Dec 28,2021 | 7 min read

Why do we need the Insolvency and Bankruptcy Code?

What is Insolvency and what is bankruptcy?

Money or capital funds are essential for any business. A lot of businesses do not have the wherewithal to manage the finances of the business from their personal resources. For this reason, we have another player in the field - the lenders. Whenever a business fails or is unable to pay back what is owed to the lenders, it gives rise to a situation known as insolvency (not having enough money to pay back what is owed) and bankruptcy (not having enough money to pay back the debts). 

It is essential to understand the difference between insolvency and bankruptcy

The earlier regime in the country was that whenever a business became insolvent or bankrupt, the business was shut down and the assets were liquidated to repay all pending dues. 

Prior to the IBC, the issue of insolvency and bankruptcy was dealt with under the following acts - 

  1. The Provincial Insolvency Act 

  2. The Presidency Towns Insolvency Act

  3. The Recovery of Debt Due to Banks and Financial Institutions Act 

  4. Sick Industrial Companies (Special Provisions) Act (SICA)

  5. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act

  6. Companies Act

The Insolvency and Bankruptcy Code was formulated with the aim that there be a single framework which resolves the issue of insolvency and bankruptcy for not just firms and companies but also for the individuals. 

Main Objectives of IBC 

The main objectives that were kept in mind while drafting the IBC were as follows - 

  1. Improvise the resolution of conflicts related to insolvency and bankruptcy - IBC sets down a simplified result-oriented procedure for the resolution of all conflicts. 

  2. To help in restructuring the dues in a manner to not cause loss to any of the parties involved - IBC helps in adding value to the entity and not just liquify it for the limited purpose of fulfilling the dues owed. If there is no option but to liquidate the assets of a business for that also the procedure has been laid down under IBC. 

  3. IBC provides a landscape of efficiency and growth for the entities - the end goal of the Code is to do what is best for the business. It is not necessary to liquidate all the assets but in case it is felt that liquidation is in the best interest of the entity, the procedure will proceed in that manner. To provide the best resolution is what makes this legislation unique. 

  4. The code helps in recognising the true value of the assets - since the end goal is not just to pay back dues to the creditors but to do what is the best way forward for the business in the long run, the assets are analysed and then only a resolution process is decided upon. This process helps in the assessment of the entity and its assets as a whole and helps in recognizing the best way forward.  

  5. To ensure that there is a parity in the treatment of creditors - another unique feature of this code is that it treats all creditors in an equitable manner depending on their share of credit or dues owed. 

  6. Helps in providing a resolution for the insolvency in a timely, efficient and impartial manner - IBC has fixed a timeline for various processes that have to be carried out under its provisions. This helps in limiting the delay that often happens during the various processes under the provisions of insolvency and bankruptcy. 

  7. A transparent and predictable insolvency law that incentivises information - information is the most powerful tool. For this reason IBC provides for Information Utilities. These Utilities provide all information that is necessary for the processes enshrined under the IBC. The role of the Information Utility is to procure and collect information that may come in use or may be of importance in deciding the future of an entity that has approached the courts under IBC. 

  8. Recognition of existing creditors and their rights and ranking priority of claims - IBC helps in clearly establishing rules for the creditors and the priority in which their claims will be addressed or taken up. 

Overall, IBC has been a boon for all entities that are facing bankruptcy. This Code helps in providing not only the best possible solution and resolution but also does so in a speedy and an efficient manner. The essence of the Code is to ensure that no entity or creditor should face any loss or damage while at the same time keeping the best interest of the debtor in mind.

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