Updated on: Jun 17th, 2024
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2 min read
After the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha on 21st December 2015, it was referred to the Joint Committee. On such a referral the Committee had presented its recommendations and a modified Bill based on its suggestions. In May 2016 both the Houses of Parliament passed the Insolvency and Bankruptcy Code, 2016. The major objective of this economic reforms is to focus on creditor drove insolvency resolution.
In India, the Insolvency and Bankruptcy Code, 2016 is one matured step towards settling the legal position with respect to financial failures and insolvency. To provide easy exit with a painless mechanism in cases of insolvency of individuals as well as companies, the code has significant value for all stakeholders including various Government Regulators. Introduction of this Code has done away with overlapping provisions contained in various laws –
Before the enactment of this Code, there were multiple agencies dealing with the matters relating to debt, defaults, and insolvency which generally leads to delays, complexities and higher costs in the process of Insolvency resolution. The ‘Board for Industrial and Financial Reconstruction (BIFR)’, one of the Insolvency Regulators, has been a phantasm for sick industrial companies. It is expected that the Insolvency and Bankruptcy Code, 2016 will expedite the cases pending for a long time and resolve them within 180 days with a further period of 90 days.
The provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities:-
Moreover, this code shall apply only if minimum amount of the default is Rs. 1 lakh. However, by placing the notification in Official Gazette, Central Government may specify the minimum amount of default of higher value which shall not be more than Rs. 1 crore.
Exceptions: There is an exception to the applicability of the Code that it shall not apply to corporate persons who are regulated financial service providers like-
A sound legal framework of bankruptcy law is required for achieving the following objectives:-
Improved handling of conflicts between creditors and the debtor
It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.
Set a limit between malfeasance and business failure
It can also provide flexibility for parties to arrive at the most efficient solution to maximize value during negotiations. The bankruptcy law will create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.
Macroeconomic downturns losses to be allocated
An infirm insolvency regime leads to the stereotype of “rich promoters of defaulting entities” generating theories such as:
Macroeconomic downturns losses to be allocated
Clear allocation of these losses is a result of a well-defined bankruptcy framework. Taxes, inflation, currency depreciation, expropriation, or wage or consumption suppression are the common practices of loss allocation. These could affect foreign creditors, small business owners, savers, workers, owners of financial and non-financial assets, importers, exporters.
The sole intention of the Insolvency and Bankruptcy Code, 2016 is to provide a justified balance between-
The objective behind Insolvency and Bankruptcy Code, 2016 are listed below-
Insolvency and Bankruptcy Code, 2016 shifted towards creditor-driven resolution by replacing the existing 'Debtor in possession' with 'Creditor in control'. It consolidates laws related to insolvency and bankruptcy, sets time limits, and aims to balance stakeholder interests. Key objectives include promoting entrepreneurship, increasing credit availability, and establishing a regulatory body.