Before the commencement of this code, no consolidated laws were governing the statute of the Insolvency procedure in India. All the provisions, which were related to the insolvency and bankruptcy, were disintegrated like some of the provisions were given in the Companies Act, 1956 some in the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB), some of them were given in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and also in the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
Various committees were set up to look into the circumstances and mould them into one governing law, which would purely look just into the insolvency and bankruptcy of a company. Some of the committees were as follows:
- T. Tiwari Committee The committee’s objective was to secure the timely detection of sick and potentially sick industrial companies, determination of the preventive and remedial measures in a speedy way, and enforcement of such measures recommending the enactment of the Sick Industrial Companies (Special Provisions) Act 1985 (SICA).
- Eradi Committee This Committee was headed by Justice V.B. Eradi the objective of this committee was to make amends in the existing law relating to the winding-up of companies and to achieve more transparency and avoid delays in the liquidation of the companies. This committee also suggested the setting up of a National Company Law Tribunal (NCLT).
- N.L. Mitra committee the main objective of this committee was the consolidation of all disintegrated bankruptcy laws into a separate code. This committee also suggested constituting a National Tribunal with benches at the jurisdiction of each High Court to receive and deal with all cases for bankruptcy, restructuring, and finally for insolvency with an appeal lying to the High Court and SLP to the Supreme Court.
- Vishwanathan committee this committee was the one, which led to the established code, which today is known as the IBC, 2016. The Committee recommended a consolidation of the existing legal framework, by discontinuing two laws and amending six others The Committee proposed the idea to establish a creditors committee, the Committee proposed two tribunals to address the grievances the National Company Law Tribunal will have jurisdiction over insolvency resolution and liquidation of companies and limited liability partnerships; and the Debt Recovery Tribunal will have jurisdiction over insolvency and bankruptcy resolution of individuals.
The Insolvency and Bankruptcy Code 2016 is landmark legislation, which consolidated the regulatory framework governing the restructuring and liquidation of persons such consolidation was done to provide for greater clarity in the law and facilitate the application of consistent and coherent provisions to different stakeholders affected by the business failure or inability to pay the debt.
What are Insolvency and Bankruptcy?
Insolvency is the situation where the entity’s Cash flow, which is coming in, falls beneath its cash flow, which is going out. For individual debtors, this implies that their incomes are low for them to clear off all their debts. For companies, this implies that the money flows into the business, and its assets are less than its liabilities. Therefore, insolvency is the inability of debtors to repay their debts.
On the other hand, Bankruptcy occurs when a court has determined insolvency, and the court has given orders for its resolution. An insolvent debtor seeks relief through a legal procedure; it is also a formal declaration of insolvency by law of the land.
Structure of the Code
This code has 255 Sections, which have been divided, into five parts; this code also has 11 schedules, which amends various statutes.
The code suggests there be two tribunals to adjudicate the insolvency cases, in the cases of insolvency of companies and Limited Liability Partnerships (LLPs), the adjudicating authority is the National Company Law Tribunal (NCLT), while the cases involving individuals and limited liability partnerships are dealt by the Debts Recovery Tribunals (DRTs).
The order for appeal the Companies and LLPs are the NCLT then the NCLAT (National Company Law Appellate Tribunal) and finally, the Supreme Court of India and the order of appeal for individuals and the LLPs are the DRT then thereafter the DRAT( Debt Recovery Appellate Tribunal) and again finally the Supreme Court.
Insolvency and Bankruptcy Board of India (IBBI)
The IBBI is the regulatory body of the IBC, 2016.
It is a regulator, which sees to the rules and regulations of a profession as well as processes under the Code. The role of the IBBI is varied as it looks into the working of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies, and information utilities. The Board is also responsible for the implementation of the Code, which is one of the main objectives of the Code that consolidates the laws about insolvency resolution of corporate persons, partnership firms, and individuals in a time bound manner. The Board is given the power to frame and enforce rules for various processes under the Code, corporate insolvency resolution, corporate liquidation, individual insolvency resolution, and individual bankruptcy.
Financial Creditor (FC)
Financial creditors are those creditors whose relationship with the organization is of a financial contract, such as a loan or debt security along with interest, which is disbursed against the consideration for the time value of money. These may include institutions like the Banks.
Operational Creditor (OC)
Operational creditors are those whose liabilities from the entity comes from a transaction on operations. These may include workers, employees of an organization, the relationship is purely transactional.
Corporate Applicant/ Corporate Debtor (CD)
These are people or entity or their authorized member or partner, the person in charge of managing his operations and the person who has financial control over the affairs of the corporate debtor and they owe a debt to the FC or the OC.
Committee of Creditors (CoC)
This is a committee of people, which includes the Financial as well as the Operational Creditors of the Corporate Debtor. The voting share of the committee is determined based on the financial debt owed to them; the decisions of the committee of creditors are taken by a vote of not less than 51%.
These people enforce the resolution process and manage the affairs of the corporate debtor the adjudicating authority shall appoint an interim resolution professional within 14 days from the insolvency commencement date. He shall collect the information relating to the debtor’s assets, finances, and operations, take its control and custody, receive and collate claims and constitute a committee of creditors.
The Insolvency and bankruptcy code, 2016 was enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals and to provide for a time-bound insolvency resolution mechanism to ensure maximization of value of assets, promote entrepreneurship, and to increase the availability of credit, balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India as a regulatory body, to provide a procedure for connected and incidental matters.