INSOLVENCY AND BANKRUPTCY CODE- A Retrospective

Insolvency is often read as a negative word as it is always coined with one’s inability to pay off the debts. Since the introduction of insolvency and Bankruptcy Code, 2016 (IBC) fortunes of the promoters of many corporates had changed overnight. Till then, holding on to the ownership of an entity was considered as a divine right- a right which no one can question. Since the introduction of the IBC, many stalwarts who had owned companies had to step down from their adobes of comfort and face the hard reality of losing control over their business. In recent days many big corporate names had appeared in the newspaper headlines for that reason.


The principal behind the Insolvency and Bankruptcy Code (Code) is simple. It can easily be correlated with the proverb “a stitch in time saves nine”. If a corporate person (Company or LLP) owes more than Rs.1 lakh to someone, either against availing of a service or against the purchase of a product or as a loan and the said payment is defaulted, then the board of directors of that corporate person have no right to continue in the said position. The Corporate who had defaulted in repaying the debt is called Corporate Debtor(CD) and the person to whom the debt is called Financial Creditor (FC) or Operational Creditor (OC). Banks and financial institutions are coming under the classification of Financial Creditor. Suppliers and vendors are coming under the classification of Operational Creditors. As per the recent amendment, home buyers or apartment buyers are also considered as Financial Creditors who can initiate the resolution process against the builder or contractor who are not honouring the timelines of completion of construction.



The intention of IBC is not to punish the defaulting debtor but to handhold it to normalcy through a process called Corporate Insolvency Resolution Process. Corporate Insolvency Resolution Process [CIRP] is a time bounded process during which various options to pay off the debts, without disturbing the operations of the Corporate Debtor, shall be actively considered. CIRP is for a period of 180 days within which all efforts shall be put in to revive the Corporate Debtor from a great fall. In order to help the Corporate Debtor during its hard time, a professional shall be appointed as Resolution Professional(RP), who shall take over the management of the Corporate Debtor from the Board of Directors of the Company. The powers of the Board of Directors of the Corporate Debtor shall be suspended during the CIRP and RP shall be playing their role. It is very logical to keep away the defaulting promoters from the management of the company. There is a saying that there are no sick companies and there are only sick promoters. The Resolution process shall be carried out under the supervision of National Company Law Tribunal (NCLT). The National Company Law Tribunal (NCLT) is the adjudicating authority for insolvency resolution or liquidation or bankruptcy of the corporate debtors and personal guarantors of the corporate debtor.


During the CIRP, there will be moratorium on all the debts of the Corporate Debtor. Resolution Professional shall constitute a Committee of Creditors(CoC) which shall consist only of Financial Creditors. During the CIRP, the Resolution Professional shall invite the bids for reviving the Corporate Debtors which shall be known as “Resolution Plan”. The Resolution plan shall contain the clauses for the revival of the Corporate Debtor by repaying the debts. The resolution plan has to be approved by the CoC and the NCLT should be satisfied about the rationale of the plan. Once the resolution plan is approved, the bidder shall act on the basis of the terms of the plan and settle the debts of the Corporate Debtor in the manner specified in the Code, which is named as Water fall mechanism. On approval of the Resolution plan the moratorium shall come to an end. The promoters of the Corporate Debtor have to give way to the bidder who won the bid.


In case there are no resolution plans or the plans submitted are not acceptable to the CoC or the NCLT and on expiry of 180 days(which can be extended upto 270 days) the Corporate Debtor shall face liquidation. The Resolution Professional (RP) shall act as Liquidator and he shall relieve the Board of Directors from all the responsibilities and duties. The Liquidator shall sell of the assets of the Corporate Debtor and settle the debts of the Corporate Debtor based on the water fall mechanism specified in the Code.


The purpose of the Code is to protect the assets and business of the Corporate Debtor without value erosion and hand over the baton to a more effective team who shall takeover and settle the debts of the Corporate Debtor. Timely invocation of the resolution process will help the creditors to retrieve their hard earned money which would otherwise be lost. The intention behind the Code is to preserve the capital of the business, retain the jobs and protect the business environment of the Country.


The IBC is still in it nascent stage and there is a long road to go to attain perfection. Ease of recovering the debt is one of the major parameters to access the ranking of the country in World Bank’s ease of doing business. Even with the introduction of IBC, the ranking in that segment is still at 180 out of 190 ranks. So far 1198 applications has been admitted in NCLT’s across the country out of which 212 companies are in liquidation phase and 816 companies are undergoing resolution process.

The IBC is literally and practically a path paving piece of legislation which is capable to improve the financial health of the Corporate Debtor, lenders, vendors and the Country as a whole.


BIJOY P PULIPRA

(Author is a Corporate Trainer, Practising Company Secretary and Insolvency Professional from Thiruvananthapuram and can be contacted on bijoy@artismc.com ).

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