The Insolvency and Bankruptcy Code:

2016
Introduction to the Code

India had the highest economic growth rates after the internet boom in the year 2000. A huge
amount of investments were pouring inside the country as big companies saw it as a vast market
and wanted to put solid footing in India. Companies had over-leveraged themselves in fear of
losing lucrative opportunities. During the financial year of 2007-08, the Global Financial Crisis
hit, and the high growth levels stopped. It led to low revenues, and subsequently, the high
inflation levels caused RBI to increase the interest rates. This all led to the creation of an
enormous number of NPAs in the financial sector. 
The government introduced the 12 Debt resolution mechanisms, but it was a failure in the end as
all the laws failed to curb NPA's. The borrowers used the loose provisions of law and created
ambiguity in the judicial proceedings. They kept delaying it, and even when the cases were
resolved, the creditors ended up taking massive cuts in debt recovery. 
The Ministry of Finance, in the year 2015, estimated that it would take 326 years to complete the
backlogs. The Insolvency and Bankruptcy Code (IBC) was enacted in the year 2016 to tackle
problems relating to insolvent companies and their closure. Many public sector banks,
operational creditors, and financial institutions were facing challenges. The Code aimed to tackle
the bad loans which were affecting the banks due to these insolvent companies. The Code has
introduced a time-bound process under which insolvency will take place. Enactment of the Code
has helped many employees working in these companies in India. They are now able to claim
their dues quickly with the help of the National Company Tribunal (NCLT) established under
this Code. IBC, after its enactment has successfully stopped many companies from defaulting
their loans. The Code improved India's ranking in "Ease of Doing Business" drastically.
Currently, India stands at the 66th position. Before this Code was enacted, India's ranking was
133. 
Objective and Purpose of the Code
 Resolve Conflicts between the creditors and the debtor – The Code defines procedural
certainty and the process of negotiation. The Code works in a way that reduces the
problems of common property. This Code reduces the information asymmetry for all the
economic participants.
 The Code provides flexibility to the parties to reach the most efficient solution to achieve
the maximum value during negotiation.
 A platform for negotiation between the creditors and the external financers are created
through this Code to create the possibility of rearrangements.
 To amend the laws relating to the reorganization and insolvency resolution of the
partnership firms, individuals, and corporate firms. 
 A time limit is to be set in which the insolvency proceedings will be completed i.e., 180
days.
 To raise the value of the assets of the interested parties.
 This Code works in increasing the global ranking of the world in doing ease of business. 
  The Code will help in promoting entrepreneurship. 
 The Code establishes an Insolvency and Bankruptcy Board of India to act as a regulatory
body. 
 The Code proposes to regulate the insolvency professionals and professional insolvency
agencies. The role of these agencies would be to develop professional standards and work
as a disciplinary committee. 
 Three types of resolution professionals are set up under the Code i.e., the Interim
Resolution Professional, Final Resolution Professional, and the Liquidator.
 Information Utilities has been set up under the Code. The work of these information
utilities is to various types of data from the listed companies and also the data of the
creditor's companies. 
 Individual Insolvency database is to be set up to provide information about the
insolvency status of individuals.
 An Adjudicating authority is set up to exercise the cases over a debtor. 
Relevant Social & Political Scenario at the time of enactment
At the time when the Code was passed in the parliament, big defaulters like Vijay Mallya and
Nirav Modi's defaults were putting pressure upon the public sector banks of India. There was no
unified law against these defaulters. The rules which dealt with defaulters came under the likes
of the Indian Contract Act, the Sick Industrial Companies (Special Provisions) Act, 1985,
(SICA), the Securitizations, and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. The Code aims to bring all the laws under one roof to provide ease to the
primary creditors. The then Finance Minister Mr. Arun Jaitley said that "A systemic vacuum
exists with regard to bankruptcy situations in financial firms. This Code will provide a
specialized resolution mechanism to deal with bankruptcy situations in banks, insurance firms
and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015,
when enacted, will provide a comprehensive resolution mechanism for our economy". However,
at the time of enforcement of the Code, there were no special provisions for cross-border
insolvency. 

Amendments

1. The Code went under a lot of changes since its inception; the first change came with the
Insolvency and Bankruptcy Code (Amendment Act), 2017. Partnership firms, a proprietorship
firm, individuals, and personal guarantors will be included under the heads "applicability" With
this amendment, frivolous applications made by the personal guarantor will be avoided after the
moratorium period is declared. Section 29A is inserted in the Code which lists the persons who
cannot submit a resolution plan. It includes the undischarged insolvent, person convicted of an
offence, disqualified from the post of director, account is NPA, a willful defaulter etc. If a person
is NPA, if he pays his/her dues within 30 days, then they can submit the resolution plan. 

2. The Insolvency and Bankruptcy Code (Amendment) Ordinance Bill was introduced in the
year 2018. The objective of the Ordinance Bill was to strengthen the Corporate Insolvency
Resolution Process (CIPR). The Ordinance states that "to balance the interests of various
stakeholders in the Code, especially the interests of home buyers and micro, small and medium
enterprises, promoting resolution over the liquidation of corporate debtor by lowering the voting
threshold of the committee of creditors and streamlining provisions relating to the eligibility of
resolution applicants." 
 One significant change brought with this Ordinance was the inclusion of "Home Buyers" under
the definition clause of Financial Creditors. The home buyers will be able to recover the amount
paid as advanced through this addition. Another significant addition to this Act was that CIPR
can now be initiated by the guardian, administrator, and the executor of the financial creditor. 
 A "Committee of Creditors" will be formed that will consist of all the "financial Creditors."
They will majorly work as a body to make routine decisions regarding the CIPR. 

3. Insolvency and Bankruptcy (Second Amendment) Bill, 2018 – The approval of the
Competition Commission of India is required to finalize the resolution plan set by the financial
creditors. This will reduce the chances of extending the time of the CIPR, i.e., 90 days of
extension. 

4. Insolvency and Bankruptcy Code (Amendment Bill), 2019 – The amendment proposes to
strengthen the time-limit provisions in the Act. Secondly, a specific minimum payout is defined
for the operational creditors for any resolution plan. Thirdly, it provides the manner in which the
group of financial creditors should vote. 
 
 
Scope of Improvement in Code
 
 1. Cross Border Insolvency – Even though the Code has two mechanisms to deal with cross
border insolvency, a proper framework is needed to comprehend the situation. There are many
Indian Companies whose assets and creditors located across the globe. The same goes for foreign
companies that have subsidiaries in India. These issues cannot be resolved without adopting the
UNICTRAL Model Law on Cross Border Insolvency. 

2. Delays in Resolution – The Code aims to work in a time-bound manner, but in some cases,
the 270 days fixed timeframe was broken. It was due to the procedural aspects and lack of legal
infrastructure. The average time in which a case was completed was 333 days. 

3. Operational costs in Liquidation – In most cases, the lenders agree to liquidate the company
rather than bid on it. The value coming out of liquidation is more than bidding; however, the
actual amount which comes out is meager due to the operational costs and inefficient cash flows.
The Code needs to be amended in a way so that either the liquidation process becomes more
profitable for the lenders or the bidding process needs to be updated. 

4.  Lack of NCLT benches –There are thousands of cases that are pending before the NCLT,
and there are only 16 benches to review them, making the whole process of resolution longer.

5. Alignment with other Statutes – The IBC needs to be synchronized with all the other laws at
the time. For instance, the IBC does not provide tax exemptions in accordance with the Income-
tax laws. Successful bidders do not get the necessary tax exemption for taking over the insolvent
company. The income tax laws need the bidders to pay tax accrued on book profits. 
6. Contingent Liabilities – Most of the bankrupt companies have various pending liabilities like
– government dues, labor cases, and other commercial disputes. This makes it difficult to
ascertain how much obligations will be discharged under the CIRP.