It was a time when India struggled many defaults in debt and debt recovery laws. It was a stage where there was a lot of colliding. It was later realised that a mere debt recovery would not address the damage being incurred by the non-performing assets (NPAs).
The result was a curiosity and desire for a long-term solution to address NPA problems and ensure a healthy and true credit flow in the economy.
The Insolvency Bankruptcy Code 2016 was enacted on 28th May 2016 in order to deal with NPAs as a solution. The clear object of IBC was to establish a consolidate framework for insolvency of corporations, partnership firms and individuals in a time bound manner. In IBC, the incidence of debt failure is sought out and tackled in two ways.
The first step is for debtors to change their behaviour to encourage good business decision-making and prevent business failure. Secondly, the Insolvency Bankruptcy Code serves as a process through which corporates that are financially ailing are given a rehabilitation process to get their company back up on its feet.
Under the Insolvency Bankruptcy Code, the debtor-in-possession regime was replaced by a creditor-in-control regime.
Essentially, the creditor in control model hands control of the debtor over to its creditors. It relies upon the managerial skills of a newly appointed executive to take over an ailing company, ensuring the continuation of business.
Once an insolvency petition is filed, a moratorium is imposed by the court. The moratorium restricts the institution and continuation of any proceedings against the corporate debtor during the CIRP. In fact, the purpose of introducing a moratorium is to protect corporations from financial attacks.
However, a moratorium does not protect the key managerial personnel of the corporate debtor who were responsible for the insolvency of the corporate debtor.
The Insolvency Bankruptcy Code has changed the India insolvency law to a great extent. It has therefore contributed to the development of disciplined borrowing amongst companies. Promoters are concerned about losing control of their enterprises during the time of default.
A financial creditor is defined in section 5(7) of the Insolvency Bankruptcy Code 2016 as one who gives money to the promoters. Banks and home buyers are considered promotional creditors.
Following steps are followed by the debtors in case of any default.
Under the section 5(20) of the Insolvency Bankruptcy Code 2016, operation creditors are those creditors who provide goods and services to the promoters rather than giving money or cash.
The process is as follows:
Under Section 5(a) of the IBC 2016, corporate debtors are entities that borrow money from financial creditors or take goods or services from operation creditors as a debt. The process is as follows: