Focus: GS III- Indian Economy
Why in News?
The Insolvency and Bankruptcy Board of India (IBBI) celebrated its sixth Annual Day .
What is Insolvency and Bankruptcy?
- Insolvency is a financial status: your debts are greater than the fair market value of your assets & you’re unable to pay your debts as they generally become due.
- Bankruptcy is a legal status: it’s a legal procedure whereupon an insolvent person files for protection from her creditors so that they cannot commence or continue legal proceedings (like a wage garnishment) against her to recover their debts.
About Insolvency and Bankruptcy Code (IBC), 2016
- Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
- The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been pulling the Indian economy down for years.
Objectives of IBC
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximization of the value of assets of corporate persons.
Insolvency and Bankruptcy Board of India (IBBI)
- The Insolvency and Bankruptcy Board of India (IBBI) is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India.
The IBBI is a Statutory Body under the Insolvency and Bankruptcy Code, 2016 (IBC).
- It covers Individuals, Companies, Limited Liability Partnerships and Partnership firms.
- It attempts to simplify the process of insolvency and bankruptcy proceedings.
- It handles the cases using two tribunals like NCLT (National Company Law Tribunal) and Debt Recovery Tribunal.
Process of resolution of Insolvency
- If the adjudicating authority accepts the Insolvency resolution process initiated by any of the stakeholders of the firm: firm/debtors/creditors/employees., then – an Insolvency resolution professional (IP) is appointed.
- The power of the management and the board of the firm is transferred to the committee of creditors (CoC) and they act through the IP.
- The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
- If they decide to revive, they have to find someone willing to buy the firm.
- The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
- They invite open bids from the interested parties to buy the firm.
- They choose the party with the best resolution plan, that is acceptable to the majority of the creditors (75 % in CoC), to take over the management of the firm.