What is the Insolvency and Bankruptcy Code, 2016?
About the Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 (IBC), is the bankruptcy law of India. It consolidates multiple laws related to insolvency and creates a single framework for both insolvency and bankruptcy. In addition, the Code aims to establish a time-bound process to resolve financial distress, making it easier for creditors and debtors to handle defaults in a structured way.
Applicability of the Insolvency and Bankruptcy Code, 2016
The provisions of IBC apply to:
- Companies
- Limited liability entities
- Partnership firms
- Individuals
The only exception is financial service providers, who are regulated under different laws.
Timeframe for Insolvency Resolution
The Insolvency and Bankruptcy Code, 2016, sets strict deadlines to ensure quick resolution:
- For companies: The insolvency process must be completed within 180 days. Further, this can be extended only with creditor approvalt
- For smaller companies and startups (with an annual turnover of up to ₹1 crore): The process must be completed within 90 days, with an optional 45-day extension.
- If resolution fails, the company moves into liquidation.
This time-bound approach ensures that businesses either revive quickly or close down without dragging cases for years.
Who Regulates the IBC?
The Insolvency and Bankruptcy Board of India (IBBI) regulates all IBC proceedings.
- IBBI consists of 10 members appointed by the Central Government.
- Moreover, it regulates insolvency professionals, professional agencies, and information utilities.
- It ensures transparency as well as accountability in the entire process.
Role of Insolvency Professionals
A licensed insolvency professional (IP) plays a crucial role in the resolution process. They:
- Administer the insolvency process
- Manage the debtor’s assets
- Provide creditors with the necessary financial information
- Facilitate decision-making for creditors
Who Adjudicates Insolvency Cases?
IBC cases are handled by:
- National Company Law Tribunal (NCLT): For companies
- Debt Recovery Tribunal (DRT): For individuals
These bodies approve the initiation of the process, the appointment of insolvency professionals, and the final decisions of creditors.
Procedure Under the Insolvency and Bankruptcy Code, 2016
The resolution process starts when a default occurs:
- Initiation: Either the debtor or the creditor can trigger the insolvency process.
- Administration: An insolvency professional manages the debtor’s assets and provides financial information.
- Moratorium: For 180 days, creditors are prohibited from taking any legal action against the debtor.
- Committee of Creditors: Financial creditors form a committee to decide the debtor’s future.
- Decision: Creditors may restructure the debt, change repayment terms, or sell assets.
- Failure to Resolve: If no decision is taken within the timeframe, the debtor’s assets go into liquidation.
Role of the Committee of Creditors
The committee of creditors (CoC) is the decision-making body under IBC. Further, it consists of financial creditors who lent money to the debtor. In addition, they can:
- Restructure the repayment schedule
- Sell the debtor’s assets to recover dues
- Approve revival plans
If the committee fails to decide within 180 days, liquidation becomes mandatory.
Liquidation Process Under IBC
When liquidation begins:
- An insolvency professional oversees the process.
- Assets are sold, and proceeds are distributed in this order:
- Insolvency resolution costs (including IP fees)
- Secured creditors
- Due to workers and employees
- Unsecured creditors
- Insolvency resolution costs (including IP fees)
This ensures fairness and clarity in repayment.
Difference Between Insolvency and Bankruptcy
- Insolvency: A financial state in which a person or company cannot meet debt obligations.
- Bankruptcy: Particularly, a legal declaration that follows insolvency, providing relief or liquidation.
Simply put, insolvency is the problem, while bankruptcy is the legal solution.
Conclusion
In conclusion, the Insolvency and Bankruptcy Code, 2016, has transformed the way India handles financial distress. Coupled with its time-bound framework, strong regulatory body (IBBI), and structured legal process, it ensures faster resolution and prevents value erosion of businesses. By bringing transparency and efficiency, IBC has strengthened India’s credit culture and given both creditors and debtors a fair mechanism to resolve financial disputes.
FAQs on Insolvency and Bankruptcy Code, 2016
A: The IBC was introduced to fix the problem of long delays in resolving insolvency cases. Earlier, businesses and banks suffered as cases went on for years. Moreover, IBC ensures a quicker, more transparent system where creditors can recover dues in a time-bound manner.
A: Both creditors (banks, financial institutions, and suppliers) and debtors (companies or individuals who owe money) can initiate insolvency proceedings if there is a default.
A: The IBC sets a strict timeline. Usually, the process must be completed within 180 days, and in special cases, it can be extended up to 330 days.
A: If no resolution plan is approved within the given timeline, the company goes into liquidation. Further, its assets are sold, and the money is distributed among creditors in a defined order of priority.
A: The IBC has significantly improved India’s ease of doing business ranking, boosted investor confidence, and reduced the fear of bad loans for banks by giving them a reliable mechanism to recover money.
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