What is IBC or the Insolvency and Bankruptcy Code?

[ecis2016.org] Here is all you need to know about India’s Insolvency and Bankruptcy Code (IBC)

The central government in India, in 2016, introduced a code to resolve insolvency cases amid a spike in the number of bankruptcies. This law is known as the IBC or the Insolvency and Bankruptcy Code (IBC), 2016. An act of parliament of India, the Insolvency and Bankruptcy Code (IBC), 2016, received an approval from the country’s president in May 2016.

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The IBC, which has 255 sections and 11 schedules gives both, the debtor and the creditor, the right to initiate insolvency proceedings against each other. Since the IBC was introduced in 2016, a large number of insolvency cases have been registered and resolved – till June 2020, 250 companies had been rescued and 955 others were sent for liquidation.

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What is insolvency?

Before the IBC was put in place, companies going for insolvency – a situation where a business or a company is not able to repay its debts – had to follow a long and tedious process and approach multiple authorities to seek a resolution.

Upon introduction, the IBC 2016 repealed two laws: the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920. It also amended 11 other laws, including:

• The Sick Industrial Companies (Special Provisions) Act, 1985
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and
• The Companies Act, 2013

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Resolution timeframe under IBC

The IBC aims to act as a single-stop entity in that regard. Introduced at a time when large-scale loan defaults had begun to stress India’s banking system, the insolvency code also intends to protect small investors and provide solutions in a time-bound manner – a resolution plan must be devised within 330 days after the start of the insolvency proceedings through the corporate insolvency resolution process (CIRP). Initially, the deadline was set at 180 days (+90 days extension) for resolving insolvency cases. However, it was later increased to 330 days.

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With the enforcement of the insolvency code in India, companies are now liquidated under the supervision of the National Company Law Tribunal (NCLT) and the National Company Appellate Tribunal (NCAT). Also note that before the introduction of the IBC 2016, it took nearly 1,500 days to resolve an insolvency case.

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Applicability of the IBC

The insolvency code covers insolvency, liquidation, and bankruptcy of the entities listed below:

1. Companies established under the Companies Act, 2013, or any other previous law.
2. Companies governed by any special act for the time being in force.
3. Companies set up under the LLP Act 2008.
4. Any other company being incorporated under any other law for the time being in force.

Note that for the IBC to be applicable, the minimum amount of the default has been kept at Rs 1 lakh.

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Amendment to IBC in 2021

The government, on April 4, 2021, amended the IBC, 2016, to provide for a pre-packaged resolution process for micro, small and medium enterprises. The centre promulgated The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, to amend the IBC.

Earlier, in view of the Coronavirus pandemic, the government disallowed fresh insolvency proceedings for a year, starting from March 25, 2020.

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IBC (Insolvency and Bankruptcy Code) latest news

Moratorium under IBC applies only to companies and not to their promoters: SC

September 20, 2021: In a decision that would make it difficult for promoters of defaulting companies to take the insolvency route to avoid penalties, the Supreme Court (SC) has ruled that the moratorium offered under the provisions of the Insolvency and Bankruptcy Code (IBC), applies only to corporate debtors and not its promoters.

The observation by the top court came, in a case against the promoters Today Homes and Infrastructure PVt Ltd by its home buyers, even though a moratorium had been declared under Section 14 of the IBC.

What is a moratorium under IBC

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It is pertinent to mention here that Section 14 of the IBC restrains initiation of certain proceedings, once the National Company Law Tribunal (NCLT) admits a company’s petition for initiation of insolvency.

Once the plea of a company to go for insolvency is admitted, the NCLT declares a moratorium prohibiting:

• New suits or continuation of proceedings or pending suits against the corporate debtor.
• Transferring, alienating, disposing or encumbering of, by the corporate debtor, of any of its assets or legal right or beneficial interest therein.
• Any action to recover, enforce or foreclose any security interest in respect of its property created by the corporate debtor.
• The recovery of any property occupied by or in the possession of the corporate debtor, by an owner or lessor.

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SC stance on moratorium under IBC

While clarifying that the moratorium is only in relation to the corporate debtor, i.e., the builder and not in respect of its directors, the three-judge bench of the SC said: “The petitioners would not be prevented by the moratorium under Section 14 of the IBC from initiating proceedings against the promoters in relation to honouring the settlements reached before this court.”

The top court also clarified that no new proceedings could be undertaken or pending ones continued against the developer company, since the moratorium declared in respect of the corporate debtor continued to operate under Section 14 of the IBC. The SC also directed the NCLT to dispose of the Today Homes and Infrastructure Pvt Ltd case within six months.

Today Homes and Infrastructure case

A group of home buyers, who had bought units at Today Homes and Infrastructure’s project, Canary Greens in Sector 73 of Gurgaon, had earlier approached the National Consumer Dispute Redressal Commission (NCDRC), seeking refund of their moneys with interest, when the builder failed to complete the project after 2014, the deadline committed in the builder-buyer agreement.

While ruling in favour of the buyers on July 12, 2018, the NCDRC directed the builder to refund the principal amount, along with 12% interest, within four weeks.

Even as it failed to comply with the NCDRC order, Today Homes was dragged to the Delhi High Court by another group of home buyers. To its relief, the Delhi HC stayed the NCDRC order, saying no coercive steps should be taken against the managing director of Today Homes.

While this matter reached the SC, the company moved the NCLT, which initiated the corporate insolvency resolution process under the IBC. Another set of buyers moved the apex court, challenging the move by the builder, saying Today Homes filed for insolvency only to stall the refund of the amount due to them.

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