INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.   The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

INDIVIDUAL, PARTNERSHIP FIRM OR COMPANY defaults on a business loan of ₹ 1 lakh or more, then,  lenders approach NATIONAL COMPANY LAW TRIBUNAL (NCLT)  to initiate proceedings under the I&B Code.

The code applies to companies and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take Decisions To Resolve Insolvency. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The Code creates various institutions to facilitate resolution of insolvency:

INSOLVENCY PROFESSIONALS:

A specialized cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

INSOLVENCY PROFESSIONAL AGENCIES:

 The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.

INFORMATION UTILITIES:

Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.

ADJUDICATING AUTHORITIES:

The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA

The INSOLVENCY AND BANKRUPTCY BOARD OF INDIA was established on 1st October 2016 under THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (Code). It is a key pillar of the ecosystem responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.

It is a unique regulator regulates a profession as well as processes. It Has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies, Insolvency Professional Entities, and Information Utilities.

IBBI composition consists Of One Chairman, 1 Nominated Member From RBI, other members from Government’s side. Total 1 chairman + 9 member = 10 people. IBBI’s administrative control rests with the Ministry of corporate affairs (MCA). Chairman Has 5 Years / 65 Age Tenure, whichever earlier. He is also eligible for a reappointment.

TWIN BALANCE SHEET PROBLEM

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

Thus, TBS is two-fold problems for Indian economy which deals with:

1. OVERLEVERAGED COMPANIES– Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans. Note: 40% of corporate debt is owed by companies who are not earning enough to pay back their interest payments. In technical terms, this means that they have an interest coverage ratio less than 1.
2. BAD-LOAN-ENCUMBERED-BANKS– Non Performing Assets (NPA) of the banks is 9% for the total banking system of India. It is as high as 12.1% for Public Sector Banks contributing to four-fifths of the total NPAs. As companies fail to pay back principal or interest, banks are also in trouble.