This article has been written by Akanksha Mishra, 2^nd year Ballb (Hons.) Guru Gobind Singh Indraprastha University.

Abstract

The Insolvency and Bankruptcy Code (IBC), which was put into effect in 2016, has made some major improvements to how India deals with corporate insolvency and bankruptcy. It provides a clear and organized process for companies to work through financial trouble, with a set timeline for coming up with a recovery plan. If a plan can’t be made, the IBC also explains how assets should be sold and creditors paid out during the corporate liquidation process.

While the IBC has definitely been an improvement, there are still some issues that need to be addressed. For one, there can be delays in the Corporate Insolvency Resolution Process (CIRP), and there aren’t enough trained professionals to handle all the cases. Also, there can be confusion because the laws aren’t always clear, and different courts can interpret them in different ways. In order to fix these problems, we need better education about insolvency laws, more training for professionals, and more legal clarity overall. If we can do all that, India can have a stronger, more efficient system for dealing with corporate insolvency, which would create a more stable business environment.

Keywords Insolvency and Bankruptcy Code (IBC), Corporate Insolvency Resolution Process (CIRP), Corporate liquidation, Insolvency professionals, Insolvency and Bankruptcy Board of India (IBBI), National Company Law Tribunal (NCLT)

Introduction

The Insolvency and Bankruptcy Code (IBC), which was put into effect in 2016, made major changes to how corporate insolvency is handled in India. This new system was designed to make the process simpler and clearer, which would ultimately benefit creditors, debtors, employees, and shareholders alike. It was also intended to improve India’s standing in international business rankings, attracting more investors and encouraging economic growth. The IBC lays out a structured approach to resolving corporate insolvency, called the Corporate Insolvency Resolution Process (CIRP). This path provides businesses with a way to work through their financial difficulties. In cases where a company can’t be saved, the IBC also outlines a liquidation process. Insolvency professionals play a big role in managing the resolution process under the IBC. Meanwhile, the National Company Law Tribunal (NCLT) and its appeals counterpart, the National Company Law Appellate Tribunal (NCLAT), are responsible for overseeing these proceedings. While the IBC has definitely made some progress, it’s not without its challenges. This shows that there’s still room for improvement in order to create an even more effective insolvency framework.

Historical Background of Corporate Insolvency and Bankruptcy in India

The concept of insolvency and bankruptcy in India has been around for a really long time, like all the way back to the ancient texts like the Manusmriti. These texts talked about debt and how it affects people, which is basically the same as insolvency and bankruptcy nowadays. But, the first real laws about it didn’t come until later, during British rule.

During the British era, the laws about insolvency were based on laws from England, but they were mostly about individuals, not businesses. The first laws about this were the Presidency Towns Insolvency Act of 1909[1] and the Provincial Insolvency Act of 1920[2], but they didn’t really cover corporate insolvency all that well. It wasn’t until the Companies Act of 1956 that businesses started to get some protection from insolvency.

After India gained independence, they kept making new laws to help with corporate insolvency, like the Sick Industrial Companies Act (SICA) of 1985[3] and the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) of 1993[4]. But, even with all these new laws, the system was still pretty fragmented, which meant it was hard to figure out who was responsible for what and how to solve problems.

Finally, in 2014, a group called the Bankruptcy Law Reforms Committee (BLRC) was formed to study the situation and make recommendations for change. Their work led to the Insolvency and Bankruptcy Code (IBC) being passed in 2016[5]. This law is like a big overhaul of the whole system, bringing everything together in one place and making it easier to deal with insolvency in a fair and efficient way.

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code (IBC), which was passed in 2016, completely revamped the way India handles corporate insolvency[6]. It introduced a clear, efficient, and transparent system for dealing with companies that are struggling with debt, giving creditors and investors more confidence in the market. The heart of the IBC is the Corporate Insolvency Resolution Process (CIRP), which provides a set timeframe of 180 days (with a possible 90-day extension) for businesses to come up with a plan to become profitable again[7]. If they can’t agree on a plan, the company goes into liquidation. The Insolvency and Bankruptcy Board of India (IBBI) oversees all this, accrediting insolvency professionals to manage the process.

The IBC also centralized legal jurisdiction for insolvency cases to the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) for appeals, making it easier to navigate the system[8]. Since its implementation, the IBC has seen a lot of success, resolving cases faster and promoting accountability. However, there are still some challenges to address. Overall, though, the IBC is seen as a game-changer for making India’s business environment more stable and friendly for investors.

Key Elements of the Corporate Insolvency Resolution Process (CIRP)

The Corporate Insolvency Resolution Process (CIRP) is the main way for companies in India that can’t pay their debts to try and get back on track. It’s part of the Insolvency and Bankruptcy Code (IBC), 2016[9]. The CIRP has a bunch of steps, and it’s overseen by the National Company Law Tribunal (NCLT).

1. Either a financial creditor or an operational creditor can start the CIRP if they think the debtor company owes them money and they haven’t been paid. The debtor company can also start the process on their own if they want[10].
2. Once the CIRP starts, an IRP gets chosen by the NCLT to manage the company’s assets and make sure everything keeps running. The IRP also has to make a list of all the creditors who are owed money.
3. The IRP makes a list of all the creditors, and then a CoC gets formed from the financial creditors. This is a group of creditors works together to make decisions during the CIRP, like picking a Resolution Professional (RP) to run the process and approving any resolution plans.
4. The RP, who’s like the general manager of the process, works with the CoC to come up with a resolution plan. This is a proposal for how to fix the company’s money problems or get the most money back for the creditors. The CoC has to approve the plan by a vote of at least 66% of its members. If they don’t agree, the plan goes back to the drawing board.
5. Once the plan is approved, it goes to the NCLT for a final sign-off. If the plan is rejected, the company goes into liquidation. If it’s accepted, the company follows the plan and starts working on fixing its problems or paying back its creditors.
6. The CIRP has to happen pretty fast, with a maximum of 180 days, plus an extra 90 days if needed. This helps keep things moving and keeps the company’s assets from getting used up too quickly.

The NCLT is kind of like the boss of the CIRP. They get to decide if resolution plans are good or not. If people don’t like their decision, they can appeal to the National Company Law Appellate Tribunal (NCLAT).

Corporate Liquidation Process under the Insolvency and Bankruptcy Code, 2016

Corporate liquidation happens when a company’s in so much debt that it can’t pay its creditors back, even after trying to work things out through the Corporate Insolvency Resolution Process (CIRP). Basically, it’s the last resort to try and get some money back for everyone involved.

The National Company Law Tribunal (NCLT) decides when a company needs to be liquidated. They can do this if a resolution plan gets rejected, if the Committee of Creditors (CoC) votes for liquidation, or if the CIRP just doesn’t work out after a certain amount of time. Once the company’s been ordered for liquidation, the NCLT picks an insolvency professional to be the liquidator, who’s basically in charge of selling off all the company’s assets and making sure everyone gets paid back as fairly as possible.

The liquidator takes control of everything the company owns and creates this big pool of assets called a liquidation estate. They can sell these assets through auctions or private sales to anyone who wants to buy them. The money from these sales goes to pay back all the people the company owes money to, starting with all the fees and stuff related to the liquidation process, then to secured creditors (like banks that have collateral), then to employees who haven’t been paid, and then to any other unsecured creditors. If there’s any money left over, it goes to shareholders[11].

The whole point of liquidation is to try and get as much money back as possible for everyone involved while being as fair and fast as possible. It can be really complicated, but it’s important for everyone to understand what’s going on so they can make sure they get treated right[12].

NCLT AND NCLAT: Roles in Corporate Insolvency and Bankruptcy in India

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are pivotal institutions in India’s corporate insolvency and bankruptcy framework. Established under the Companies Act, 2013, they play key roles in implementing and overseeing the Insolvency and Bankruptcy Code (IBC), 2016.

National Company Law Tribunal (NCLT)

The NCLT serves as the primary adjudicating authority for corporate insolvency cases in India. It has the power to admit or dismiss insolvency applications, oversee the Corporate Insolvency Resolution Process (CIRP), and approve or reject resolution plans. With jurisdiction across the country, the NCLT has multiple benches, allowing for localized handling of cases to expedite proceedings.

In the context of the IBC, the NCLT’s key functions include:

– Admitting CIRP applications from financial creditors, operational creditors, or corporate debtors.

– Appointing interim resolution professionals (IRPs) and overseeing the formation of the Committee of Creditors (CoC).

– Approving or rejecting resolution plans based on their compliance with the IBC.

– Ordering liquidation if the CIRP fails to produce a viable resolution plan.

National Company Law Appellate Tribunal (NCLAT)

The NCLAT serves as the appellate body for the NCLT. It hears appeals against NCLT decisions, providing a mechanism for stakeholders to seek redress if they disagree with the tribunal’s rulings. The NCLAT plays a critical role in ensuring the legal consistency and fairness of NCLT decisions.

In the context of corporate insolvency and bankruptcy, the NCLAT’s key functions include:

– Hearing appeals against NCLT decisions related to the CIRP and liquidation.

– Reviewing cases involving the conduct of insolvency professionals or resolution plans.

– Providing guidance and establishing precedents that shape future cases.

Together, the NCLT and NCLAT provide a comprehensive legal framework for corporate insolvency and bankruptcy in India, promoting consistency, transparency, and fairness in the resolution of corporate insolvency cases.

Recent Amendments and Legal Developments in Corporate Insolvency and Bankruptcy in India

The Insolvency and Bankruptcy Code (IBC) has seen a ton of changes since 2016, dude. India’s really been working on improving its corporate insolvency process and making it more efficient for everyone involved. There have been some major amendments and legal developments to help with that, too.

One big change was the introduction of the “pre-packaged insolvency resolution process” (pre-pack) specifically for small businesses called Micro, Small, and Medium Enterprises (MSMEs). This was supposed to be a faster, cheaper way for these smaller businesses to deal with their debt problems and maybe even restructure without going through a super long Corporate Insolvency Resolution Process (CIRP)[13].

Another important amendment focused on speeding up the resolution process in general. They made the timeline for CIRP tighter so that things could get wrapped up quicker, and they clarified some stuff about interim finance to help companies undergoing insolvency keep their heads above water[14].

The courts have also been getting involved, dude. The Supreme Court and the National Company Law Appellate Tribunal (NCLAT) have been dropping rulings left and right that interpret the IBC and help out with situations like what happens during the moratorium during CIRP, how homebuyers are treated as financial creditors, and even who gets what when a company is liquidated[15].

These changes and rulings are all about making the insolvency and bankruptcy process in India more fair and effective, man. It’s supposed to help create a stronger business environment where companies can fail without dragging everyone else down with them. It’s pretty cool to see how it’s all evolving.

Challenges and Issues in Corporate Insolvency and Bankruptcy in India

Despite the significant strides made with the Insolvency and Bankruptcy Code (IBC), 2016, several challenges and issues persist in the corporate insolvency and bankruptcy landscape in India. These challenges can affect the efficiency and effectiveness of the insolvency process and require careful consideration by policymakers and stakeholders.

Delays and Prolonged Processes

One of the primary challenges is the delay in completing the Corporate Insolvency Resolution Process (CIRP). Although the IBC mandates a 180-day timeline (extendable by 90 days), many cases exceed this limit due to litigation, procedural complexities, or lack of resolution plans. These delays can erode asset values and reduce creditor recoveries[16].

Limited Qualified Insolvency Professionals

The role of insolvency professionals is crucial to the success of the CIRP, but India faces a shortage of experienced and qualified professionals. This shortage can lead to delays and inconsistencies in managing insolvency cases, impacting the overall resolution process[17].

Legal Ambiguities and Evolving Jurisprudence

The IBC is relatively new, and its interpretation has evolved through court decisions and amendments. Legal ambiguities, such as the rights of different creditor classes, moratorium scope, and resolution plan approvals, can create uncertainty, leading to increased litigation and appeals[18].

Inefficient Recovery for Operational Creditors

Operational creditors, including suppliers and vendors, often find themselves at a disadvantage in the insolvency process, with lower priority in the distribution of recovered assets. This can deter smaller businesses from engaging with companies undergoing insolvency, affecting the broader business ecosystem.

Impact of External Factors

External factors such as economic downturns or the COVID-19 pandemic can significantly impact the insolvency process. These factors can lead to increased insolvency filings, placing additional strain on the National Company Law Tribunal (NCLT) and other involved entities.

Limited Awareness and Understanding

Finally, there’s a need for greater awareness and understanding of the IBC among businesses and stakeholders. A lack of knowledge about the insolvency process can lead to missteps and further complications.

Addressing these challenges requires a coordinated approach involving legal reforms, capacity building, and enhanced stakeholder education to ensure a more efficient and effective corporate insolvency and bankruptcy framework in India.

International Comparison in Corporate Insolvency and Bankruptcy

When comparing India’s corporate insolvency and bankruptcy framework with international practices, it’s clear that there are both similarities and differences. The Insolvency and Bankruptcy Code (IBC), which was introduced in 2016, aligns with international best practices by emphasizing a time-bound resolution process and using insolvency professionals to manage things. This approach is pretty similar to systems in countries like the United Kingdom and the United States, where their insolvency laws are focused on restructuring and maximizing creditor recoveries.

But there are also some key differences. For example, in countries like the United States, their Chapter 11 bankruptcy process gives debtors more control during the reorganization process, allowing them to have more flexibility when restructuring and still keep running their business. On the flip side, India’s Corporate Insolvency Resolution Process (CIRP) puts control in the hands of insolvency professionals, with creditors having a bigger say in the decision-making process.

India’s insolvency framework has taken ideas from other countries’ experiences to create a streamlined process, but it’s still evolving to address some challenges like delays and uncertainties for stakeholders. Comparing India’s system to others on an on-going basis can help them refine their approach and make sure it keeps getting better and better, so that it can foster business confidence and support economic growth in the long run.

Future Outlook and Recommendations for Corporate Insolvency and Bankruptcy in India

The Insolvency and Bankruptcy Code (IBC), 2016, has really upped India’s corporate insolvency game, but there’s still room for improvement. Going forward, corporate insolvency and bankruptcy in India need to focus on addressing current challenges and making the process more efficient, transparent, and fair for everyone involved.

One big area for improvement is speeding up the Corporate Insolvency Resolution Process (CIRP). Cutting down on delays and simplifying procedures would help resolve cases faster, which is crucial for preventing assets from depreciating and getting creditors the best possible outcomes.

Another important thing to work on is building a strong team of insolvency professionals. Investing in training and certification programs can really help make sure everyone involved in the process knows what they’re doing and approaches cases consistently and effectively.

Clarity in the law is also super important. The IBC has had a ton of amendments and legal interpretations, which can sometimes create confusion. Having a clear and consistent legal framework, backed up by precedents from the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), can really help streamline the process.

Finally, it’d be great to raise awareness about insolvency laws among businesses and stakeholders. If more people understand how the process works and when it’s appropriate to use it, they can take a proactive approach to financial distress and potentially avoid insolvency altogether.

Conclusion

The Insolvency and Bankruptcy Code (IBC), which was established in 2016, has had a huge impact on how corporate insolvency and bankruptcy are handled in India. This new law created a faster, more efficient system that’s helped make business more predictable and stable. Even though it’s been pretty successful, there are still some problems that need to be fixed, like delays, confusing rules, and making sure there are enough insolvency professionals with the right skills.

To keep improving the system, we need to address these challenges. This means constantly updating the laws to make them clearer, training more people in the field, and getting everyone involved to understand the new rules better. That way, India can keep its insolvency and bankruptcy system strong, help businesses get back on their feet, and keep the economy growing.

[1] Presidency Towns Insolvency Act, 1909

[2] Provincial Insolvency Act, 1920

[3] Sick Industrial Companies Act, 1985

[4] Recovery of Debts Due to Banks and Financial Institutions Act, 1993

[5] Insolvency and Bankruptcy Code, 2016

[6] Insolvency and Bankruptcy Code, 2016

[7] Ibid.

[8] National Company Law Tribunal Rules, 2016

[9] Insolvency and Bankruptcy Code, 2016

[10] Ibid.

[11] Insolvency and Bankruptcy Code, 2016

[12] Ibid.

[13] Amit Singhania & Parth Goswami, “Understanding Pre-Packaged Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016” (2020) 5 International Journal of Scientific Research and Management, 140-146

[14] Alok Dhir & Udit Jain, “Recent Amendments in the Insolvency and Bankruptcy Code, 2016: An Analysis” (2019) 10 Journal of Corporate & Commercial Law & Practice, 5-11

[15] Pooja Mahendra, “Interpreting the Insolvency and Bankruptcy Code, 2016: A Review of Supreme Court and NCLAT Decisions” (2021) 15 Indian Journal of Law and Public Policy, 73-88

[16] Vishrut Kansal, “Corporate Insolvency Resolution Process in India: A Critical Appraisal” (2020) 12 Journal of Insolvency and Bankruptcy Law and Practice, 215-227

[17] Ravi Kota, “Issues and Challenges in Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016: An Empirical Study” (2019) 9 International Journal of Legal Sciences and Research, 32-44

[18] Shekhar Chandra, “Interpreting the Insolvency and Bankruptcy Code, 2016: An Analysis of Recent Judicial Pronouncements” (2021) 17 Indian Journal of Corporate Law Studies, 88-101