This article has been written by Haripriya. E pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The Insolvency and Bankruptcy Code (IBC) 2016 is a groundbreaking enactment to resolve the banking sector’s financial health and legal landscapes. To achieve stable economic growth, the country’s financial health plays a major role. In India, banks are facing insolvency and routing towards bankruptcy as these banks cannot pay interest payments and are overdue for more than 90 days. Such banks are labelled as NPAs (non-performing assets) and have the potential to affect financial health and economic stability.

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The legal framework of the Insolvency and Bankruptcy Code (IBC) includes laws such as Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) and Sick Industries Companies Act, which are facing low recovery rates with long duration in resolving insolvency cases. The Insolvency and Bankruptcy Code processes the insolvency resolutions promptly by helping banks recover from NPAs, providing a framework as well as the recovery procedure, and promoting credibility with the interests of the stakeholders.

Features of Insolvency and Bankruptcy Code (IBC), 2016

The Modus Operandi of the Insolvency and Bankruptcy Code is a unified framework for resolving the insolvency and bankruptcy issues for all entities by completing the process of resolution within 180 days and may extend for 90 days under certain conditions. It takes important decisions on behalf of the creditors in the resolution plan and manages by appointing professionals adhering to the resolution process with transparency and efficiency. Here are the features that are incorporated in the Insolvency and Bankruptcy Code:

  1. Single framework:
    • The IBC establishes a single, consolidated framework for insolvency and bankruptcy proceedings, applicable to all entities, including companies, individuals, and partnerships.
    • It replaces the fragmented approach of various laws, such as the Companies Act, the Sick Industrial Companies Act, and the Provincial Insolvency Act, offering a one-stop solution for insolvency resolution.
  2. Adjudication authorities:
    • The IBC designates specific adjudication authorities to handle insolvency cases.
    • For corporate insolvency, the National Company Law Tribunal (NCLT) serves as the adjudicating authority, while for individual insolvency, the Debt Recovery Tribunal (DRT) has jurisdiction.
    • These tribunals are responsible for overseeing the insolvency resolution process, adjudicating disputes, and approving resolution plans.
  3. Creditor in control:
    • The IBC places creditors at the core of the insolvency process, empowering them with decision-making abilities.
    • Creditors have the authority to appoint a resolution professional who is responsible for managing the insolvency resolution process.
    • The resolution professional works in collaboration with creditors to formulate and implement a resolution plan that maximises the value of the debtor’s assets and ensures a fair distribution among creditors.
  4. Timely resolution:
    • The IBC emphasises the importance of timely resolution of insolvency cases.
    • It stipulates a time-bound process, typically extending up to 180 days, with an additional 90 days in certain circumstances based on specific conditions.
    • This stipulated time frame ensures prompt resolution of insolvency cases, preventing prolonged delays and legal battles.
  5. Information compilation:
    • The IBC recognises the significance of information in the insolvency resolution process.
    • It mandates the compilation of financial information about debtors, including assets, liabilities, and financial statements.
    • This information is crucial for creditors, resolution professionals, and other stakeholders to assess the debtor’s financial condition and formulate effective resolution plans.

The Insolvency and Bankruptcy Code serves as a comprehensive and progressive framework for addressing insolvency and bankruptcy cases in India. It promotes transparency, efficiency, and fairness in the resolution process, with the ultimate goal of maximising the value of assets and ensuring equitable treatment of creditors and other stakeholders.

Addressing NPA’s

The Insolvency and Bankruptcy Code performs a crucial role in addressing the issues of NPAs in several ways.

The Insolvency and Bankruptcy Code (Section 7) allows a financial creditor to begin the insolvency resolution process against a corporate debtor by applying the NCLT. The claim validity is determined and accepted and the resolution timeline officially commences. To recover overdue, minimise asset devaluation and enhance the chances of recovery. This provides better recovery rates and ensures the insolvency is managed professionally so that the recovery rate for banks and financial institutions has been substantially higher.

The Insolvency and Bankruptcy Code also provides better credit discipline; as per Section 9 of the Insolvency and Bankruptcy Code, an operational creditor initiates the insolvency process by issuing a demand notice to the debtor. If the debtor fails to pay or dispute within the specific timeframe. The tribunal then evaluates whether to accept the application. This section is crucial for creditors offering services or goods to the debtors. This mechanism guarantees creditors a clear process to seek a resolution by Launching the Corporate Insolvency Resolution Process by an Operational Creditor.

Quick resolution process as the deadline for completing the insolvency resolution process as per Section 12 that the resolution process must conclude within 180 days from the application date. The timeline can be extended by an additional 90 days with the approval of NCLT to ensure a swift resolution process. The timeline also ensures the debtor’s assets’ value, preventing prolonged legal battles and ensuring the efficiency of the process and payment to creditors.

By barring entities that have mismanaged assets on loans in the resolution process, Section 29A provides a group of individuals ineligible to propose a resolution plan. This includes the defaulters and tracks the nonperforming assets. Efficient resolution results in reduced stock and improved financial health relating to NPAs for banks.

Insolvency and Bankruptcy Code impacting the banking sector

By revival of stressed assets and acquiring them by financially stronger entities preserving the jobs and contributing towards economic stability. By boosting the confidence in the system domestically and internationally by attracting the investors to invest in the country.

Though the Insolvency and Bankruptcy Code faces many challenges in withstanding case complexities as many stakeholders are involved, capacity constraints due to the huge number of cases at NCLT and DRT for resolution eventually lead to delayed procedures. Stressed asset valuation remains as an issue as the accuracy may affect the resolution process. Over time, the government and the regulatory bodies have made reforms to address these challenges by augmenting the capacities of adjudicating authorities, i.e., NCLT and DRT, by swiftly appointing judges and improving necessary infrastructure. Also by simplifying the process of insolvency resolution promptly with efficacy. The standards of valuation have been enhanced for the quality of valuation standards for asset valuation.

However, some recent changes have made the Insolvency and Bankruptcy Code stronger in the aspect of the resolution process.

In 2021, a new format was introduced, which is the pre-packaged insolvency resolution process. It narrows down to the fact that it is the most ballooned resolution procedure for only the MSMEs. Now the debtors and creditors can therefore come up with a resolution plan before they even engage in a formal procedure efficiently. 

In the case of cross-border insolvency, the amendment provided to the Insolvency and Bankruptcy Code was mentioned, which best resolved the particular case that involved assets of the company located in a foreign territory. Consequently, due to giving the mechanism for the simultaneous settlement of the insolvency concerning the entities belonging to a group, the regime has been created in terms of the legislation. The latest amendments in making the liquidation process easier enhance the speed and improve recovery for the creditors.

Empowering creditors

The Insolvency and Bankruptcy Code (IBC) marked a significant shift in the Indian insolvency regime by empowering creditors and transforming the landscape of debt recovery. One of the key provisions of the IBC was the ability for creditors to initiate insolvency proceedings against defaulting borrowers. This provision fundamentally altered the power dynamics in insolvency cases, giving creditors a greater say in the resolution process.

Before the enactment of the IBC, borrowers often held a dominant position in insolvency proceedings. However, the IBC empowered creditors by allowing them to initiate insolvency proceedings against borrowers who defaulted on their obligations. This provision ensured that creditors had a more active role in the resolution process and could actively participate in decision-making.

The IBC recognised the importance of protecting the rights of creditors and ensuring that they were treated fairly in insolvency proceedings. By giving creditors the power to initiate insolvency proceedings, the IBC aimed to create a more balanced and equitable insolvency framework.

Creditors could play a crucial role in shaping the outcome of insolvency proceedings. They could influence the selection of the insolvency resolution professional, a key figure responsible for overseeing the insolvency process, and participate in the committee of creditors, which made decisions related to the restructuring or liquidation of the debtor company.

The empowerment of creditors under the IBC had several positive implications. It encouraged a more proactive approach from creditors in pursuing debt recovery, leading to more timely and efficient resolution of insolvency cases. Additionally, it enhanced the accountability of borrowers and discouraged them from engaging in reckless borrowing practices, knowing that their creditors had the power to initiate insolvency proceedings if they defaulted.

However, the empowerment of creditors also presented certain challenges. There were concerns that creditors might abuse their power and use the IBC provisions to unfairly target borrowers. To address these concerns, the IBC established safeguards to protect the interests of borrowers and ensure that they were treated fairly throughout the insolvency process.

Overall, the empowerment of creditors under the IBC was a transformative step that sought to address the imbalances in the pre-IBC insolvency regime. By giving creditors a greater say in the resolution process, the IBC aimed to create a more effective and equitable framework for resolving insolvency cases in India.

Case study

ESSAR metallics bankruptcy decision: Essar is one of the largest essence makers; they’ve fallen into deep financial hassle, and having non-appearing means leading the enterprise into bankruptcy complaints under the Insolvency and Fiscal Disaster Law (IBC). The employer was reportedly under a debt of INR 50,000 crore, making a giant bankruptcy profile in India. Essar Metallics is overall anguishing the Indian banking system. The increasing number of NPAs has affected the fiscal institution’s stability and capability to advance.

The remedy has changed the enterprise into a critical look for the Insolvency and Bankruptcy Code. Operation of Section 7 of the Insolvency and Bankruptcy Code, through fiscal lenders, led with the aid of SBI, at NCLT, the solicitation has been initiated, after assaying the substantiation of the defaulters and the case has been admitted and appointed Insolvency Resolution Procedure to carry out the control of Essar Steel. The inauguration of the commercial bankruptcy resolution process to begin and resolve promptly.

The resolution plan includes Section 12 of the Insolvency and Bankruptcy Code. The professionals have been appointed for the resolution plans from the capacity decision timber. Submitting an in-depth resolution plan with an offer to resolution and decision plan by the ArcelorMittal group has been considered through the commission of lenders of Essar Internal’s financial lenders on parameters of its feasibility and viability. After the challenges from felony forums and the NCLT blessing, the whole process was handed 270 days in resolving huge-scale bankruptcy and changed the shape of ArcelorMittal taking up Essar Metallics for INR 42,000 crores. This became a corner case in the history of insolvency and bankruptcy law.

Conclusion

The Insolvency and Bankruptcy Code has considerably transformed the financial and legal landscape of insolvency decisions in India, playing a vital role in addressing the trouble of non-performing assets (NPAs) within the banking sector. Since its enactment in 2016, the Insolvency and Bankruptcy Code has delivered a streamlined, time-certain, and creditor-centric framework for resolving insolvency instances, which has greatly improved recovery rates for banks and economic establishments. This indeed has led to the control of NPAs and enhanced the overall economic health and balance of the banking system and the case study provides the instances and the efficiency of preserving the financial health of the country.

The Insolvency and Bankruptcy Code has additionally strengthened investor and creditors confidence domestically and internationally by supplying a strong mechanism for the resolution of monetary distress. As the Insolvency and Bankruptcy Code continues to evolve, it’ll play a pivotal role in fostering a more fit credit score tradition, lowering the load of NPAs, and selling long-term monetary boom and balance in India. The achievement of the Insolvency and Bankruptcy Code underscores its important significance as a cornerstone of India’s monetary infrastructure.

References

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