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The Insolvency and Bankruptcy Code (IBC), introduced in 2016, brought significant changes to India’s insolvency laws, replacing the fragmented regime previously governed by multiple laws. The IBC has improved and streamlined the insolvency process by creating a unified legal framework. Insolvency refers to a financial state where an individual or company is unable to pay their debts as they fall due. Insolvency does not automatically lead to bankruptcy, which is a legal declaration made after the insolvency phase, where a court intervenes to resolve outstanding debts. The IBC plays a critical role in addressing both insolvency and bankruptcy. It consolidates various laws relating to the reorganization and resolution of insolvent individuals, partnerships, and companies. By introducing a more efficient, time-bound process, it aims to reduce delays and improve outcomes in resolving financial distress in India. This law has become a key tool for economic reform, fostering quicker recovery of businesses and fair settlement of creditor claims.
Under the IBC, insolvency processes are managed by Insolvency Professionals (IPs) and regulated by the Insolvency and Bankruptcy Board of India (IBBI). The process starts by filing a petition with the National Company Law Tribunal (NCLT) and appointment of an Interim Resolution Professional (IRP) and IRP takes control of the debtor’s assets and manage the company during the resolution process. Concurrently IRC forms a Committee of Creditors (CoC) which includes all the financial creditors and holds the power to approve or reject the resolution plan. If a viable resolution plan is approved by CoC then it is presented to the NCLT for final approval. If no plan is approved, the company proceeds to liquidation, where assets are sold to repay creditors.
The IBC has been instrumental in improving the ease of doing business in India, as it provides a clear, structured framework for dealing with insolvency and bankruptcy cases, contributing to a more resilient financial ecosystem. IBC had a significant impact on businesses in India, reshaping the corporate landscape by offering a streamlined and time-bound mechanism for dealing with financial distress.
With the introduction of the IBC process in a time-bound manner, the reliability of creditors on the process grew manifold, and the valuation of assets became more transparent, enabling the assets of the insolvent entity to reach their maximum value. Additionally, it established a framework for creditors to recover dues, thereby increasing confidence in the financial ecosystem.”
Moreover, IBC process has brought accountability to both debtors and creditors by enabling creditors to initiate insolvency proceedings against defaulting companies. This has incentivized businesses to maintain financial discipline, avoid defaults, and adhere to better debt management practices. The stringent and swift recovery process has pressured businesses to settle dues promptly, leading to a decline in NPAs, especially in the banking sector. Creditors, including banks and financial institutions, have seen improved recovery rates under the IBC. This has increased confidence among creditors and attracted more investments, as the risk of losing capital has decreased. The IBC provides an opportunity for genuine and viable businesses to undergo restructuring rather than outright liquidation. This gives struggling but potentially viable businesses a chance to recover and continue operations.
The IBC law has created a demand for Insolvency Professionals (IPs), who manage the insolvency process. This has introduced a higher level of professionalism and expertise in handling distressed assets, ensuring more efficient and effective resolution. The IBC has allowed banks to clean up their balance sheets by resolving NPAs, which was a significant concern before its implementation. This has strengthened the banking sector, enabling banks to extend more credit and support economic growth. By addressing systemic issues related to bad loans and financial distress, the IBC has contributed to greater financial stability within the Indian economy.
Insolvency and Bankruptcy law opened opportunities for M&A activity as distressed assets become available for acquisition. Companies looking for growth opportunities can acquire such assets at a reduced price, helping them expand while providing a resolution to creditors. Also, it has promoted better corporate governance as companies strive to avoid insolvency proceedings, which often lead to changes in management and significant scrutiny from regulators and creditors.
Despite so many changes inducted into IBC law, like timebound framework still there are discrepancies and challenges due to the backlog in the NCLT and the appeals process, which goes beyond the stipulated period. The National Company Law Tribunal (NCLT), which oversees insolvency cases, faces a massive backlog due to the sheer volume of cases.
Parties often file appeals against NCLT decisions to the National Company Law Appellate Tribunal (NCLAT) or the Supreme Court, prolonging the resolution process and sometimes extending it beyond the stipulated timeline. Certain provisions of the IBC have been subject to varied interpretations, resulting in litigation that slows down the process. Issues such as the order of priority for creditors, the treatment of operational creditors, and personal guarantors have led to legal uncertainties.
Overall, the IBC has made significant contributions to the Indian business environment by ensuring a more predictable, efficient, and creditor-friendly process for insolvency resolution. While there are challenges to address, the IBC has proven to be a critical tool for bolstering the financial and corporate landscape in India.
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