The Laws against Bankruptcy and Insolvency in India

Bankruptcy & Insolvency » The Laws against Bankruptcy and Insolvency in India

Table of Contents

Introduction to Bankruptcy and Insolvency in India

Bankruptcy is defined as the legal process in which an entity or a person who cannot repay their borrowed sum seeks relief. Whereas insolvency is the state of being unable to repay the debts upon their maturity. In India, all cases related to bankruptcy and insolvency are covered under the Insolvency and Bankruptcy Code (2016). The Insolvency and Bankruptcy Code is a central law that governs bankruptcy proceedings for individuals, partnership firms, and companies. 

The Insolvency and Bankruptcy Code has 11 schedules. Each schedule headlines the various conditions in which creditors, defaulters, entities, and organizations can seek relief in the event of bankruptcy. As per a survey, nearly 1500 Indian companies in the FY 2020 – 2021 were either liquidated or resolved under IBC.

The Application of Insolvency and Bankruptcy Code (IBC) in India

Healthy credit flows and overdrafts are crucial parts of a growing economy. In a country like India, the generation of capital to grow and sustain businesses is important. When a business or a person turns insolvent, they begin to default on loans. It is important that banks can recover as much sum as possible in an event of insolvency or bankruptcy. Here when the laws of Insolvency and Bankruptcy Code step in. 

In an event of insolvency, viable businesses get a chance to either select new owners or pursue liquidation. The IBC code implements the fastest possible way to recover as much new credit as possible.

History of Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code was launched in 2016 by the Central Government of India. The law overhauls the previous bills and creates a new and sophisticated medium for corporate distress resolutions. Historically, the cases of insolvency and bankruptcy were addressed through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the Debt Recovery Tribunals.

The Processes Under the Insolvency and Bankruptcy Code (2016)

Corporate debtors incur debt to run businesses. When the business defaults on its credit payment, the debtor can appeal as per the Bankruptcy and Insolvency Act. Under section 6 of the IBC code, the Corporate Insolvency Resolution Process (CIRP) is initiated.

Under the Insolvency and Bankruptcy Code, there are only two outcomes of insolvency:

  1. Resolution: In the event of insolvency, a viable business must be resolved by either restriction/change of management or new ownership. The change must be carried out as per the law, and parties with limited liability must separate from the business.

Liquidation: In the event of insolvency, an unrecoverable business must be liquified and all the assets must be sold off to recover the cash.

Appealing for insolvency:

The defaulting party can apply for insolvency through a stipulated adjudicating authority (AA). The AAs are designated across the country under the National Company Law Tribunal (NCLT).  The tribunal must accept or reject the application within 14 working days. Since time is of the essence in the ordeal, NCLT must adhere to the deadline or provide a reason for delay. 

Upon the acceptance of the application, the adjudicating authority appoints an insolvency professional agency registered interim resolution professional (IRP). The IRPs can be trained chartered accountants, lawyers, company secretaries, and professionals working with LEX Solutions. They must know how to carry out a professional audit of the business. Upon the appointment of the IRPs, they take control of the defaulter’s business and assets and collect information about the expenses and earnings of the business. All of this happens in the coordination of the Committee of Creditors (CoC). The committee of creditors appoints the insolvency professionals who oversee the operations of a company under insolvency.

Introduction to the Insolvency Resolution

The Insolvency Resolution is a premier code under the insolvency and bankruptcy law that outlines the process of insolvency for companies, firms, partnerships, and individuals. The process of insolvency is often initiated by the creditor or the debtor. For companies and corporates, the maximum duration for completion of resolution is 180 days (with a 90-day available extension). Whereas for start-ups and small companies, the resolution process must be completed within 90 days (with a 60-day available extension).

Three Main Officials Overseeing Insolvency

  1. Insolvency regulator: Insolvency regulators oversee the insolvency proceedings and regulate the registered entities. 
  2. Insolvency professionals: Insolvency professionals are trained officials who take control of the assets of the business. The IP also examines the resolution proposals of a company while restructuring the debt. 
  3. Bankruptcy and Insolvency Adjudicator: The Bankruptcy and Insolvency Adjudicator oversee the process of insolvency with respect to the Debt Recovery Tribunal and the National Company Law Tribunal for Companies.

Also Read: What happens when a Company goes bankrupt?

Duties of the Interim Resource Professional

Interim Resource Professional (IRP) is central to insolvency operations. Right from its appointment, the IRP is inundated with the responsibilities of consolidating the claims levied by the clients/third parties and evaluating a healthy credit flow from the defaulting business.

Here are the main duties of the IRP:

  • Leading the management of the company and taking control over the daily expenditure
  • Consolidating the claims made by creditors/third parties and asses the entirety
  • Submitting a resolution plan to the AA along with the payment update to the creditors
  • Communicating between the defaulter and debtor in the process of liquidation

The Waterfall Mechanism

Upon insolvency, there is a great chance that the case heads to liquidation. When the terms are accepted, the liquidation occurs through the waterfall mechanism. The waterfall mechanism states that the funds collected from the sale of assets will be disbursed as per the resolution process. In this process, the dues of the third-party creditor or workmen are met before the government or the employees. 

Summing Up,

The Insolvency and Bankruptcy Code is the central law covering all cases of insolvency and bankruptcy in India.  From the speed of processing to the disbursement of funds, there are many pros of IBC. Ever since its launch in 2016, IBC has become one of the most utilised legislations for the recovery of debts.

If you are also looking for a bankruptcy lawyer in Chandigarh or pan India, you can contact Lex Solutions as they are the best Legal Firm in Chandigarh and have the best team of bankruptcy lawyers.