Rationale: The IBC Code was introduced to consolidate all the existing laws related to Insolvency and Bankruptcy in India and to simplify the process of insolvency resolution. Deals with all aspects of insolvency and bankruptcy of all kinds of companies, LLPs, Partnerships and Individuals; however, it does not deal with insolvency of banks.
Institutional Mechanism
Insolvency Professionals to administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
Insolvency Professional Agencies to conduct examinations to certify the insolvency professionals.
Information Utilities to report financial information of the debt owed to them by the debtor.
Adjudicating authorities: National Companies Law Tribunal (NCLT) for companies; and the Debt Recovery Tribunal (DRT) for individuals.
Committee of Creditors (CoC) may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets. However, such a decision has to be approved by at least 66% of the votes. (Earlier threshold- 75%).
Insolvency and Bankruptcy Board to regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
Procedure
Insolvency Resolution Process (IRP): When a default occurs, the resolution process may be initiated either by the debtor or creditor before the adjudicating authority. The NCLT appoints an insolvency professional to administer the IRP. The Resolution Professional identifies the financial creditors and constitutes a Committee of Creditors (CoC). The CoC would prepare the resolution plan for the restructuring the loans of the defaulted borrower. However, such a resolution plan has to be approved by at least 66% of the votes in the committee of creditors.
Liquidation (Sale of Assets) would take place if the Committee of Creditors fail to come up with a resolution plan within the time limit of 330 days.
Recent Announcement: Government has decided to increase the threshold for invoking IBC for Corporates from Rs 1 lakh to Rs 1 crores. (For individuals, threshold is Rs 1000).
Pre-Pack Insolvency
Under PIRP, there is a direct agreement between debtor (Borrower) and Creditor (Lender) to restructure the loans. There is no public bidding of the resolution plans and hence no role for the external parties. Resolution takes place through informal and direct agreement between the debtor and creditor. This ensures that the company remains in the control of promoters. This is particularly helpful for those companies which may have defaulted due to adverse economic conditions. So, PIRP offers a unique mechanism of Informal out of court settlement accompanied by legal recognition of such settlements under IBC.
Difference Between CIRP and PIRP
| Criteria | CIRP | Pre-Pack Insolvency Process |
| Who can initiate? | Either the creditor or debtor | Can be initiated only by debtor.Debtor must obtain approval of at least 66% of its financial creditors in terms of value. |
| Applicability | Applicable to all companies, including MSMEs | Applicable only to MSMEs. |
| Control of the company | Passes on to resolution professionals | Promoters remain in control of the company |
| Resolution process | Restructuring of loans through public bidding | Restructuring of loans through direct agreement between promoters and creditors |
| Can promoters take over management? | Promoters barred from bidding and hence lose control of the company | Promoters remain in control of the company. |
| Role of External parties | Can bid for the company as part of initial resolution process. | No role in the initial resolution process as resolution takes place through direct mediation between promoters and creditors.However, the new resolution plan between promoters and creditors is open for Swiss Challenge method. Example: Original promoter "X" agrees to pay 90% of the loan External party "Y" bids for repayment of 95% of loan Option to the original promoter to match up to bid of the External party i.e., pay 95% of loan and keep the ownership of company else ownership passes onto external party "V"' (Right of First Refusal for Promoter "X") |
| Type of Model | Creditor-in-possession model | Debtor-in-possession model |
| Time Limit | 330 Days | 120 days |
| Majority required for Resolution | 66% of the votes in terms of value | 66% of the votes in terms of value |
Cross Border Insolvency
Cross border insolvency deals with circumstances where the insolvent debtor has assets and creditors in multiple countries or when insolvency proceedings have been initiated against the insolvent debtor in multiple countries.
PRESENT STATUS: Cross border insolvency is regulated by Section 234 and 235 of IBC. Section 234 empowers the Central Government to enter into bilateral agreements with other countries to resolve situations about cross-border insolvency. Further, the Adjudicating Authority can issue a letter of request to a court or an authority (under Section 235) competent to deal with a request for evidence or action in connection with insolvency proceedings under the Code in countries with the agreement (under Section 234).
Problems
IBC at present has no standard instrument to restructure the firms involving cross border jurisdictions. The absence of standardized cross border insolvency framework creates complexities and raises various issues such as:
- The extent to which an insolvency administrator may obtain access to assets held in a foreign country.
- Priority of payments- Whether local creditors may have access to local assets before funds go to the foreign administration or not.
- Recognition of the claims of local creditors in a foreign administration.
- Recognition and enforcement of local securities, taxation system over local assets where a foreign administrator is appointed etc.
As can be seen, the current provisions under IBC are ad-hoc in nature and are susceptible to delay. Entering mutual (reciprocal) agreements require individual long-drawn-out negotiations with each country. This leads to uncertainty of outcomes of claims for creditors, debtors and other stakeholders as well.
Proposals: Adoption of United Nations Commission on International Trade Law Model law on Cross border insolvency with certain modifications to make it suitable to the Indian context.
This law addresses core issues of cross border insolvency cases with the help of four main principles:
- Access: Allows foreign professionals and creditors direct access to domestic courts and enables them to participate in and commence domestic insolvency proceedings against a debtor.
- Recognition: Allows recognition of foreign proceedings & enables courts to determine relief accordingly.
- Cooperation: Provides a framework for cooperation between insolvency professionals and courts of countries.
- Coordination: Allows for coordination in the conduct of concurrent proceedings in different jurisdictions.