Salient Features of the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most significant legal reforms in India in the field of commercial law. Before its enactment, insolvency matters were scattered across multiple laws such as the Companies Act, 1956, the Sick Industrial Companies Act, 1985, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. This created delays, conflicting decisions, and lack of clarity for stakeholders.

With the introduction of the IBC, India moved towards a single, comprehensive framework to handle insolvency and bankruptcy of companies, limited liability partnerships, partnership firms, and individuals. The law has reshaped the business environment by emphasising faster resolution, greater creditor participation, and strict timelines.

This article explains in detail the salient features of the IBC, 2016 in simple terms.

What is Insolvency and Bankruptcy Code, 2016?

The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive law that provides a single framework for resolving insolvency and bankruptcy of companies, LLPs, partnership firms, and individuals in India. It was enacted to replace multiple overlapping laws and ensure a faster, time-bound, and transparent process. 

The Code introduced new institutions like the Insolvency and Bankruptcy Board of India (IBBI), National Company Law Tribunal (NCLT), Debt Recovery Tribunal (DRT), Insolvency Professionals, and Information Utilities. Its aim is to protect creditor rights, promote entrepreneurship, improve ease of doing business, and strengthen India’s overall financial and economic system.

What are the Salient Features of the Insolvency and Bankruptcy Code, 2016?

Comprehensive and Uniform Law

The IBC consolidates all laws related to insolvency and bankruptcy into a single piece of legislation. Earlier, companies and individuals had to follow different procedures under multiple statutes. Now, a uniform framework applies to:

• Companies
• Limited Liability Partnerships (LLPs)
• Partnership firms
• Individuals

However, financial service providers such as banks and insurance companies are excluded from the ambit of IBC. They continue to be governed by their sector-specific regulations.

Institutional Framework

To make insolvency resolution formal and time-bound, the IBC establishes an entirely new institutional framework. It includes:

• Insolvency and Bankruptcy Board of India (IBBI): The regulator that oversees insolvency proceedings and regulates insolvency professionals, insolvency professional agencies, and information utilities.
• Adjudicating Authorities (AAs): NCLT for companies and LLPs, and DRT for individuals and partnership firms.
• Insolvency Professionals (IPs): Qualified professionals who manage the resolution process.
• Insolvency Professional Agencies (IPAs): Bodies that enrol and regulate insolvency professionals.
• Information Utilities (IUs): Institutions that store and verify financial information of debtors.

This framework has made the process more transparent, efficient, and professional.

Insolvency Professionals (IPs) and Their Role

One of the unique features of the Code is the creation of a new class of professionals known as Insolvency Professionals (IPs). They are trained and licensed to act as independent intermediaries in insolvency resolution. Their functions include:

• Taking control of the assets of the debtor during the resolution period.
• Verifying claims of creditors.
• Constituting the Committee of Creditors (CoC).
• Running the debtor’s business as a going concern during the moratorium period.
• Ensuring compliance with applicable laws.
• Acting as liquidators or bankruptcy trustees in case of liquidation.

Their conduct is regulated by the IBBI under the Insolvency Professional Regulations, 2016, which are amended from time to time.

Insolvency Professional Agencies (IPAs)

To regulate the working of IPs, the Code provides for Insolvency Professional Agencies (IPAs). These agencies:

• Enrol insolvency professionals.
• Provide pre-registration training and education.
• Enforce a code of conduct.
• Issue authorisation for assignments.

Currently, there are three registered IPAs in India:

• Indian Institute of Insolvency Professionals of ICAI.
• ICSI Institute of Insolvency Professionals.
• Insolvency Professional Agency of Institute of Cost Accountants of India.

Information Utilities (IUs)

Another innovation under the IBC is the establishment of Information Utilities (IUs). These are centralised electronic repositories that:

• Collect financial information about debtors.
• Authenticate and store this information.
• Provide verified data to creditors and adjudicating authorities.

The idea is to avoid disputes regarding debts and defaults and ensure swift decision-making. The IBBI (Information Utilities) Regulations, 2017 regulate their functioning.

Role of the Insolvency and Bankruptcy Board of India (IBBI)

The IBBI is the central regulator under the IBC. Its key roles include:

• Regulating insolvency professionals, IPAs, and IUs.
• Framing regulations for smooth implementation of the Code.
• Supervising the entire insolvency ecosystem.
• Representing the government in cross-border insolvency arrangements.
  

The Board consists of representatives from the Central Government and the Reserve Bank of India (RBI). It also acts as the authority under the Companies (Registered Valuers and Valuation) Rules, 2017, regulating the profession of valuers in India.

Adjudicating Authorities

The IBC establishes specialised tribunals for insolvency cases:

• National Company Law Tribunal (NCLT): Adjudicating authority for companies and LLPs. Appeals go to the National Company Law Appellate Tribunal (NCLAT) and then to the Supreme Court.
• Debt Recovery Tribunal (DRT): Adjudicating authority for individuals and partnership firms. Appeals go to the Debt Recovery Appellate Tribunal (DRAT) and then to the Supreme Court.

This separation ensures that cases are heard by specialised bodies, reducing delays.

Threshold for Initiation of Insolvency

For initiating corporate insolvency resolution, the default must be at least ₹1 crore. However, for pre-packaged insolvency resolution under Chapter III-A, the minimum default has been set at ₹10 lakh (Notification dated 9 April 2021).

Corporate Insolvency Resolution Process (CIRP)

The Code lays down a time-bound process for resolving insolvency of corporate debtors. It has two stages:

1. Insolvency Resolution Process (IRP):
   • Creditors assess the viability of the business.
   • Resolution plan is prepared and approved by the Committee of Creditors (CoC).
2. Liquidation: If revival fails or creditors choose otherwise, the debtor’s assets are liquidated and proceeds distributed.

The CIRP must be completed within 180 days, extendable by 90 days. However, a maximum cap of 330 days (including litigation time) has been introduced to prevent endless delays.

Insolvency Resolution for Individuals and Partnerships

For individuals and unlimited partnerships, the Code provides two processes:

• Fresh Start Process: Discharge of qualifying debts up to ₹35,000, subject to eligibility criteria.
• Insolvency Resolution: Debtor prepares a repayment plan, which is approved by creditors and enforced by the DRT.

If the plan is rejected or fails, bankruptcy proceedings may follow.

Restrictions on Applicants

Section 11 of the IBC disqualifies certain persons from initiating insolvency proceedings, such as:

• Corporate debtors already undergoing insolvency resolution.
• Corporate debtors who completed resolution in the last 12 months.
• Corporate debtors against whom liquidation orders exist.
• Creditors or debtors who violated terms of approved resolution plans.

This ensures that the process is not misused.

Priority of Claims in Liquidation

The IBC changes the traditional priority of claims in liquidation. The order of distribution is as follows:

1. Insolvency resolution costs and professional fees.
2. Workmen’s dues (24 months) and secured creditors.
3. Employee wages.
4. Unsecured creditors.
5. Government dues and remaining secured creditors.
6. Other debts.
7. Shareholders.

Notably, government dues are pushed lower in priority, which encourages greater creditor recovery and improves confidence in the system.

Insolvency and Bankruptcy Fund

Section 224 of the Code establishes an Insolvency and Bankruptcy Fund. Contributions come from:

• Central Government grants.
• Voluntary deposits by persons.
• Other sources and interest earned.

Contributors may withdraw up to the amount contributed during insolvency proceedings to meet specific costs.

Penalties and Offences

The IBC prescribes stringent penalties for fraudulent behaviour. For example:

Concealment of property during insolvency can attract imprisonment up to five years and fine up to ₹1 crore, or both.

This acts as a strong deterrent against misuse.

Cross-Border Insolvency

Although the Code does not fully adopt the UNCITRAL Model Law on Cross-Border Insolvency, it allows the Central Government to enter into bilateral and reciprocal arrangements with other countries. This helps deal with multinational insolvency cases.

Repeals and Amendments

The IBC repeals two older laws:

• Presidency Towns Insolvency Act, 1909.
• Provincial Insolvency Act, 1920.

It also amends 11 other legislations, including:

• Indian Partnership Act, 1932.
• Income Tax Act, 1961.
• Customs Act, 1962.
• SARFAESI Act, 2002.
• Companies Act, 2013.

This ensures consistency across the legal framework.

Importance of the IBC

The Insolvency and Bankruptcy Code, 2016 has had a transformative effect on India’s credit and business environment. Some of its major contributions include:

• Providing a clear, transparent, and predictable process for resolving insolvency.
• Reducing the time taken for resolution compared to the earlier fragmented system.
• Enhancing the confidence of creditors and investors.
• Improving India’s ranking in the World Bank’s Ease of Doing Business Index.
• Strengthening corporate governance by restricting wilful defaulters from regaining control of defaulting companies.

Conclusion

The Insolvency and Bankruptcy Code, 2016 is a landmark legislation that has overhauled India’s insolvency framework. By consolidating multiple laws into one, introducing professional insolvency practitioners, setting strict timelines, and prioritising creditors’ rights, the Code has created a more business-friendly environment.

Though implementation challenges remain, including delays in tribunals and pending adoption of cross-border provisions, the IBC continues to evolve with amendments and judicial interpretation. It represents a bold step towards a more disciplined credit culture and efficient economic system in India.