Insolvency and Bankruptcy Code (IBC)
🟠 Topic 50: Insolvency and Bankruptcy Code (IBC)
📌 Introduction
The Insolvency and Bankruptcy Code (IBC), 2016 is a landmark reform that created a comprehensive, time-bound process for resolving insolvency and bankruptcy in India. Before IBC, India’s insolvency regime was fragmented across multiple laws (SICA, RDDBFI Act, Companies Act), resulting in years-long delays and poor recovery rates.
The IBC aims to promote creditor confidence, improve ease of doing business, and ensure that viable firms are revived while non-viable firms exit quickly.
🔹 What is Insolvency & Bankruptcy?
Insolvency
The inability of a debtor (individual or corporate) to repay its debts when they become due.
Bankruptcy
The legal declaration that a debtor is unable to meet its financial obligations and has no viable recovery path, leading to liquidation.
Objectives of IBC
✔️ Establish a time-bound corporate insolvency resolution process (CIRP).
✔️ Promote credit discipline and reduce NPAs.
✔️ Maximise value of assets during resolution.
✔️ Balance interest of all stakeholders — creditors, employees, and investors.
✔️ Improve Ease of Doing Business ranking.
🔹 Applicability of IBC
The Code applies to:
| Category | Examples |
|---|---|
| Corporate Debtors | Companies, LLPs |
| Individuals & Partnerships | Personal insolvency for guarantors and firms |
🔹 Institutions Under IBC
1️⃣ Insolvency and Bankruptcy Board of India (IBBI)
- Regulator overseeing: ✔️ Insolvency Professionals (IPs)
✔️ Insolvency Professional Agencies (IPAs)
✔️ Information Utilities (IUs) - Frames rules, guidelines, and monitors the implementation of the Code.
2️⃣ Adjudicating Authorities
| Tribunal | Jurisdiction |
|---|---|
| NCLT (National Company Law Tribunal) | Corporate insolvency cases |
| DRT (Debt Recovery Tribunal) | Individual insolvency cases |
3️⃣ Insolvency Professionals (IPs)
- Registered professionals responsible for managing: ✔️ Day-to-day operations of stressed companies. ✔️ Preparing resolution plans. ✔️ Coordinating with creditors and courts.
4️⃣ Committee of Creditors (CoC)
- Consists of financial creditors (banks, financial institutions).
- Votes on: ✔️ Approving resolution plans. ✔️ Deciding liquidation if no resolution is viable.
- Decisions require 66% approval by value.
🔹 Corporate Insolvency Resolution Process (CIRP)
Key Features
| Step | Process |
|---|---|
| Initiation | Creditor files case with NCLT for default > ₹1 crore |
| Moratorium | Suspension of all legal actions against the debtor |
| Appointment of IRP | Interim Resolution Professional (IRP) takes charge |
| Information Memorandum | Details of assets, liabilities, claims |
| Resolution Plan | Submitted by bidders (investors) |
| Voting by CoC | 66% vote needed to approve plan |
| Implementation | New management takes over if approved |
✅ Time Limit: 330 days (including litigation)
Liquidation Process (if Resolution Fails)
- Assets sold to recover dues.
- Proceeds distributed in waterfall order:
| Priority | Stakeholders |
|---|---|
| 1️⃣ | Insolvency Process Costs |
| 2️⃣ | Secured Financial Creditors |
| 3️⃣ | Workmen’s Dues (up to 24 months) |
| 4️⃣ | Unsecured Creditors |
| 5️⃣ | Government Dues |
| 6️⃣ | Equity Shareholders |
Special Provisions for MSMEs
- MSME promoters allowed to bid for their companies, even if classified as NPAs.
- Simplified resolution process for small firms.
🔹 Pre-Packaged Insolvency Resolution Process (PPIRP)
- Special out-of-court process for MSMEs.
- Debtor and creditors pre-negotiate resolution plan.
- Faster approval by NCLT.
🔹 Benefits of IBC
1️⃣ Time-Bound Resolution
- Reduces years-long delays seen under old laws (SICA, BIFR).
- Average resolution time reduced to ~400 days (though still above target).
2️⃣ Value Maximisation
- Preserves value of assets by maintaining business continuity during resolution.
- Early detection helps reduce loss in asset value.
3️⃣ Improved Recovery Rates
| Parameter | Before IBC | After IBC |
|---|---|---|
| Recovery Rate | ~26% | ~32-35% |
4️⃣ Credit Discipline
- Deterrent for wilful defaults.
- Strengthened credit culture, especially in large loans.
5️⃣ Ease of Doing Business
- Boosted India’s rank in World Bank’s Ease of Doing Business Index.
- Improved investor confidence in debt resolution framework.
🔹 Case Study – Essar Steel Resolution
- One of the largest NPA cases resolved under IBC.
- Essar Steel owed ₹49,000 crore.
- Acquired by ArcelorMittal for ₹42,000 crore.
- Improved confidence in India’s corporate insolvency process.
🔹 Challenges in IBC Implementation
1️⃣ Delays in Resolution
- Average time still exceeds 400 days, despite 330-day limit.
- Frequent legal challenges slow down process.
2️⃣ Low Recovery in Some Cases
- Recovery rate for real estate and infrastructure projects below average.
- Many resolutions involve significant haircuts for creditors.
3️⃣ NCLT Overload
- High pendency at NCLT.
- Shortage of judges and infrastructure.
4️⃣ Promoter Interference
- Efforts by defaulting promoters to reclaim firms through proxy bidders.
5️⃣ Section 29A Restrictions
- Bar on defaulting promoters bidding ensures credit discipline, but limits viable bids in niche industries.
Way Forward
✔️ Strengthen NCLT infrastructure and increase judicial capacity.
✔️ Encourage pre-packaged resolutions to reduce litigation.
✔️ Improve information utilities for better data on stressed firms.
✔️ Develop sector-specific resolution mechanisms for real estate, power.
✔️ Introduce group insolvency framework to resolve conglomerate-level defaults.
📊 Key Statistics (2023)
| Parameter | Value |
|---|---|
| Cases Admitted | ~6,500 |
| Average Time Taken | ~400 days |
| Average Recovery Rate | ~32% |
| Total Recoveries | ~₹3 lakh crore |
📚 Practice MCQ
1️⃣ Consider the following statements regarding IBC:
- It applies only to companies and excludes individuals.
- It mandates time-bound resolution within 330 days.
- The NCLT acts as the adjudicating authority for corporate insolvency cases.
Which of the above statements are correct?
✅ Options:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, and 3
2️⃣ What is the minimum default amount to trigger corporate insolvency under IBC?
✅ Options:
(a) ₹1 lakh
(b) ₹10 lakh
(c) ₹1 crore
(d) ₹5 crore
3️⃣ Who approves the final resolution plan under IBC?
✅ Options:
(a) RBI
(b) Committee of Creditors (CoC)
(c) NITI Aayog
(d) SEBI
