Why and What is IBC code?

What is Insolvency & Bankruptcy Code? 

The code is the law consolidating all existing insolvency and bankruptcy laws in India. This is one of the  biggest  insolvency process laws in India.

The purpose of the law is 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.

Bad loans are the main problems of public finance systems, mainly banking systems across the world. IBC resolve claims involving insolvent companies. This was intended to tackle the bad loan problems that were affecting the banking system worldwide. IBC just within this short time could create some big changes in the debtor creditor relationship and proven as a best tool to prevent corporate loan defaults. Even some big cases also have been resolved in this short time, instilling confidence in the market.

The IBC envisages filing of Corporate Insolvency Resolution Process (hereinafter referred to as "CIRP") by the Corporate Debtor, Financial Creditor and Operational Creditor. However, in neither of the said proceedings, time frame for filing of CIRP has been provided. It is imperative to point out that the IBC is silent on the time period within which a petition for insolvency resolution is required to be filed.

Need of Insolvency & Bankruptcy Code 

After independence there was a flood of different laws enabling business in India, some of them are Companies Act, Income Tax Act, Transfer or Property Act, Securities contract Regulation Act, FEMA etc. One of the main problem faced by the financial institutions as well as corporate was insolvency and bankruptcy and the absence of single all inclusive law for it. There were more than 10 Acts which were trying to solved the insolvency and bankruptcy issues, and created lot of judicial complications and avoidable delays. The main complaints were the delayed court decisions which may even proved fatal for financial institutions as well corporates.

Some of the laws are given below for information

1. Presidency Towns Insolvency Act, 1909

2. The Provincial Insolvency Act, 1920

3. Sick Industrial Companies Act

4. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act)

5. Companies Act 2013

6. Recovery of debts due to banks and financial Institutions Act

Multiple laws created a situation where even a right decision can be challenged under another law and resulted in delayed decisions. There also was overlapping jurisdiction of different authorities like High Court, Company Law Board, Board for Industrial and Financial Reconstruction (BIFR) and Debt Recovery Tribunal. This overlapping jurisdictions and multiplicity of laws made the process of insolvency resolution very cumbersome in India.

As per the World Bank data, it takes an average 4.3 years to wind up a company in India. It is easier to start a business than to exit it. The new Insolvency and Bankruptcy Code seeks to cut it to 1 year.

The new Code seeks to help banks and other creditors from recovering their loans from the bankrupt companies in a timely and efficient way.