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A Critical Study of the Insolvency and Bankruptcy Code of India

Abstract

India faced challenges due to a fragmented legal framework regarding insolvency and
bankruptcy, before the implementation of the Insolvency and Bankruptcy Code (IBC),2016
characterised by multiple rules and procedures applicable to different entities, including
individuals, partnerships, and corporations. The fragmentation led to inefficiencies in the
resolution of insolvency cases, resulting in slow and inconsistent outcomes. Concurrently, the
nation faced the challenge of addressing the increasing volume of non-performing assets
(NPAs) within its banking sector. Non-performing assets (NPAs), defined as borrowers who
are unable to repay their loans, not only impose financial strain on banks and other financial
institutions but also pose a threat to the stability of the banking industry and hinder overall
economic growth. The Insolvency and Bankruptcy Code seeks to reform the fragmented
framework for corporate insolvency.The plan is designed to enhance the flow of credit across
India and to instill confidence in creditors regarding the prompt resolution of claims. The
objective is to unify existing individual insolvency and debt recovery legislation along with
corporate regulations into a single comprehensive law. The Insolvency and Bankruptcy Code
(IBC) represents a thorough legislative framework in India designed to tackle matters
concerning insolvency and bankruptcy. The Insolvency and Bankruptcy Code (IBC) 2016
represents a significant piece of legislation in India, fundamentally reshaping the approach to
insolvency management by establishing a thorough framework for addressing distressed assets.
This code offers a detailed overview of the intricate processes and regulations established
within the IBC for the management of debtors. The primary objective of the IBC is to facilitate
the early resolution of insolvency, thereby enhancing the value of distressed assets and creating
a conducive environment for business growth. This research paper presents a comprehensive
overview of the IBC, detailing its objectives, key provisions, and its influence on the Indian
economy and legal landscape. It also addresses the challenges and criticisms related to the
implementation of the IBC.

Keywords: Insolvency, Bankruptcy, non-performing assets, IBC

 Tentative chapterization

CHAPTER 1 : Introduction

The introductory chapter offers a synopsis of the research, commencing with an abstract that
encapsulates the aim of the study. The chapter starts with a comprehensive introduction
elucidating the topic's importance, with specific emphasis on the volition of Insolvency laws
in brief and then dealing with the implementation, and impact of Insolvency and Bankruptcy
Code. The literature review rigorously evaluates prior research, emphasising gaps that's needs
to be addressed in the present research. The research objective, scope and gaps are provided,
specifying the goal of present research and possible constraints. The research question and
hypotheses are provided, outlining the questions the study intends to answer, succeeded by the
method of research used for collecting the data.

CHAPTER 2 : Insolvency and Bankruptcy in India – Historical Perspective

Chapter 2 offers a historical analysis of insolvency legislation in India prior to the

implementation of the IBC, encompassing previous statutes like the Sick Industrial Companies
Act (SICA) and unsuccessful rehabilitation initiatives. It examines the necessity for the IBC to
tackle the escalating issues of handling NPAs and the inadequacies of prior frameworks. The
chapter delineates essential aspects of the IBC, encompassing its novel provisions, the function
of the Insolvency and Bankruptcy Board of India (IBBI), and its responsibilities.

CHAPTER 3 : Legislative framework- Insolvency and Bankruptcy and related laws.

This chapter deals with the legislative framework of the Insolvency and Bankruptcy related
laws. it highlights the various important provisions related to designed to tackle matters
concerning insolvency and bankruptcy. It gives a detailed overview of the intricate processes
and regulations established within the IBC for the management of debtors. It also highlights
how IBC facilitate the early resolution of insolvency, thereby enhancing the value of distressed
assets and creating a conducive environment for business growth.
CHAPTER 4 : Implementation, and impact of Insolvency and Bankruptcy Code..

Chapter 4 evaluates the influence of the IBC on the insolvency and bankruptcy process,
providing a study of the alterations in the NPA landscape prior to and subsequent to the IBC's
adoption. This chapter examines the impact of the IBC on recovery rates, the efficacy of the
resolution process, and how effectively it manages the same. It also analyses the legal and
regulatory problems encountered throughout the implementation of the IBC, offering a critical
assessment of the obstacles to effective NPA resolution.

CHAPTER 5 : Role of judiciary in the Implementation of IBC

This chapter delineates significant rulings and case studies pertaining to the IBC, providing
insights into the practical application of the code. The case studies and judicial rulings illustrate
the practical effects of the IBC on insolvency resolution and NPAs, highlighting triumphs,
obstacles, and legal interpretations that have influenced the code's execution.

CHAPTER 6 : Conclusion and suggestion

The last chapter encapsulates the research findings and offers recommendations for enhancing
the efficacy of the IBC in addressing NPAs and other issues. It delineates prospective
developments in insolvency law, implementing potential revisions aimed at enhancing the
efficiency of the resolution process. The conclusion summarises the research contributions,
evaluates the IBC’s effect on NPAs, and presents recommendations for policy enhancements.
The bibliography enumerates all sources cited in the research.
 CHAPTER 1 : INTRODUCTION

1.1.Introduction

1.2.Literature review

The legal background and development of India's Insolvency Regime are laid out in detail by
Sumant Batra in "Corporate Insolvency Law and Practice" (Eastern Book Company; 1st
Edition, 2017). He analysed the insolvency law process and criticised the inadequate rescue
procedure legislation in India. Key aspects of the new insolvency law based on international
best practises and experience are also discussed.

Doctoral Thesis by Researcher Pooja Agarwal under the guidance of Divya titled
“Anatomisation of law on Corporate Insolvency with a focus on the Insolvency and Bankruptcy
Code”1 (2022) makes an attempt to find out whether the Insolvency and Bankruptcy Code,
2016 is a comprehensive and revamped law sufficient to provide relief to the problem of
insolvency existing in the corporate sector. The research is undertaken to take into
consideration the factors which resulted in past legal frameworks being insufficient and causing
delays and latches, inefficiencies and bottlenecks of the system. The purpose of this research
is to focus on the aspects of the practical implementation of the Code in India. The law has
given a 360-degree turn to the existing framework. This research aims to find whether the
Indian Corporate scenario was prepared for such a drastic turn or not and analyse the positive
and negative changes it has introduced. Further, the researcher aims to check whether the new
code is as promising as it appears to understand the various developments of the Insolvency
and Bankruptcy Code, 2016 and its role in ensuring better corporate governance in the country.
Although, the Code has introduced many changes and a promising legislation, no law is perfect.
Every law has certain lacunae and loopholes which can be pointed out only once the law is
implemented. The study is useful but it has not provided any empirical testing of the Code.

“Critical Areas of Concern in the Process of Insolvency and Bankruptcy Code, 2016” 16
(2019). In this article, the author points out the key areas in the Process of CIRP under the IBC,
2016 and also regular challenges faced on the job. These consist of specific unanswered

1
questions for smoother functioning of the time-bound mechanisms. The regulatory authorities
need to pay attention to these practical matters as well, which are causing hindrances and will
substantially benefit the resolution process in the interest of all stakeholders.

1.3.
 CHAPTER 4 : Implementation, and impact of Insolvency and Bankruptcy Code..

Impact of IBC
In addition to the tangible results in handling of non-performing assets and failing companies
indicated above, IBC has also helped in the following ways:
a) Altering the creditor-debtor-promoter relationship making creditor more powerful and
debtor and promoter more responsible;
b) Enabling greater cash and financial discipline without which a company could fail in its
obligations to pay its dues triggering action under IBC;
c) Ensuring better corporate governance given that any shortcomings in management could
result in the management being replaced in the insolvency resolution process, thereby divesting
the management of their control;
d) Strengthening the position of operational creditors like employees, vendors, suppliers, etc.
in getting their dues cleared promptly failing which they can take the business to insolvency;
e) Ensuring prompt payment of dues to prevent an asset from becoming a NPAs thereby
ensuring that IBC is not invoked;
f) Ensuring payment of dues in case of existing NPAs for the upgrading of NPAs into standard
assets so that the IBC is not triggered;
g) Opening new areas of opportunity and engagement/employment for professionals like
“Chartered Accountants, Company Secretaries, Cost and Work Accountants, advocates, etc.”
as Insolvency Professionals; and for valuers, process advisors, turnaround specialists, security
services providers, lawyers, etc.;
h) A new career option as IPs for the young people through Graduate Insolvency Programme
(GIP) launched recently by IBBI;
I) Providing scope for research and review of law and practice of insolvency and bankruptcy
so as to improve the legal, institutional and infrastructural framework adopting the best
practices working well internationally.

L operational efficiency of the resolution and insolvency are also considered.

In the general improvement of NPA position in banks and financial institutions, with the
experience gained in the process of implementing IBC and the success in liquidation of
longpending cases, the proportion of cases under IBC which will be resolved, in all likelihood,
would increase.2

Concerns about Insolvency and Bankruptcy Code in CorporateResolution and

Insolvency

During the course of more than two years of implementation of the IBC for handling corporate
insolvency, there were several concerns, legal and operational, and several cases/appeals filed
before NCLT, NCLAT and Supreme Court challenging action under the IBC. The concerns
would indicate the areas of improvement in the IBC framework, thereby setting the future
agenda for action and reform in making insolvency and bankruptcy law more effective.

The Government constituted the Insolvency Law Committee (Chairman: ShriInjetiSrinivas,

Secretary Ministry of Corporate Affairs) to examine the suggestions/references received from
various quarters and related matters and make recommendations. Based on these
recommendations, IBC has been amended twice. However, the following issues also require
urgent attention to make IBC serve the purpose for which it has been enacted more effectively:

a) Resolution professional replacing Board of Directors – Once an applicationis admitted by

NCLT and IP is appointed, the Board of Directors is suspended and the IP as Interim Resolution
Professional (“IRP”) takes over the management of the company. The challenges in this regard
are the workload for the IP, his professional competence to handle the multifarious
responsibilities of the company, his being appointed as IP for other companies, conflict of
interests on such appointment, IP himself using the services of the firms where he is associated,
and the competence of persons so handling the task on behalf of IP. There have been instances
where the integrity of the IPs has also been questioned.3
b) Taking and handing over charge – The process takes place twice at least, once when IP takes
over as IRP and the second time when he is handing over to the new management (provided
that the IP continues and the CIRP culminates in resolution rather than liquidation). Since the
Committee of Creditors can elect someone other than IRP as Resolution Professional (“RP”),

2
Sreyan, Gausia Shaikh, and Bhargavi Zaveri. "Watching India’s insolvency reforms: a new dataset of
insolvency cases." Indira Gandhi Institute of Development Research Working Paper, Mumbai (2017).
3
Azhar, Syed, and B. Ramesh. "Predicting financial insolvency of listed power generation/distribution
companies in india using z–score." IOSR Journal of Business and Management (IOSR-JBM)(2017) (2017).
there will be a handing over and taking over charge between IRP and RP. An absence of a well-
defined mechanism for this process including, handing over of the records, title deeds and
property; drawing up accounts and audit of such accounts by the statutory auditors, so that the
process does not leave any doubts in assets transferred, obligations transferred, etc.

c) Long-drawn resolution process – While the time specified for resolution is 180 days
extendable to 270 days, there is no time period specified for NCLT to approve the resolution
plan approved by the Committee of Creditors. Further, is the resolution participant who has
accepted resolution backs off, the process has to be restarted, which again adds to the time
taken. The delay results in difficulties in carrying on the business of the company in the
interregnum, especially funding; and ambiguity of the position of management after the expiry
of 270 days period. Backing out of a resolution participant after approval defeats the purpose
and creates uncertainty about the finality of resolution in addition to causing further delay. \

d) Difficulties in release of assets – The secured creditors relinquishing charge on the assets
given as security for lending has been a problem resulting in a delay in steps for realization,
especially when a part of property is in the name of the company and a part is in the name of
promoters. In such cases, putting the asset to sell and realizing a good price is affected.