Topic of the Day – Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 is a major economic reform next only to the adoption of Goods and Services Tax in India. Hence, it is very important for the UPSCexam. The act came into force from December 2016. This move is aimed at consolidating the existing laws related to the insolvency of partnerships with unlimited liability, entities with limited liabilities (including limited liability partnerships), and individuals into a single legislation in order to rule out the ambiguity in the insolvency resolution process. The law also contains cross-border insolvency provisions.

Insolvency and Bankruptcy Code Explained

The procedure for insolvency resolution under this code is explained in the steps below:

  1. The creditors (operational/financial) submit an insolvency plea to the adjudicating authority (in the case of corporates, the National Company Law Tribunal).
  2. The plea has to be rejected or accepted within fourteen days of filing.
  3. If the plea is accepted, an Insolvency Resolution Professional (IRP) should be appointed.
  4. The IRP drafts an insolvency resolution plan within 180 days, with an extension of a further 90 days given in exceptional cases.
  5. During this time, the Board of Directors (BOD) of the company is suspended and the promoters have no say in the company’s management.
  6. The IRP can, however, take the help of the BOD in the day-to-day functioning of the company.
  7. If 75% of the creditors accept the resolution, the plan is implemented.
  8. If the plan is rejected by the creditors, the company is liquidated.

Insolvency and Bankruptcy Code Analysis

There are a number of benefits with this code because it is systematic and comprehensive.

  • This will help India improve its Ease of Doing Business quotient.
  • This will help India move from being a weak insolvency regime to a really strong one.
  • It will help in developing the bond markets which are a source of finance for countless infrastructure development projects.
  • If Ease of Doing Business is improved, then innovation and entrepreneurship will develop.
  • It will also help make India more attractive to foreign investment.
  • Since it is a single legislation, there will be more clarity in its application.
  • It is also one of the solutions to the increasing NPAs in the balance sheets of banks.
  • It would promote a better capital flow in the economy.
  • It would ensure a hassle-free and easy exit of sick companies.

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