Important Features of Insolvency and Bankruptcy Code, 2016 and the need for the new Code by VEDANT JAIN at LEXCLIQ

Distinguishing features of IBC, 2016

1. Comprehensive Law: Insolvency Code is a comprehensive law that envisages and regulates the process of insolvency and bankruptcy of all persons including corporates, partnerships, LLPs and individuals.
2. Withering away of Multiplicity of Laws: The Code has withered away the multiple laws covering the recovery of debts and insolvency and liquidation process and presents a singular platform for all the reliefs relating to recovery of debts and insolvency.
3. Low Time Resolution: The Code provides a low time resolution and defines fixed time frames for insolvency resolution of companies and individuals. The process is mandated to be completed within 180 days, extendable by a maximum of 90 days. Further, for a speedier process, there is provision for fast-track resolution of corporate insolvency within 90 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
4. One Window Clearance: The Code has been drafted to provide one window clearance to the applicant whereby he gets the appropriate relief by the same authority unlike the earlier position of law wherein case the company is not able to revive the procedure for winding up and liquidation, has to be initiated under separate laws governed by separate authorities.
5. The clarity in Process: There is a clear and unambiguous process to be followed by all stakeholders. There is also a shift of control from shareholders and promoters to creditors.
6. One Chain of Authority: There is one chain of authority under the Code. It does not even allow the Civil Courts to interfere with the application pending before the adjudicating authority, thereby reducing the multiplicity of litigations. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies. The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
7. Protects the Interests of Workmen and Employees: The Code also protects the interests of workman and employees. It excludes dues payable to workmen under the provident fund, pension fund and gratuity fund from the debtor’s assets during liquidation.
8. New Regulatory Authority: It provides for the constitution of a new regulatory authority, ‘Insolvency and Bankruptcy Board of India’ to regulate professionals, agencies and information utilities engaged in the resolution of insolvencies of companies, partnership firms and individuals. The Board has already been established and has started functioning.
9. Establishment of Information Utilities (IUs): A unique feature of code is the establishment of Information Utilities (IUs) which are intended to function as a databank to collect, collate and disseminate financial information and to facilitate insolvency resolution. It is envisioned that in the long run, IUs will have data on debts and credits of all the business houses and it will be able to create an automatic trigger in case of default by any debtor and the authority may initiate the insolvency process as required. Such a system will reduce the risk of credit in the economy.

Need for a New Law

1. According to the Ease of Doing Business Report of the World Bank, it takes an average of four to five years in the insolvency resolution process in India.
2. The main reason behind such delay in the legal process is the existence of overlapping legislations and adjudicating authorities dealing with the insolvency of companies and individuals in India.
3. The Government of India then formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate hassle-free and time-bound revival and closure of businesses.
4. The framework of law which was in existence earlier had failed to resolve insolvency situations.

(a) Financial failure – a persistent mismatch between payments by the enterprise and receivables into the enterprise, even though the business model is generating revenues.

(b) Business failure – which is a breakdown in the business model of the enterprise, and is unable to generate sufficient revenues to meet payments.

(c) Malfeasance and mismanagement by promoters

5. The laws which were in existence were not aligned with the market realities and had several inadequacies.
6. There was no single window resolution available and the resolution and jurisdiction were with the multiple agencies with overlapping powers that were leading to delays and complexities in the process.
7. The Companies Act deals with the corporate insolvency law and the individual insolvency laws were being dealt with by a century-old two Acts, i.e., The Provincial Towns Insolvency Act and the Presidency Towns Insolvency Act.

(a) Multiple laws governing Debt resolution and multiple forums

(b) Parallel proceedings by different parties on the same debtor in different forums and Conflicts between laws and over jurisdictions.

(c) Asymmetry of information.