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INSOLVENCY & BANKCRUPTCY

The Insolvency and Bankruptcy Code, 2016 aims to consolidate and amend the laws relating to insolvency resolution of companies and limited liability entities, partnerships and individuals, which are contained in various enactments, into a single legislation. The main focus of this legislation is at providing resurrection and resolution in a time bound manner for maximization of value of debtor’s assets. The Code has put forth an overarching framework to aid sick companies to either wind up their business or engineer a revival plan, and for investors to exit. Notably, the Code has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency resolution process if default occurs.

Why the code is imperative now –

  • Improve ‘Ease of Doing Business’ ranking for India.
  • The stressed assets in the Indian banking system have peaked at US$ 150 billion or over Rs. 10 lakh crores (15% of gross advances).
  • Heightened focus on the resolution of the problem by the Reserve Bank of India (RBI) and the Supreme Court. The previous RBI Governor had stated that “Our intent is to have clean and fully provisioned bank balance sheets by March 2017”.
  • There is a dire need of capital today – not just for stressed companies but for growth in general.
  • Long time for resolution and recovery; Doing away with a fragmented framework.
  • The average life of cases recommended for restructuring in 2002 was 7 years and the average life of cases recommended for winding up to the court was 6.5 years.
  • Improve the confidence of the International investor in the debt market.


Highlights of IBC-2016 (Premise of the code):

  • The IBC code aims at constituting Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.
  • The code will shift the existing ‘Debtor in possession’ to a ‘Creditor in control’ era.
  • Precisely defined ‘order of priority’ or priority of payment mechanism.
  • The code aims at consolidating all existing insolvency related laws as well as amending multiple legislations.
  • The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.
  • The code proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
  • Introduce a qualified insolvency professional (IP) as intermediaries to oversee the process.
  • The code aims to resolve insolvencies in a strict time scheduled manner – the evaluation and viability determination must be completed within 180 days.
  • Moratorium period of 180 days (extendable up to 270 days) for the Company. (Under fast track case of corporate debtors(low income and assets) the period will be 90 days (extendable up to 135 days)).
  • Insolvency professional to take control over the management of the Company.
  • Cross border insolvency can also be addressed through this process.
  • Importance on identification of financial failure and maximizing the asset value of insolvent firms.
  • Material transactions can be investigated and in case of any illegal diversion of assets personal contribution can be ordered by court.
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