Insolvency & Bankruptcy Code (IBC) : Changing the Architecture of Insolvency Resolution

Sourav Shekhar

As we all know that solving the insolvencies problem is a long process and does not offer an economically viable arrangement. In 2015 The Insolvency and Bankruptcy Bill (IBC) was introduced in the Lok Sabha, But it was given to the joint committee of the parliament for further modifications. In May 2016 both the houses of the parliament passed the Insolvency and Bankruptcy Code Bill 2016.

What is IBC?

The insolvency and bankruptcy code bill, 2016 emphasizes the creation of the single law for insolvency and bankruptcy by the integration of the current framework. It mainly focuses on the interest of the small investors and the simplification of the business process. The bill has 255 sections and 11 schedules

Applications of the Code: The provisions of the Insolvency and Bankruptcy Code (IBC) will apply for the processes like insolvency, liquidation, or voluntary liquidation of these entities:

1. Companies that are incorporated under the companies act of 2013 or any previous laws.
2. The Limited Liability partnership under the LLP act of 2008.
3. Various partnership firms and individuals also.
4. Any other company governed which is regulated by any special activities for the time in force, except in the case the existing provisions is inconsistent with the special acts.
5. Any different body incorporated under any law for time being in force, as taken by the central government in this regard.

Objectives of the code: The legal framework of the bankruptcy law is for these objectives:

1. Solving conflicts between creditors and debtors: It provides certainty about the procedure and assists in solving the conflicts between debtors and creditors. It also helps in the reduction of information asymmetry for the economic participants.

• Keeping the interest of all the stakeholders of the company, so that they can easily enjoy the availability of credit.

2. Helps in the negotiation process: It also helps in providing the flexibility for various parties to come up with an efficient solution to maximize their value. In brief, the bankruptcy law provides a platform for the creditors and the external financiers which easily create the possibilities for rearrangements.
3. Macroeconomic losses to be allocated: An infirm insolvency regime leads to the conception that rich promoters are defaulting entities.

• Maximization of the value of assets.
• Promoting entrepreneurship.
• Increasing the limit of the availability of credit.
• Dealing with cross-broader insolvency.
• Establishing the method of debt financing.

Procedure for solving insolvency: These are the processes:

1. Taking of the decision: Whenever a default occurs, the decision of the process of resolution may be taken by the debtor or creditor. It was administered by the insolvency professionals. The professional provides all the information related to the debtor and creditor.
2. Initiation of resolving the insolvency: A committee is formed including the debtors and creditors by the insolvency professional. The committee consisting of creditors will take a decision regarding the debt. They can revive the debt owed to them by brought some changes in the repayment schedule, or of the liquidation.
3. Liquidation: If the debtor goes into the liquidation, an insolvency professional administers the liquidation process. Starting from selling the debtors assets distributed in the following order of precedence:

• The cost of insolvency resolution consisting of the charges of the insolvency professional.
• Securing of the creditors whose loans are backed by the collateral, dues to other workers.
• Those creditors who are unsecured.
• Government dues.
• Those shareholders who are on priorities.
• Equity shareholders.

Issues for consideration:

1. Multiple Insolvency Professional Agencies: The regulator will be the bankruptcy board and it will regulate the Insolvency professional agencies will help in the regulation of the insolvency professionals. The presence of the multiple IPAs operating could enable competition in the sector.
2. As we know that the court provides the order of liquidity. But it is unclear due to the following reasons:

• In this process the secured creditors received their all outstanding amount.
• Unsecured creditors have priority over the trade creditors.
• The repayment of the government dues after unsecured creditors.

3. 3. Smoother Functioning: As we all know that the smooth functioning of the code depends on the various factors and the performance of the entities such as Insolvency Professionals, Insolvency Professional Agencies, and the information. There are many pending cases in the DRT’s

Summing Up

As we all know that being a new Legislation IBC (Insolvency & Bankruptcy Code) has gone through several amendments in a very short span of time to minimize the loopholes of the bill. It also helps in the smoother functioning of the bill. In this short journey of the IBC the legislative think tanks helped in introducing new specifications in the bill to make the smother insolvency process. Various ordinances of the central government also resolved the complexities involved in the insolvency process. All the stakeholders also make an important role in the success of the historical bill. The IBC 2016 has completely changed the insolvency architecture of the country and becoming a legal milestone.