The rationale behind various legislations that are coming into force in recent times is to bring various legislations dealing with similar issues under a single umbrella. The development of the Insolvency and Bankruptcy Code (hereinafter “IBC”) can be attributed to the same quest of the legislators to bring laws pertaining to sick companies under a single head. Hence, the IBC which came in to force in the year 2016 after repealing the Sick Industrial Companies Act, was brought into force to tackle the ambiguity by having various laws for the same issue.
At this juncture, it becomes necessary as to why there was the law by the name of SICA in existence and how the same led to the development of the IBC in the year 2016. The SICA came into force due to the rampant growth in the sick industries around the year 1980 to 1990, and to spot these companies and revive them through various mechanisms was the main objective of the Act. This was primarily done to ensure that the money confined to these industries could not be multiplied due to the inactivity of the company and be released resulting in the proper usage of such investment in better ventures.
There were certain amendments brought in the SICA as well and a new Act with some diluted provisions brought in the year 2003 aiming to ensure that such sickness not be used in a deceitful manner by industries and undue advantage not be taken of the provisions of the Act. However, even after bringing such changes and amendments, the Act failed to live up to the expectations of its creators and resulted in disgrace to the legislators. This was the event that laid the foundations of IBC as it was only after the utter failure of the SICA that the legislatures thought of bringing an umbrella legislation which shall cater to all the needs of the current times.
The IBC was thus notified in the month of June 2016 and the SICA was repealed effectively from December 2016. The Act has a wider scope and aims to resolve issues pertaining to insolvency resolution and reorganisation of such organisations in a consolidated manner. The application of the Act is on individuals as well as companies, LLPs, Partnership Firms, and Corporate Persons.
The Insolvency and Bankruptcy Code – Insights into the Law
The aim of the Act as discussed above is in clear manners not only just to reorganise the insolvency resolutions and consolidation of such laws but also to promote entrepreneurship along with balancing the interests of all the stakeholders in the market. This to a certain level means that there are varied aims that are brought in along with the consolidation of the other laws so as to ensure better implementation of the laws under a single umbrella. The Act has various establishments under it so as to ensure the smooth functioning of the Code which are as follows: –
- Insolvency and Bankruptcy Board (IBBI) – The Board acts as a regulator for the code and ensures the implementation of the Act and its provisions in a manner that the objectives of the Act are achieved. The Board is assigned with various powers that are from the assignment of insolvency, registration of insolvency till publication data pertaining to the regulations in the Act.
- Insolvency Professional Agencies – The Act allows for the Companies which are registered under Section 8 of the Companies Act to be Insolvency Professional Agencies after approval by the IBBI. These companies help in developing the ethics and professional standards for the insolvency proceedings and along with the same also act as first-level regulators among the insolvency professional members.
- Insolvency Professionals – These are the individuals who are the members of the Insolvency Professional Agencies which render their services in the agency. These individuals need recognition from the IBBI for rendering their services as Insolvency Professionals.
The Code provides the National Company Law Tribunal (hereinafter “NCLT”) with the powers of an adjudicating authority under the Act. The NCLT has the power to hear all the cases that pertain to insolvency resolution for Corporate persons. It is further important to note that for the Partnerships and firms such authority is given to the Debt Recovery Tribunal (hereinafter “DRT”). Both these Tribunals are entrusted with the work of applying the provisions of the Act and decide on the matter hand by either declaring a moratorium or ordering an investigation by an interim resolution professional.
Hence it must be understood that there are ample mechanisms present under the Act to ensure the implementation of its provisions. The authorities that are created through the Act have been given powers that are necessary to achieve the objective with which the legislation was brought into place.
Issues and Solutions: IBC and Various Challenges
In this segment, the pertinent fact to note is that as per the World Bank Report of 2016 the insolvency proceedings in India, on average, take around 4.3 years, which is far more than UK or USA which have only 1-1.5 years as their insolvency proceedings period. The information becomes relevant to understand the primary issue pertaining to the Insolvency resolution in India. It must be further noted that there are pertinent issues with some of the provisions in the Act and there are also provisions that bring in ambiguity in the field of the law.
Firstly, it has to be certainly appreciated that there have been insolvency professional agencies that have been created to ensure the implementation of the legislation in a manner such that there is no ruckus in the proceedings however it is still unclear as to why there are multiple regulators that have been created in the name of IPAs and IPs. It is certain that if there are many IPAs in the market it shall enable competition however it must also be understood that such an increase in the competition may also come with an underlined problem of conflict of interests and thence may lead to more harm than good.
Secondly, a very important aspect of the Act is regarding the paying off of the debts when the liquidation is done. Though the code provides the order of how there will be a distribution of the assets however the Code utterly fails to reason the very sequence that is specified in the Code. It is left ambiguous as to why a secured creditor is entitled to receive a complete outstanding sum instead of it being up to their collateral value. Also, it is very unclear from the provisions of the Code that why the unsecured creditors are to be prioritised over both the trade creditors and the government dues.
Thirdly, there are also issues pertaining to the cases that come up to the NCLT due to the threshold limit that is set which is Rs 1 lac and the resultant of the same is that it becomes an easy passage for operational creditors to easily drag the corporate debtor to the tribunal which has a certain impact on speedy resolution of the bigger cases and ultimately defeating the objective of the legislation. It must thus be understood that if the same continues the very promise of the IBC pertaining to the timely resolution of debt will prove to be without any basis and will only lead to distress among the investors and lenders.
Lastly, there also lay issues pertaining to the working of the regulatory authorities under the Code which has to have an enhanced working with evolution as per the need of the hour so as to ensure that there is a systematic achievement of the object of the Code.
However, with the passage of time, there have been developments in the IBC which have made the legislation stronger. Thus, it may be conclusively said that the IBC has learned through its problems, issues, and outcomes and has turned out to be stronger. It has to be understood in the first place that the IBC has been successful in providing time-bound solutions to the creditors which were becoming impossible in previous times. Further, the amendments brought to the IBC have also restricted the promoters from being involved in the bidding process of the assets, the resultant of this is that the process has now become more reliable, lucid, and trustworthy with fewer chances of unfairness towards any party. There has been a clear aim of the IBC to cut off the NPA Companies and to promote the main objective of more and more profitable businesses in the country. Thus, the Code is making sure that the promoters and the businessmen do not just operate as per their wishes and fancies even when they have a large pile of NPAs. It is clearly evident through the new bankruptcy and winding up cases being filed after the IBC came into force which numbers to around 2800 cases in the year 2018 alone.
It thus proves to be a boon for the Indian market and economy, as there have been loads of Merger and Acquisition deals that are being observed due to these regulations which along with wiping off the NPA companies is also allowing the profitable ventures to acquire these companies and is allowing the pumping up of their functioning through putting in more capital and other necessities. As far as the success story of the IBC goes it is necessary to mention the increase in the recovery rate of the stressed assets which was 26% before the Code came into force and which increased to 48% after its inception in the year 2016. Along with it the increase in liquidation cases posts IBC shows its success throughout the area barring a few cases where it still needs restructuring.
 The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.
 §188, The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.
 §196, The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.
 §204, The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.
 § 5(1), The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.
 § 79(1), The Insolvency and Bankruptcy Code, 2016, Act No. 31, Acts of Parliament, 2016.