Insolvency and Bankruptcy Code (IBC)
About Insolvency and Bankruptcy Code, 2016
- Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
- The Insolvency and Bankruptcy Code (IBC) provides a time-bound process for resolving the insolvency of corporate debtors called the corporate insolvency resolution process (CIRP).
- Earlier, the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh, but considering the stress on companies amid the pandemic, the government increased the minimum amount to ₹1 crore.
- Under CIRP, a committee of creditors is constituted to decide on the insolvency resolution. The committee may consider a resolution plan which typically provides for the payoff of debt by merger, acquisition, or restructuring of the company. If a resolution plan is not approved by the committee of creditors within the specified time, the company is liquidated (the assets of the borrower will be sold to repay creditors).
- During CIRP, the affairs of the company are managed by the Resolution Professional (RP), who is appointed to conduct CIRP.
- The National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies and Limited Liability Partnerships. The Debt Recovery Tribunal (DRT) adjudicates insolvency resolution for individuals and partnership firms.
- The Insolvency and Bankruptcy Board of India (IBBI) regulates the functioning of IPs, IPAs and IUs.
- The code was amended in 2019 which mandated a deadline for the completion of the resolution process within 330 days, including all litigation and judicial processes.
Insolvency and Bankruptcy Code (Amendment) Act, 2021
- In 2021, the Parliament passed the Insolvency and Bankruptcy Code (Amendment) Act, 2021 to expedite and provide an efficient alternate insolvency resolution process for corporate persons classified as micro, small and medium enterprises (MSMEs) under IBC.
Highlights of the Act
Pre-packaged insolvency resolution
- The Act introduces an alternate insolvency resolution process for micro, small, and medium enterprises (MSMEs), called the pre-packaged insolvency resolution process (PIRP).
- Unlike CIRP, PIRP may be initiated only by debtors. The debtor should have a base resolution plan in place. During PIRP, the management of the company will remain with the debtor.
Minimum default amount
- Application for initiating PIRP may be filed in the event of a default of at least one lakh rupees. The current law limits the pre-pack resolution mechanism to defaults not exceeding one crore rupees.
Debtors eligible for PIRP
- PIRP may be initiated in the event of a default by a corporate debtor classified as an MSME under the MSME Development Act, 2006.
- Currently, under the 2006 Act, an enterprise with an annual turnover of up to Rs 250 crore, and investment in plant and machinery or equipment up to Rs 50 crore, is classified as an MSME.
Why in News?
- The Insolvency and Bankruptcy Board of India (IBBI) has sought public comments on the regulations notified till date under the insolvency law as it looks to crowdsource ideas for the regulatory framework.
Tag:Economy, Government Acts, Polity
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