Insolvency
- March 26, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Insolvency
Subject: Economy
Section: Msc
Context:
Insolvency proceedings were initiated against Delhi-based Supertech by the National Company Law Tribunal
Concept:
- Insolvency is a condition in which a debtor is unable to pay his/her debts.
- Bankruptcy is a legal process that involves an insolvent person or company that is unable to pay its debts.
Law?
The Insolvency and Bankruptcy Code, 2016 (IBC) is India’s bankruptcy law, which aims to unify the existing framework by establishing a single insolvency and bankruptcy law. It covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
It enables creditors to analyse a debtor’s viability as a business decision. Furthermore, creditors might either agree to the plan for its resurrection or propose a quick liquidation.
The goal of the code is to address insolvencies in a timely way; the evaluation and viability determination must be done within 180 days.
The Company is subject to a 180-day moratorium (which can be extended up to 270 days). The resolution time frame for startups and small businesses is 90 days, which can be extended by 45 days.
Objectives of IBC
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximization of the value of assets of corporate persons.
The framework consists of the following bodies/institutions:
- Insolvency Professionals: They will be in charge of the resolution procedure. They also handle the debtor’s assets and provide information to creditors to help them make decisions.
- Insolvency Professional Agencies: Insolvency practitioners will be registered with professional agencies for insolvency. Exams would be conducted to certify insolvency specialists, and a code of behaviour for their performance would be enforced by the agencies.
- Information utilities: They will maintain track of debts owed to creditors, as well as repayments and debt defaults.
- Adjudicating authorities: They will sanction the start of the resolution procedure, appoint the insolvency professional, and sign off on the creditors’ ultimate judgement.
- The National Company Law Tribunal (NCLT) is the deciding authority for corporations and limited liability firms.
- Individuals and partnership firms have their debts adjudicated by the Debt Recovery Tribunal (DRT).
- The Insolvency and Bankruptcy Board will oversee insolvency experts, professional agencies, and information utilities established under the Code.
Insolvency Resolution Process
- Insolvency resolution process can be initiated by any of the stakeholders of the firm: firm / debtors / creditors / employees.
- If the adjudicating authority accepts, an Insolvency resolution professional (IP) is appointed.
- The power of the management and the board of the firm is transferred to the committee of creditors (CoC). They act through the IP.
- The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
- If they decide to revive, they have to find someone willing to buy the firm.
- The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
- They invite open bids from the interested parties to buy the firm.
- They choose the party with the best resolution plan, that is acceptable to the majority of the creditors (75 % in CoC), to take over the management of the firm.
National Company Law Tribunal (NCLT) is constituted under section 18 of the Companies Act, 2013 in 2016 based on the recommendation of the Justice Eradi committee on law relating to insolvency and winding up of companies. The National Company Law Tribunal (NCLT) is a quasi-judicial body that adjudicates issues relating to Indian companies. National Company Law Appellate Tribunal The NCLAT was constituted under Section 410 of the Companies Act, 2013 to hear appeals against the orders of the National Company Law Tribunal (NCLT). NCLT is a quasi-judicial body that adjudicates issues relating to companies. It is also the appellate tribunal for orders passed by the NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code (IBC), 2016, and for orders passed by the Insolvency and Bankruptcy Board of India (IBBI) under Sections 202 and 211 of the IBC. Any person aggrieved by any order of the NCLAT may file an appeal to the Supreme Court. |