Simple Understanding of the Complexities of IBC

 

Insolvency and bankruptcy Code (IBC) came as a ray of sunshine of hope for foreign investors who have always wanted to dip their toes in the Indian startup market “pond”, but couldn’t do it. The reason for this apprehension was the long and tedious method of retrieving the invested money if the company that they had invested in failed to perform and went insolvent. that being said, times have changed and this once long and tedious journey has now reduced only to tedious. Now that IBC is gaining popularity, it is time that everyone can easily understand its concept.

What is Insolvency?

Insolvency refers to a financial state of an entity unable to pay back its debts. This entity can be anything from a person, a partnership or a company. The debts can either be financial debts or operational debts.

Definitions

The above statement might be nauseating to understand. Therefore, this situation calls for a need to make it simpler. In order to do that, let us begin with defining the terms that we have highlighted:

  1. Operational debts: Debts that are incurred to assist the operations of the debtor company for a short term. These debts include accounts payable, income taxes dues, employee wages etc.

  2. Financial debts: These are non-operational debts. These are the debts that the debtor entity has incurred for non-critical and non-operational reasons. They mostly are long term debts.

Now, the creditors who provide these credits to the debtors are called operational creditors and financial creditors respectively.

The need for Insolvency and Bankruptcy Code

The debtors are not the only one who suffers in the case of insolvency. Additionally, the issue of retrieving back the debts is also a major issue for a creditor. In such circumstance, short of pursuing a legal course, there is nothing more that can be done. This legal course is provided through Insolvency laws. These laws exist to accomplish the following goals:

1. To pay the creditors.

2. To alleviate the debtors from their debts and give them a clean slate.

When put in words, these laws can be put. However, one can face several challenges when these laws are put into practice. The challenges can be categorized in the following two points:

  1. Challenge of time: Getting a proper recourse to deal with insolvency takes a lot of time. There are many cases where the insolvency issue took decades to resolve.

  2. Challenge of uncertainty: If the time taken to reach a desirable recourse is too much, so is the probability of uncertainty. There are several cases where even if you take the right course of action to deal with the insolvency. However, the result still remains extremely uncertain.

The above two challenges end up playing a role in being the origins of another challenge.

  3. Challenge of indecisiveness: How to make the insolvent entity survive? Does it even deserve to be revived? Can liquidation ensure full repayment to the creditors? These questions emerge from the above two challenges that this causes indecisiveness.

In the end, the result of insolvency was more akin to a dog chasing its tail.

Insolvency and bankruptcy code into existence in order to deal with the above challenges. This code took the needs of creditors to heart and made sure the resolution of insolvency occurs within a short amount of time.

The Features of IBC

IBC reduces the time taken to resolve the issue of insolvency through the introduction of some new rules and does away with the ones that are outdated. Registration wall explains the salient features of this code as follows:

  1. A central Regulatory Agency: The code has implemented IBBI as the central regulatory agency to oversee the matters of insolvency. An abbreviation of Insolvency and Bankruptcy Board of India, it is a singular platform to oversee every matter is a great boon for timely resolution.

  2.Adjudicating authorities: The tribunals that judge the matters of insolvency resolution for corporate debtors and individual debtors are now different. For corporate debtors, the tribunal is NCLT or National Company Law Tribunal. For the individual, or partnership cases of insolvency, the tribunal is DRT or Debt Recovery tribunal.

Note: Corporate debtors refer to debtors that are companies.

  1. Insolvency Professionals (IP): They are the individuals who are veterans in the field of insolvency that are appointed by the debtors, creditors or the NCLT in order to formulate a resolution plan.

  2. Insolvency Professional agencies (IPA): IPAs are the institutes that provide resolution professionals.

Insolvency resolution process: It is the foundation that doubles as the Focus of IBC 2016. We are going to take a deep dive in this particular matter.

Insolvency Resolution Process:

The insolvency resolution process is the very core of the code. It is a vast process with a lot of intricacies. However, the entire process boils down to the following points.

1. First, the debtor commits default in repayment of debts.

2. The creditor who is the victim of the above point sends a demand notice under section 8 of the insolvency act to the debtor. This demand notice contains an invoice of the defaulted payment and demand repayment from the debtor.

3. After the debtor receives the notice, they have 10 days to respond to it. These responses can be:

1. Proof of repayment

2. Proof that the payment that has been defaulted is in dispute.

3. No response.

4. In the presence of the third response, the creditor is compelled to file a section 9 petition under the Insolvency and Bankruptcy Code.  This petition is put in front of the NCLT. If the petition is legitimate, then the adjudicating authority accepts it.

5. AS the NCLT accepts the application, the creditors choose their representatives to establish a committee of creditors.

6. At the same time, the petitioner appoints an insolvency professional.

7. The insolvency professional gears the next 180 days towards revising a resolution plan by looking into the information derived from the information utility.

8. The Insolvency professional presents the plan to the NCLT and the Committee of Creditors (The CoC).

9. Then, CoC votes upon whether to accept the plan or reject it.

10. If accepted, the resolution plan follows through. Else, the company has to go through liquidation.

Benefits of this Code

1. Foreign investors are now considering India to be a place where they can actually invest without fear of much loss.

2. The same investors can now enjoy a flexible strategy to exit a failing startup.

3. The availability of credit in the market has maximized.

4. On time, and fair payment to the creditors.

6. Startups are now more diligent towards overcoming failures.

5. The resolution process is now a matter of days, not decades.

6. India now ranks at 77 in the list of countries there is “ease of doing business”.

Conclusion

The above is the simple understanding of Insolvency and Bankruptcy Code or IBC. This creditor-friendly code gives us a new scenario where the foreign investment inflow is on the rise. However, there is some matter of this code that bypasses the principles of natural Justice. Furthermore, communicating this code to rural areas is still an issue. Therefore, the mass appeal of the IBC code is yet to be seen.

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