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An informative journey of Insolvency Bankruptcy Code (IBC)
- Feb 20, 2023
- 3 mins read
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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.
Insolvency Bankruptcy code- A fast settling jurisprudence.
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.
A positive impact of Insolvency Bankruptcy Code
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.
Who can file an application for corporate insolvency resolution and how
Financial Creditor
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.
- The financial creditors have the authority to file an application before the adjudicating authority.
- Once the information is furnished, within 14 days the adjudicating authority must ascertain the default and if default has occurred, the application is registered.
- If default has not occurred, the application is rejected.
- Within seven days of the registration, the authority must notify the financial creditors that the application has been admitted, followed by the process for insolvency resolution.
Operational creditor
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:
- Operational creditors send demand notices to corporate debtors when they default.
- The demand notice is sent to the creditors within 10 days of notice of repayment of the unpaid operation or notice of existence of disputes.
- If the dispute payment is not received within 10 days, the applicant can file an application before the adjudicating authority.
- Then operational creditors proposed for resolution professional and within 14 days the adjudicating authority has to admit or reject the application.
- Commencement of the insolvency resolution process.
Corporate debtor
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:
- On commission of default, the corporate debtor files an application before the adjudicating authority.
- After furnishing of information the adjudicating authority passes an order within 14 days to admit or reject the application.
- When the application is accepted, the insolvency resolution process takes place, whereas if it is declined, a notice will be sent by the adjudicating authority to rectify the defects.
