The Insolvency and Bankruptcy Code, 2016.
The Insolvency and Bankruptcy Code, 2016 (IBC, 2016)
Background and Purpose:
The IBC was enacted to consolidate and amend laws relating to insolvency and bankruptcy of individuals, companies, and partnership firms.
It aims to provide a single, comprehensive, and time-bound framework for resolution of insolvency and bankruptcy.
The Code replaced earlier fragmented laws such as the Sick Industrial Companies Act, 1985, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
The primary goal is to maximize the value of assets, promote entrepreneurship, balance the interests of all stakeholders, and encourage credit availability.
Key Features of the Insolvency and Bankruptcy Code, 2016
1. Applicability and Coverage (Sections 1-3)
Applies to companies, limited liability partnerships, partnership firms, and individuals.
Covers both corporate insolvency resolution and individual insolvency/bankruptcy.
2. Insolvency Resolution Process (Part II & III)
Corporate Insolvency Resolution Process (CIRP) begins with a default of ₹1 lakh or more.
The Financial Creditor, Operational Creditor, or Corporate Debtor can initiate the insolvency process.
An Insolvency Resolution Professional (IRP) is appointed to manage the company and take control.
A Committee of Creditors (CoC) consisting mainly of financial creditors is formed.
The CoC decides the resolution plan, which is approved by the Adjudicating Authority (NCLT for companies).
3. Time-bound Resolution (Section 12)
The CIRP must be completed within 330 days (including any litigation period).
If no resolution plan is approved within this period, the company goes into liquidation.
4. Liquidation Process (Part II, Chapter III)
When resolution fails, liquidation commences.
Assets are sold and proceeds distributed according to a waterfall mechanism:
Insolvency Resolution Process Costs
Secured Creditors with enforcement rights
Workmen’s dues
Financial Creditors
Operational Creditors
Unsecured Creditors
Shareholders and partners (equity holders)
5. Fast Track Insolvency (Section 55)
For small companies and start-ups, a fast-track process is available with a shorter timeline.
6. Individual Insolvency and Bankruptcy (Part III)
Procedures for insolvency resolution and bankruptcy for individuals and partnership firms.
It includes repayment plans and bankruptcy order if repayment fails.
7. Adjudicating Authorities and Regulatory Bodies
National Company Law Tribunal (NCLT) is the adjudicating authority for companies.
Debt Recovery Tribunal (DRT) for individuals and partnerships.
The Insolvency and Bankruptcy Board of India (IBBI) regulates insolvency professionals and entities.
8. Moratorium (Section 14)
Once CIRP starts, a moratorium is declared prohibiting:
Legal actions against the debtor,
Transfer or disposal of debtor’s assets,
Enforcement of security interests.
This protects the debtor and ensures smooth resolution.
Important Legal Principles Under IBC
Corporate Debtor's Management: After insolvency proceedings begin, management control shifts from the board to the Insolvency Resolution Professional.
Resolution Plan Approval: Requires approval of at least 66% of voting shares of Committee of Creditors.
No Preferential Transactions: Transactions made to defraud creditors can be reversed.
Cross-border Insolvency: Though not explicitly included, provisions are evolving to deal with international insolvency.
Landmark Case Law on IBC, 2016
Case 1: Innoventive Industries Ltd. v. ICICI Bank (2018) - Supreme Court
Facts: The issue was whether the NCLT could admit an insolvency petition filed by a financial creditor despite an existing dispute.
Held: Supreme Court ruled that if the dispute is prima facie genuine and not a frivolous defense, the tribunal should reject the insolvency petition.
Legal Principle: Insolvency proceedings cannot be initiated where a bona fide dispute exists between parties. The Code is not a debt recovery tool but a resolution mechanism.
Case 2: Swiss Ribbons Pvt. Ltd. v. Union of India (2019) - Supreme Court
Facts: Challenges to the constitutional validity of the IBC provisions.
Held: The Supreme Court upheld the validity of the entire Code, stating it promotes insolvency resolution, protects public interest, and ensures time-bound proceedings.
Legal Principle: The Code strikes a balance between interests of creditors, debtors, and the public; it is constitutionally valid.
Case 3: K. Sashidhar v. Indian Overseas Bank (2019) - Supreme Court
Facts: Dealt with whether operational creditors could initiate insolvency proceedings.
Held: The Court clarified that operational creditors can initiate insolvency proceedings if the operational debt is undisputed.
Legal Principle: Operational creditors have a right under the Code, but their claims can be rejected if there is a genuine dispute.
Case 4: ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2018) - Supreme Court
Facts: Related to eligibility of promoters to submit resolution plans.
Held: Promoters involved in fraud or non-compliance under other laws can be barred from submitting resolution plans.
Legal Principle: IBC aims for clean insolvency resolution; “persons not eligible” are disqualified to maintain integrity of the process.
Case 5: Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) - Supreme Court
Facts: Regarding the extent of powers of the Committee of Creditors and the adjudicating authority in approving resolution plans.
Held: The Supreme Court held that the CoC has the power to decide the resolution plan subject to compliance with law; the NCLT’s role is to ensure the plan meets legal requirements.
Legal Principle: The decision-making power lies primarily with the CoC, with judicial oversight for legality.
Summary Table: Key Aspects of IBC, 2016
| Feature | Description |
|---|---|
| Applicability | Companies, LLPs, partnerships, individuals |
| Initiation | By financial creditor, operational creditor, or corporate debtor |
| Insolvency Process Time | 330 days (including litigation) |
| Adjudicating Authorities | NCLT (companies), DRT (individuals/partnerships) |
| Moratorium | Prohibits actions against debtor during insolvency process |
| Resolution Plan | Requires 66% CoC approval, followed by NCLT sanction |
| Liquidation | If no resolution, assets sold and proceeds distributed |
| Penalties | Criminal and civil penalties for fraudulent activities |
Conclusion
The Insolvency and Bankruptcy Code, 2016 represents a landmark reform in India’s insolvency regime by providing a single, coherent, and efficient mechanism for insolvency resolution. It fosters entrepreneurship by ensuring timely exit and restructuring of distressed companies, while protecting creditors' rights and promoting credit discipline.
Judicial interpretations have refined the Code’s application, emphasizing:
Prevention of misuse,
Fairness in resolution,
Respect for genuine disputes,
The primacy of creditor committees,
And constitutional validity of its provisions.
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