Do we know who all the stakeholders that are going to be affected due to a company or a body corporate’s inability to pay the debt that it borrowed from those creditors are? In other words, who will be affected if a firm becomes insolvent? Is there any form of guarantee to these creditors, especially when it comes to unsecured creditors? What about other stakeholders? Insolvency is a newly developing and fast-evolving field that heavily demands more legal professionals, auditors, financial authorities, etc. This article will briefly introduce and ensure an understanding of the insolvency law(s) in India, which every law student and a person who is interested in the Insolvency and bankruptcy area should know.
The Road to IBC, 2016:
Let us quickly look at the background on the laws and rules relating to Insolvency before and after the arrival of the Insolvency code of 2016. Before this law, the Presidency Towns Insolvency act of 1909 took care of Insolvency matters in India, which was followed by the Provisional Insolvency act, 1920. In order to get structured as Insolvency and Bankruptcy Code, 2016 (hereby referred to as Code of 2016), it made amendments to eleven laws which also included the existing Companies act of 2013, Recovery of debts due to banks and financial institutions act of 1993 and lastly, the Securitization and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) act, 2002. This code was implemented in different phases. Thus, the Insolvency and Bankruptcy code of 2016 came into force in August 2016.
Objects of IB Code, 2016:
In order to know the main objects behind the enactment or, in other words, the consolidation, we should look into the preamble of the code of 2016. The preamble of the code shall be read as follows,
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and 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, and for matters connected therewith or incidental thereto.”
If we see the above wordings, it is clear that a corporate debtor shall be not be exempted from any liability, especially the payments to creditors. It also helps in the maximization of the value of the assets of the corporate entity and shall also ensure that all the stakeholders of the company and their interests are properly protected through the procedure established under the law. One main thing which has to be focused on is the cycle of a supportive financial economy. If a business has to run to earn profits, there should become capital that has to be invested. If the promoters of the corporate entity do not have the required capital, the creditor comes into the picture. So, this code helps in the sustainability of this economic cycle between creditors, a corporate entity, and the economies of scale towards a nation like India.
The process involved under the Code of 2016:
Unlike other laws or, in other words, unlike the previous laws on the insolvency regime, the Insolvency and Bankruptcy code of 2016 gives two main processes before a company, or a corporate debtor goes for liquidation. But, who is the corporate debtor? A corporate debtor here would mean the corporate entity which owes money to the creditor. So, the first process is that the corporate entity, under the code of 2016, shall come up with a resolution plan (CIRP) to resolve the issue within a time-bound manner, as mentioned under the preamble of the code. Another way is the last resort, where only after the failure of the first stage, such an entity shall be left to go for liquidation.
One of the key features that have been identified with the code of 2016 is the identification of the Insolvency beforehand itself. This is made clear under section 4 of the code, which determines that the initial Insolvency shall be the default of rupees one lakh. Recently, in the year 2020, the Indian Ministry of Corporate Affairs had notified this initial default amount as one crore rupees.
Four main Institutions under IBC, 2016
Having seen the process involved under the code of 2016, let us look into some of the institutions that are constituted by the IBC, 2016, for the purpose of achieving the greater goal set up in the preamble. Firstly, chapter 2 of the code of 2016 deals with Insolvency professionals. As per the code, these are some of the professionals who have the responsibility to overlook the resolution plans of the corporate entities and also the process involved there for all the corporate entities ranging from liquidation.
Second and another important institution under this law is the regulatory body called the Insolvency and Bankruptcy Board of India. The preamble of this law also states the constitution of IBBI. It has been constituted under chapter 3, section 188 of the code of 2016. They are apex bodies, and a statutory body performs the functions mentioned there.
Thirdly, it is the adjudicatory body. All the cases under the law shall reach the National Company Law Tribunal, which is constituted under the Companies act of 2013. The same shall be vested on it as per section 5 of the code of 2016 for the purpose of adjudication in spite of the constitution under the Companies act, 2013.
Lastly, section 3(21) defines the term Information Utility. It means a person who is registered with the Board as an information utility under section 210. It is created for the purpose of managing the issues such as the existing gaps between the creditor and the company. To resolve this asymmetrical information, Information utility has been constituted.
Conclusion:
As mentioned earlier, it is more important to sustain the credit facilities for the running of any business across the country. This automatically ensures that there is no economic instability within the nation. So, IBC, in that way, helps in bridging this gap and ensures the capital market or the credit facilities are not affected at all.
