Redesigning India's Financial Skyline: The Role of the Insolvency and Bankruptcy Code (IBC)

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) has emerged as a tool for changing the financial outlook of things and even make the resolution process of distressed companies smooth. As it enhances creditor confidence while still promoting corporate governance, it plays a very significant role in economic growth and stability. Though bankruptcy and insolvency are more frequently discussed, they do refer to two very different dimensions of financial distress. Broadly, while talking about the balance sheet or cash flow perspective, insolvency refers to an inability to settle debt obligations. In turn, bankruptcy refers to a process in law that outlines a manner in which insolvent entities may liquidate debts by litigating through courts. The bankruptcy laws aim at giving some new leases to debtors on one hand while trying to treat creditors fairly so that order is restored in financial markets. This blog post will study and analyse how IBC has impacted investor behaviour, capital flows, and market dynamics by highlighting the importance of IBC on developing a healthier financial ecosystem.

Laws of India

a) Insolvency and Bankruptcy Code (IBC), 2016

The IBC is the central enactment dealing with insolvency and bankruptcy in India and has both corporate and individual juridical persons within its ambit. IBC institutes the Corporate Insolvency Resolution Process (CIRP) for the expeditious resolution process of companies. Cases before the National Company Law Tribunal (NCLT) form its jurisdiction, while cases of personal insolvency fall under the Debt Recovery Tribunal (DRT). Under IBC, a committee of creditors is also institutionally instituted to represent creditor interests in the proceedings of the resolution process.

b) Companies Act, 2013

This incorporation law, the Companies Act 2013, provides the general legal framework for the organisation and operation of corporations, especially at the stage of the winding up of a company. Procedures for voluntary and compulsory winding up, also indicate the tasks of liquidators so that the assets may be distributed systematically to the creditors. The Companies Act, 2013 satisfies IBC's needs through enhanced corporate governance and a procedure for systemic winding up.

c) Recovery of Debts and Bankruptcy Act, 1993

In several aspects, this Act had assisted banks and other financial institutions to recover debts. The DRT ( Debt Recovery Tribunal) established by it expedited the whole process of debt recovery. While this Act is generally superseded by the IBC, it still survives where relatively smaller amounts of money are involved in the debt recovery proceedings.

d) Negotiable Instruments Act, 1881

This Act has, therefore provided the statutory framework relating to the creation, transfer, and enforcement of negotiable instruments comprising cheques and promissory notes. It also introduced provisions for dishonoured cheques. It may initiate insolvency proceedings against the cheque issuer and a complaint lodged by a holder of the dishonoured cheque.

e) Pre-Packaged Insolvency Framework

This was introduced in 2021 to deal with stress of small and mid-sized companies. It allows a company to enter into resolution plans with the creditors even before the initiation of the insolvency process under the IBC. This framework aims at faster resolution to reduce burden on NCLT.

f) Regulatory Framework

Insolvency and Bankruptcy Board of India (IBBI) regulates the process of insolvency and guides all concerned parties regarding the IBC. It describes practices in the process of practising insolvency in India and also regulates the service providers besides the practising professionals in dealing with the domain of insolvency. In managing the non-performing assets coupled with its insolvency resolution, the financial institutions comprising of banks have to adhere to various provisions of IBC wherein its process reaches a conclusive outcome in an unbiased and transparent manner.

Key Provisions of IBC

IBC is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. It provides for a time-bound process to resolve insolvency.

Applicability: The provisions of the Code are applicable to companies, limited liability entities, firms, and individuals (i.e. all entities other than financial service providers).

Timeframe for completion of the exercise: Companies have to complete the entire insolvency exercise within 180 days under the IBC. The deadline may be extended if the creditors do not raise objections to the extension.

For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days, and the deadline can be extended by 45 days. If debt resolution doesn't happen, the company goes for liquidation.

Regulation of the IBC proceedings: The Insolvency and Bankruptcy Board of India (IBBI) has been appointed as a regulator and it can oversee these proceedings. IBBI has 10 members appointed by the Central Government.
IBBI regulates insolvency professionals, insolvency professional agencies, and information utilities set up under the Code.

Facilitation of the insolvency resolution: A licensed professional administers the resolution process, manages the assets of the debtor, and provides information for creditors to assist them in decision-making.

Adjudication over the proceedings: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT) for companies and the Debt Recovery Tribunal for individuals.
The courts approve initiating the resolution process, appointing the insolvency professional, and giving nod to the final decision of creditors.

Procedure to resolve insolvency under the Code: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manages the debtor’s assets. This process lasts for 180 days, and any legal action against the debtor is prohibited during this period.

Committee of Creditors: A committee consisting of the financial creditors who lent money to the debtor is formed by the insolvency professional. The creditors' committee decides the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule or selling the assets of the debtor to get their dues back.
If a decision is not taken in 180 days, the debtor’s assets go into liquidation.

Liquidation Process

• Insolvency Professional Appointment: An insolvency professional is appointed to administer the liquidation process.
• Sale of Assets: The debtor's assets are sold to raise funds.
• Distribution of Proceeds:
  • First: Payment of insolvency resolution costs, including the remuneration to the insolvency professional.
  • Second: Payment to secured creditors (those whose loans are backed by collateral).
  • Third: Payment to workers and other employees (e.g., unpaid wages and benefits).
  • Fourth: Payment to unsecured creditors (those without collateral backing their loans).

Impact of IBC on Financial Markets

There has been a considerably high impact of the IBC on the financial markets of India. It not only ensures a transparent process of resolution of insolvency that gives the comfort to lend but also stimulates the participation of lenders in streamlining their practices and credit sanctions that spur growth in the markets.

IBC fosters efficient capital allocation as it identifies viable businesses and enables the restructuring of distressed assets thus making sure that capital goes to the most productive uses.

The IBC promotes an even more disciplined corporate environment because firms are more mindful of their health and, therefore, corporate governance and financial management also improve. This, in turn, impacts market valuations on this corporate resolution of NPAs which will ensure better provisions of firm's financial health and thus impact stock prices and investor sentiment.

The IBC has fostered the rise of distressed asset markets as it allows investors and private equity firms, to acquire assets at prices significantly undervalued and thus boosts activity and liquidity in the secondary markets. The code also impacts the statutory frameworks and financial practices, through the pressure for changes in legal frameworks as well as support for best practices.

Implementation Issues

India’s insolvency and bankruptcy laws, particularly the Insolvency and Bankruptcy Code (IBC), face multiple challenges.

Case Backlogs and Delays:

• The National Company Law Tribunal (NCLT) faces significant backlogs of cases.
• These backlogs result in lengthy delays in resolving insolvency cases, leading to depreciation in asset values.

Focus on Financial Distress Over Speed:

• The IBC aims for speedy resolution of insolvency cases, but the delays often cause prolonged financial distress for both debtors and creditors, contrary to the law's objectives.

Lack of Awareness Among Stakeholders:

• Many creditors and debtors are unaware of the provisions and processes under the IBC, hindering effective resolution.

Variability in Professional Quality:

• Insolvency professionals vary in terms of quality and capability, which can impact the efficiency of the resolution process.
• Inadequate training or untrained personnel can lead to adverse results in the insolvency resolution.

Inadequate Creditors' Participation:

• Some creditors fail to actively participate in the insolvency process, which complicates and delays the resolution.

Conflicting Laws:

• Conflicts between the Companies Act and the Negotiable Instruments Act add complexities to the insolvency resolution process.
• These conflicting laws create confusion and complications in debt recovery processes and in applying the IBC effectively.

Reforms

Significant reforms are required to improve the implementation of India's bankruptcy and insolvency laws.

• One of the urgent reforms is to make the National Company Law Tribunal (NCLT) more efficient in reducing the time taken to dispose of pending cases.

Increase in NCLT Benches and Technology Adoption:

• Efficiency can be enhanced by increasing the number of NCLT benches to handle cases more promptly.
• The adoption of new technologies should be prioritized for better case management, ensuring urgent cases are given priority.

Raising Stakeholder Awareness:

• Workshops and awareness programs should be conducted to improve the understanding of the Insolvency and Bankruptcy Code (IBC) among stakeholders (creditors, debtors, and insolvency professionals).
• Active involvement and awareness will improve the overall resolution process.

Improvement in Professional Training Standards:

• Improving training standards for insolvency professionals would enhance their skills and effectiveness in creating high-quality resolution plans.

Encouraging Active Participation of Creditors:

• Creditors' active participation should be encouraged for smoother and more effective resolutions.
• Transparency and incentives can help create an environment for collaborative and fruitful dialogue among stakeholders.

Pre-Packaged Insolvency Framework:

• The pre-packaged insolvency framework should be applied more widely, as it enables companies to recover faster and preserve value, rather than facing prolonged insolvency proceedings with less favorable outcomes.

Conclusion

With this approach towards effective resolution processes and increased creditor confidence, IBC has transformed the face of finance for India as a whole. Challenges to be targeted for further building up the framework would be related to case backlog and the factor of people's awareness. IBC creates a more resilient financial ecosystem not only for more timely resolutions but also for sustainable growth and stability in India.

References

1. Dhingra, S. (2018), Understanding the Insolvency and Bankruptcy Code: A comprehensive guide. New Delhi: LexisNexis.
2. Insolvency and Bankruptcy Code, 2016, Ministry of Corporate Affairs.
3. Khandelwal, K., & Sharma, R. (2019). Pre-packaged insolvency in India: Opportunities and challenges. International Journal of Law and Management, 61(4), 889-902.
4. Understanding the IBC KEY JURISPRUDENCE AND PRACTICAL CONSIDERATIONS, https://ibbi.gov.in/uploads/whatsnew/e42fddce80e99d28b683a7e21c81110e.pdf