create a new institutional structure. A quick online legal research for Indian Laws would reveal that the code’s main aim is to ‘promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and establish an Insolvency and Bankruptcy Board of India…’  in a time-bound manner.

It is applicable to:

  • All companies incorporated under the Companies Act, 2013
  • All companies under any other act for the time being in force
  • Individuals and partnership firms

What are the major benefits and changes due to the IBC?

  • Helps wind up cases quickly
    Prior to the law being passed, as legal research suggests, India was ranked 136 out of 10 countries when it came to solving cases of insolvency or bankruptcy, or so says the World Bank. Under the RDDBFI Act 1993, it took over 2 years for a case of bankruptcy to be solved. However, the IBC code reduces the timeline and directs the cases to be solved within a year, ushering in relief for all stakeholders involved. Not only that, but it also provides for cross-border insolvencies by creating bilateral agreements with other countries. The role of the National Company Law Tribunal is of the essence here. Another interesting feature of the code is the fast track corporate insolvency resolution which seeks to solve cases within 90 days of the declaration of insolvency.
  • Protects workers of a bankrupt company

When a company goes bankrupt, the workers used to be the first ones affected. However, this is no more the case. The code states that no pension funds, provisional funds or gratuity funds will be a part of the estate of business while declaring bankruptcy. Furthermore, the salary of the workers and employees will be given the first preference in the case of liquidation of assets.

  • Voluntary liquidation and operational creditors
    A helpful directive of the IBC seeks to offer relief to people who have not defaulted by allowing to proceed for voluntary liquidations. This is a great way to expedite bankruptcy cases and can be availed by corporate persons, firms and individuals.

Coming to operational creditors, if the debtor is a corporate giant, insolvency is a difficult situation to tackle. The IBC however, gives operational creditors rights to initiate proceedings, making it easier for them to get their money back. This is a first of its kind inclusion as all acts so far, including The Companies Act 2002, Sick Industrial Companies Repeal Act 2003, RDDFI Act 1993, and the likes, have either excluded operational creditors or only favoured secured financial institutions.

Almost two years since the implementation of the Insolvency and Bankruptcy Act, thorough legal research would reveal an improvement in India’s rank to 103 from the previous 136 in the field of resolving insolvency – which shows a significant leap in the working of the credit market and economy of the country. The next in line is the corporate bond market, the funding fuel for the future of our country. Along with relief to debtors, the IBC is a welcome sign to investors. This would help improve the scenario of startups and entrepreneurs in our country and would eventually attract foreign investors, thus, proving to be a much-needed boost to the Indian economy.