Understanding Bankruptcy and Insolvency Act

March 25, 2022, 3:56 pm | Updated June 6, 2023, 10:55 am IST
Understanding Bankruptcy and Insolvency Act
Readers must have heard of the Bankruptcy and Insolvency Act 2016 but some of you must not be clear about what exactly it is. Insolvency is the inability to timely pay back the debts owed by a person or a company to their creditors. However, insolvency is followed by filing of bankruptcy as a legal procedure in case of inability to pay outstanding debts. To resolve this problem, restructure the company assets and attempt to repay creditors, the Insolvency and Bankruptcy Code, 2016 was brought into picture. Read the information below for a better understanding of IBC Act 2016.
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Have you heard about Abhimanyu of Mahabharata? He knew how to enter the Chakravyuh and how to compete as well. What he was not aware of was how to exit the Chakravyuh, and that is where his defeat was affirmed. The same used to happen with the corporate sector in the past few years. Provisions for entry in the corporate sector were eased through introduction of LPG (Liberalisation-Privatisation-Globalisation). Even competition in the market was paved way for via eradication of monopoly assured through the Competition Act, 2002. But, the winding up of a company was a very tiresome and never ending process which proved a chronic disease for the Indian economy over time. When so many laws proved inefficient, the Insolvency and bankruptcy (IBC) Code 2016 arrived as a blessing. Hereunder, various facets of how IBC 2016 uplifted the Indian market for business have been dealt with.  

Background of Insolvency and Bankruptcy Code

When there comes a new rule, its need is realized in advance, as we say ‘Necessity is the mother of invention’. There were tranquil ways for companies to incorporate and compete in the business world. It was realized later that there has to be some room for companies to exit the business world without leaving big potholes for the creditors. 

Before the Bankruptcy and Insolvency Act, there were laws like SICA (Sick Industrial Companies Act) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) which did not perform up to the mark which they were introduced for. In 2015, Asset Quality Review was done by the Reserve Bank of India which disclosed high NPA rates in India. Since the pre-existing laws were insufficient for resolving the problem of creditors, banks and the companies, the Bankruptcy and Insolvency Act India came into force in 2016. The IBC 2016 is termed a Code because it is an amalgamation of various pre-existing Acts dealing with the issues around Bankruptcy and Insolvency Act. These laws also include SARFAESI Act, 2002 and the Sick Industrial companies (Special Provisions) Act, 1985. Look out for banking lawyers near me for local assistance in your area.

Purpose of Bankruptcy and Insolvency Act

The Insolvency and Bankruptcy Code was introduced in 2016. The aim behind IBC 2016 was to resolve claims of creditors of insolvent companies, non-corporate entities like LLPs/firms and individuals, and also the pressure over the banking sector due to Non-Performing Assets (NPAs). The track record of Bankruptcy and Insolvency Act 2016 affirms the backdrop idea while introducing the Code through wide success of resolving defaulting corporations. The IBC Code 2016 empowers financial creditors with an increase in recovery rate. As per World Bank 2020 report on Ease of Doing Business which assesses business-friendly regulations, India ranked 63 improving 79 pointers since 2014 which is a great achievement. Another golden feather is the out of court resolution of insolvency after the advent of IBC 2016. Earlier without Insolvency and Bankruptcy Code, the corporate insolvency matters used to burden courts as well as the people affected by it. Now, debtors are paying money to banks even before declaration of insolvency in anticipation of default or not to cross the red line and come in the radar of the National Company Law Tribunal. The two way sword that prioritizes resolution followed by liquidation has effectively helped resolving insolvency cases.

Framework of Bankruptcy and Insolvency Act, 2016

IBC 2016 brought along a team of professionals who were handed over the responsibility of regulation and adjudication of matters. With the help of flowchart provided below, it may be noted that the Bankruptcy and Insolvency Act India appoints two bodies, Regulators and Adjudicators. The Insolvency and Bankruptcy Board of India is the top notch regulatory body. It consists of Insolvency Resolution Agencies, Insolvency Professionals and Insolvency Utilities. On the other side, the adjudicating bodies include National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT). It must be noted that DRT has been associated with insolvency since its establishment in the 1990s. However, NCLT has been handed over the tasks through IBC Code 2016 only.

Understanding the Roles

  • Insolvency Resolution Agencies - They are responsible for framing the codes and ethics to be followed in order to effectively accomplish dept paybacks.
  • Insolvency Professionals - These are professionals who handle the management of a company declared insolvent. 
  • Insolvency Utilities - These are financial advisors for debt recast/ restructure/ reconstruction plan.
  • National Company Law Tribunal - Responsible for adjudicating insolvency matters involving corporate entities.
  • Debt Recovery Tribunal - Responsible for adjudicating insolvency matters related to non-corporate entities like LLPs, firms and individuals.

Process for Insolvency and Bankruptcy

The Bankruptcy and Insolvency Act 2016 lays a four-step process for resolving the debts or liquidating the company assets based on what suits best as per facts:

  1. The creditors or debtors approach NCLT/DRT to initiate insolvency process.The application has to be accepted by NCLT or DRT, as the case may be, within 14 days.
  2. The lenders/ creditors shall join hands for the formation of ‘Committee of Creditors’ to thereby appoint ‘Insolvency Professional.’ The Insolvency Professional(s) hereby appointed shall run the company during this interim period while the insolvency matter continues. IP has 180 days or in some complex issues, additional 90 days to deal with the matter.
  3. After expiry of the given period, the CoC gives a ‘Debt Recast Plan’ to help creditors reach the final resolution.
  4. Either the Debt Recast Plan is adopted if all the creditors agree for resolution of insolvency. Otherwise, the company proceeds for liquidation during the final resolution. All the company assets are liquidated and distributed among the creditors in accordance with their shares.

Advantages of IBC Code 2016

It has been a few years since IBC Code 2016 came into existence. But the effectiveness of the same is assured through the following pointers:

  • A panoramic law
  • Ease of doing business - World Bank Ease of Doing Business Rank 63
  • Good for Banks and Asset Reconstruction Companies (ARCs)
  • Time bound process - 180 days or additional 90 days
  • One stop solution for bankruptcy matters
  • A solution for NPAs and ‘haircut’
  • Relieving locked up assets
  • Ease of investment in India
  • IBBI is the authoritative body which consists of professionals
  • Improvement in Corporate Bond Market


Where there is a will, there is a way. And where there is a good law and its implementation, there are great results as well. A well drafted law may lose its essence due to a few loopholes in it. Since a company is not a real identity but some real persons, i.e. humans act with the company’s face, it is quite often for those people to mess things up which diminishes the company’s ability to remain in business. Wrapping up such business has been eased through the Insolvency and Bankruptcy Code. However, the problem of NPAs is not yet fully resolved which needs in-depth research and treatment.

[1] Liberalization, Privatization and Globalization Scheme of 1991. [2] Limited Liability Partnerships.

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(a) The Insolvency Resolution Process (IRP) The IRP provides a collective mechanism to lenders to deal with the overall distressed position of a corporate debtor. This is a significant departure from the existing legal framework under which the primary onus to initiate a reorganisation process lies with the debtor, and lenders may pursue distinct actions for recovery, security enforcement and debt restructuring. The Code envisages the following steps in the IRP: (i) Commencement of the IRP A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT). The defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings. (ii) Moratorium The NCLT orders a moratorium on the debtor's operations for the period of the IRP. This operates as a 'calm period' during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor. (iii) Appointment of Resolution Professional The NCLT appoints an insolvency professional or 'Resolution Professional' to administer the IRP. The Resolution Professional's primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors. This is similar to the approach under the UK insolvency laws, but distinct from the "debtor in possession" approach under Chapter 11 of the US bankruptcy code. Under the US bankruptcy code, the debtor's management retains control while the bankruptcy professional only oversees the business in order to prevent asset stripping on the part of the promoters. Therefore, the thrust of the Code is to allow a shift of control from the defaulting debtor's management to its creditors, where the creditors drive the business of the debtor with the Resolution Professional acting as their agent. Part III of the Insolvency and Bankruptcy Code, 2016, deals with insolvency and bankruptcy of individuals and partnership firms. According to a statement issued by IBBI on Tuesday, the draft rules and regulations have been submitted by a working group which was formed to recommend the strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016, dealing with insolvency and bankruptcy in respect of guarantors to corporate debtors, i.e., personal guarantors, and individuals having businesses. http://www.mondaq.com/india/x/492318/Insolvency+Bankruptcy/The+Insolvency+And+Bankruptcy+Code+2016+Key+Highlights To All Registered Insolvency Professionals All Registered Insolvency Professional Agencies (By mail to registered email addresses and on web site of the IBBI) Dear Madam / Sir, Sub: Fees payable to an insolvency professional and to other professionals appointed by an insolvency professional. Section 206 of the Insolvency and Bankruptcy Code, 2016 (Code) provides that only a person registered as an insolvency professional with the Insolvency and Bankruptcy Board of India (IBBI) can render services as an insolvency professional under the Code. Section 23 read with section 5(27) of the Code requires that an insolvency professional, who is appointed as an interim resolution professional or a resolution professional, shall conduct the entire corporate insolvency resolution process, including fast track process. In terms of section 5(13) of the Code, ‘the fees payable to any person acting as a resolution professional’ is included in ‘insolvency resolution process cost’, which needs to be paid in priority. 2. The Code of Conduct for Insolvency Professionals under the IBBI (Insolvency Professionals) Regulations, 2016 require that an insolvency professional must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken. He shall not accept any fees or charges other than those which are disclosed to and approved by the persons fixing his remuneration. 3. In view of the above, it is clarified that an insolvency professional shall render services for a fee which is a reasonable reflection of his work, raise bills / invoices in his name towards such fees, and such fees shall be paid to his bank account. Any payment of fees for the services of an insolvency professional to any person other than the insolvency professional shall not form part of the insolvency resolution process cost. 4. Similarly, any other professional appointed by an insolvency professional shall raise bills / invoices in his / its (such as registered valuer) name towards such fees, and such fees shall be paid to his / its bank account. 5. This circular is issued in exercise of powers under section 196 read with section 208 of the Insolvency and Bankruptcy Code, 2016. Yours faithfully, -Sd- Please take PAID phone call with me through VIDHIKARYA and get more legal guidance.
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