The Insolvency and Bankruptcy Code (IBC) 2016 is aimed at faster and a more transparent resolution and higher recovery of stressed loans i.e. the NPAs faced by banks.
But first let us understand a basic difference between Insolvency and Bankruptcy.
In the past, banks have restructured the stressed assets, primarily bad loans, through the medium of Corporate Debt Restructuring (CDR), which was limited in its scope and objective. In June 2015, RBI introduced the scheme of Strategic Debt Restructuring (SDR) which allowed lenders to acquire majority ownership in the borrower's company by converting a part of their outstanding loan (including overdue interest) into equity. At a later date, it can transfer the control to a new promoter.
The Insolvency and Bankruptcy Code
For defaults above Rs.1 Lakh, the creditor (himself or jointly with other financial creditors) may initiate insolvency resolution process against the corporate borrower. The IBC proposes two independent stages:
1. Insolvency Resolution Process – This is the first stage during which financial creditors assess the viability of the debtor’s business and the options for its revival ; and
2. Liquidation – if the insolvency resolution process fails or the financial creditors decide to wind up the operations and distribute the assets of the debtor.
The Corporate Insolvency Resolution Process (CIRP)
a. A financial creditor or an operational creditor or the corporate debtor (the borrower) may initiate the insolvency resolution process in case of default by corporate debtor.
b. An application is to be made before the National Company Law Tribunal (NCLT) for initiating the resolution process.
c. Appointment of Interim Resolution Professional (IRP) within 14 days of the acceptance of application.
d. Interim IP takes control of the debtor’s assets and operations alongside collecting the company's financial information. The Board is suspended and all its powers vests with the IRP.
e. Declaration of the moratorium in favour of the corporate debtor by the NCLT for a period of 180 days which can be extended by a further 90 days i.e. a total of 270 days. The moratorium is declared beginning from the date of commencement of insolvency proceedings and is in force till the CIRP period. The moratorium prohibits - any transfer/sale of company assets, initiating or continuing any existing legal suit against the corporate debtor, recovery, foreclosure, enforcement under SARFAESI and termination of essential contracts against the corporate debtor.
f. Within 30 days after the appointment of the IRP, a Committee of Creditors (CoC) is constituted comprising of only the financial creditors excluding any related party financial creditor. Operational creditors should be part of Creditors’ Committee (without voting right) if their aggregate dues are not less than 10% of the debt.
g. The COC then appoints an independent person to function as the “resolution professional” for the remainder of the CIRP term. The resolution professional may be the same person as the interim resolution professional, or someone else, depending on what the COC wants.
h. Within 180 days from the start of the CIRP, a resolution plan for the revival of the company needs to be approved by the CoC with a 75% majority voting. The NCLT can extend this by another 90 days.
i. The resolution plan will be sent to NCLT for final approval and implemented once approved. If no decision is made during the resolution process or the plan is rejected, the NCLT will order to liquidate the debtor’s assets to repay the debt.
Tata Steel recorded the first successful resolution under the IBC after it acquired Bhushan Steel Ltd for Rs 36,500 crores.