Insolvency Law at India
India’s insolvency law is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), which provides a comprehensive legal framework for the resolution of insolvency and bankruptcy for individuals, companies, and partnerships. Here’s an overview of the key elements:
1. Insolvency and Bankruptcy Code (IBC) Overview
The IBC consolidates and amends the laws relating to insolvency and bankruptcy to ensure the resolution of disputes in a time-bound and efficient manner. The law primarily aims to balance the interests of debtors and creditors and to provide a formal process for the resolution or liquidation of debts.
2. Insolvency Process for Companies and LLPs
The corporate insolvency resolution process (CIRP) is initiated when a company or LLP defaults on its debts, and a financial creditor, operational creditor, or the company itself files an application to the National Company Law Tribunal (NCLT).
Steps involved in the CIRP:
Application to NCLT: A creditor (financial or operational) or the corporate debtor files a petition with NCLT. The application must be submitted with supporting evidence of default.
Admission of Application: NCLT assesses the application. If it is satisfied that a default has occurred and the necessary conditions are met, it admits the application within 14 days.
Moratorium Period: Upon admission, a moratorium is imposed, preventing the initiation of any new legal action against the debtor and preserving the assets of the debtor.
Resolution Professional (RP): NCLT appoints a resolution professional who takes over the management of the company and leads the resolution process. The RP manages the corporate debtor’s affairs and attempts to work out a resolution plan.
Committee of Creditors (CoC): The financial creditors of the company form the Committee of Creditors (CoC), which evaluates the resolution plan submitted by the RP. A majority of creditors must approve the plan.
Resolution Plan Approval: If the resolution plan is approved by the CoC, it is submitted to NCLT for final approval. NCLT has 30 days to approve or reject the plan.
Liquidation: If the resolution process fails or if no plan is approved within the stipulated time, the company enters liquidation, and the assets are sold to repay creditors.
Timeframes:
The CIRP must be completed within 180 days, extendable by another 90 days. If no resolution is reached, the company will undergo liquidation.
3. Insolvency Process for Individuals and Partnerships
Under the IBC, individuals and partnerships can also file for insolvency, though the process differs slightly. The individual insolvency process is primarily aimed at helping individuals who are unable to repay their debts due to financial distress.
Steps involved:
Application to Debt Recovery Tribunal (DRT): An individual facing insolvency can file a petition with DRT to initiate the insolvency resolution process.
Interim Moratorium: Upon the admission of the insolvency application, an interim moratorium is imposed, which prevents creditors from initiating or continuing legal proceedings against the individual.
Repayment Plan: A repayment plan may be created, outlining how the individual intends to repay their debts. This plan must be approved by the majority of creditors.
Bankruptcy: If the individual cannot repay their debts, they may be declared bankrupt, and their assets can be liquidated to satisfy creditors.
4. Liquidation
If the resolution process fails or if a company cannot be revived, it moves into liquidation. A liquidator is appointed to sell the company's assets and distribute the proceeds to creditors according to the priority of claims. The order of priority is as follows:
Secured creditors (with collateral)
Unsecured creditors
Employees' dues (including salaries and pension contributions)
Shareholders (if there are remaining assets after paying all creditors)
5. Adjudicating Authorities
National Company Law Tribunal (NCLT): Handles the corporate insolvency resolution process and liquidation for companies and limited liability partnerships (LLPs).
Debt Recovery Tribunals (DRTs): Handle individual and partnership insolvencies.
Insolvency and Bankruptcy Board of India (IBBI): The regulator overseeing the implementation of the IBC and the conduct of insolvency professionals.
6. Key Features of IBC
Time-Bound Process: The IBC aims to resolve insolvency cases quickly, typically within 180 days for corporate debtors, with a possible extension of 90 days.
Creditor-Driven Process: The process is largely creditor-driven, particularly in the case of corporate debtors.
Insolvency Professionals: Insolvency professionals, such as resolution professionals and liquidators, play a significant role in managing the insolvency process.
Committee of Creditors (CoC): In corporate insolvency, the creditors form a CoC to decide on the resolution plans.
Cross-Border Insolvency: The IBC also includes provisions for resolving insolvency cases with foreign elements, under certain circumstances.
7. Recent Amendments and Updates
The IBC has been amended several times since its enactment to enhance its effectiveness, including:
Introduction of Pre-Packaged Insolvency: For MSMEs (Micro, Small, and Medium Enterprises), a pre-packaged insolvency resolution process was introduced in 2021 to enable quicker and simpler resolution.
Changes in Default Threshold: The threshold for initiating insolvency for operational creditors was raised from ₹1 lakh to ₹1 crore, effective in 2020.
Conclusion:
India’s Insolvency and Bankruptcy Code (IBC) has transformed the insolvency resolution process, making it more structured and time-bound, with an emphasis on protecting creditors’ rights while allowing businesses a fair chance for revival. For both companies and individuals, the law ensures that a transparent and efficient resolution or liquidation process is in place.
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