What is Bankruptcy?
When an organisation is unable to take care of its financial obligations or make payment to its creditors, an organisation files for bankruptcy in the court of law, a petition is filed in the court for the same where all the outstanding debts of the company are measured and paid out if not in full from the company’s assets.
Insolvency and Bankruptcy Code: Section 79 (4) "bankruptcy" means the state of being bankrupt; (the state of being completely lacking in particularly good quality.)
Two primary objectives of Bankruptcy are:-
• to do the fair settlement of the legal claims of the creditors with an equitable distribution of debtor's assets, and
• to provide the debtor with an opportunity for a fresh start.
Bankruptcy amounts to a business failure, but not voluntary winding up the same. The Government of India has implemented the Insolvency and Bankruptcy Code (IBC) to strengthen all laws correlated to insolvency and bankruptcy and to tackle the problem of Non-Performing Assets (NPA) that has been dragging the Indian economy for years.
Companies not only generate employment but also create economic growth on a large scale. It is essential to bring in a mechanism to settle entities driving into bankruptcy, without causing damage to the economy. That's where IBC came in.
Before the initiation of IBC, the companies took about five to six years with respect for the dissolution of its operations; the number has dropped to a year nowadays. It helps to increase the ease of doing business and also to develop a stronger sense of trust in investors and lenders.
There have been significant debates, whether the implementation of IBC is a boon or a bane. The whole process of insolvency and liquidation is always in the hands of the debt holders and shareholders. Generally, by the time the entire process completes, the assets are eroded with very few left for distribution.
The IBC has flagged the way for a significant power shift from the hands of debt and shareholders to creditors and now a creditor with a default of Rs 1 lakh, can roll the company into liquidation. However, there are some grey areas where it evolves foreign creditors.
The benefit of this enactment has been the time-restricted resolution process. Besides, the IBC regulations recently amended that promoters are now prohibited from bidding or getting engaged in the process of selling the assets and making the whole process transparent and reliable. It has fostered an immense hope of faster recovery, lesser defaults, and a stronger lending and investment sector in India.
Most of the businesses have outstanding debts in crores based on their business practices. They partially fail in reasoning how a creditor can file for bankruptcy if the company defaults payment to other creditors and not the creditor who is the applicant.
The law has now made it very clear that promoters and business holders can no longer work as per their rules. The authorities are trying to make a genuine attempt to reduce the time by curbing delays and preventing NPAs.
The development in law has been a massive boon for the mergers and acquisitions of the companies while every debt-stricken company tries the restructuring of the debt or selling its distressed assets to the potential buyers.
The banks have been piling up on stressed assets of the companies, and the cases of IBC being filed with the National Company Law Tribunal (NCLT) are increasing day by day.
All in all, the IBC seems to be in its first stage, backed by a persuasive composition and structure. The government is getting evolved for bettering the provisions of the code; furthermore, the Supreme Court (SC) has also amended it many times.
The purpose of the IBC is to develop a proper process for the resolution of insolvency, which focuses on the same and not becomes a mechanism for recovery. It is observed that the work is in progress, with a better future as it is trying to overcome obstacles and try to tackle important issues.
Procedure to file a case for Insolvency:
A case for insolvency is filed before the adjudicating authority, i.e. in NCLT by financial or operation creditors or the corporate debtor themselves. The plea is allowed or rejected in a maximum of 14 days. If the petition is accepted, the tribunal appoints an Insolvency Resolution Professional (IRP) to draft a plan for resolution within 180 days (extendable by 90 days). After that, the court initiates the Corporate Insolvency Resolution process. For the time, the Company Board of Directors are suspended, and promoters do not have a say in the management of the company.
If required by IRP, they can seek the support of the company’s management for day-to-day operations. Moreover, if the Insolvency Resolution Professional fails to revive the company, the process of liquidation is initiated.