The Insolvency And Bankruptcy Code, 2016 : An Overview


The introduction of the insolvency and bankruptcy law is better understood in connection with the country’s growing bankruptcy decisions in connection with other developing and industrialized countries around the world. According to the World Bank (2015 report), India took an average of 4.3 years to solve bankruptcy, with other economies also averaging 1 year. It reflects the legal gaps that lead to delays in insolvency and bankruptcy cases. This current code for 2016 applies to corporate persons (companies, associations, LLP, etc.) as well as to individuals.

One of the key elements of business support is a mechanism to resolve failed or bankrupt companies without harming an economic operator. The continuation of a financially non-viable business leads to the blocking of funds and physical assets. Similarly, this can create stress for the lender who granted the non-performing business a loan. An insolvency code in the form of a series of laws is required to solve failed companies/individuals.

What is Bankruptcy?

Bankruptcy is a financial situation in which a company/individual cannot pay debts to creditors. According to the India Bankruptcy and Insolvency Code 2016, an insolvency company is a debtor who has been declared bankrupt by a contracting authority by approving an insolvency application.

Need for Bankruptcy Code:

There must be a legal process in all economies that is accompanied by institutions that together can or can solve the problems of failed institutions. An early solution with sound principles will help related parties such as banks not suffer from the failure of the business unit to which they have lent. Similarly, bankruptcy and bankruptcy proceedings will help ensure the confidence of banks, foreign investors, and affiliates in crisis mitigation mechanisms related to the country’s commercial entities. A situation where investing money in litigation has long been blocked is the least preferred situation for business partners and lenders. The use of the bankruptcy process can also help the company that does not solve its problems early without getting into the worst case.

Aim of the Code:

The 2016 Code applies to companies and individuals. Provides a temporary process for solving bankruptcy. In the event of a default, creditors have control over the debtor’s assets and must make decisions to resolve the bankruptcy within 180 days. In order to ensure an uninterrupted settlement process, the Code also provides debtors with immunity to the settlement claims of creditors during this period. The code also consolidates the provisions of the current legal framework to form a common forum for debtors and creditors of all kinds to solve bankruptcies.

Who facilitates the insolvency resolution under the code?

The code creates several institutes to facilitate the resolution of the bankruptcy. These are as follows:

1. Bankruptcy professionals:

It is proposed to create a specialized squad of licensed professionals. These professionals manage the settlement process, manage the debtor’s assets, and provide information to creditors to help them make decisions.

2. Professional insolvency agencies:

Insolvency professionals register with professional insolvency agencies. The agencies conduct audits to certify bankruptcy trustees and enforce a code of conduct for their performance.

3. Information services:

Creditors report financial information about the debt owed to them by the debtor. This information includes records of debts, liabilities, and late payments.

4. Contracting authorities:

The procedures for the resolution process are laid down by the National Court for Company Law (NCLT) for companies. and the Debt Recovery Court (DRT) for individuals. The responsibilities of the authorities include approving the settlement process, appointing the administrator, and approving the final decision of the creditors.

5. Insolvency and insolvency authority:

The authority regulates insolvency administrators, professional insolvency agencies, and information services set up according to the code. The Board of Directors is composed of representatives from the Reserve Bank of India and the Ministries of Finance, Corporate Affairs and Law.

Procedure to resolve insolvency in the code:

The steps to resolve the insolvency are as follows:

1. Initiation:

If a default occurs, the settlement process can be initiated by the debtor or the creditor. The insolvency administrator manages the process. The professional provides the creditor with the debtor’s financial information from the information service providers and manages the debtor’s assets. This process takes 180 days and any legal action against the debtor is prohibited during this time.

2. The decision to resolve the bankruptcy:

A committee of financial creditors who borrowed money from the debtor is made up of the administrator. The creditors’ committee will decide with him on the future of the outstanding debt. You can revive the debt owed to them by changing the payment schedule, or sell (liquidate) the debtor’s assets to pay off the debt owed to them. If no decision is made within 180 days, the debtor’s assets are liquidated.

3. Liquidation:

When the debtor goes into liquidation, an insolvency administrator manages the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order:

i) insolvency settlement costs, including the liquidator’s remuneration,

ii) secured creditors whose loans are secured by guarantees and installments workers, other workers,

iii) unsecured Creditors,

iv) government ratios,

v) preferred shareholders, and

vi) shareholder shareholders.

Issues in the court that require consideration:

1. The Bankruptcy Board (regulator) will regulate professional bankruptcy agencies (IPAs), which will further regulate bankruptcy professionals (IP). The reason for multiple IPAs monitoring the performance of their members’ IPs, rather than a single regulator, is unclear. Having multiple IPAs working at the same time could enable competition in this sector. However, this can also lead to a conflict of interest between API regulatory and competitive objectives. This regulatory structure differs from the current practice in which the regulator directly regulates its registered professionals. For example, the Institute of Chartered Accountants of India (which regulates Chartered Accountants) is directly responsible for regulating its registered members.

2. The code provides a priority order for the distribution of assets during the liquidation. It is unclear why:

  1. secured creditors receive all of their outstanding amounts and not up to their collateral value,
  2. unsecured creditors take precedence over commercial creditors, and
  3. government fees They are reimbursed for unsecured creditors.

3. The proper functioning of the code depends on the operation of new companies, e.g. B. by insolvency administrators, professional insolvency agencies, and public information services. These units must evolve over time for the system to function properly. In addition, the NCLT, which recognizes corporate bankruptcy, has yet to be formed and the DRTs are overloaded with pending cases.


In order to establish a bankruptcy regime for companies and individuals, the parliament passed the bankruptcy and bankruptcy code 2016. The code offers a uniform and comprehensive insolvency law that covers all companies, companies, and individuals (except financial companies). Bankruptcy is a sensitive issue for financial companies such as banks, and a separate settlement system will be adopted later for this purpose. The code provides a clear, consistent, and rapid process for identifying financial difficulties early and solving companies when it is determined that the underlying business is profitable. He suggests two options: restructuring if the company is profitable and liquidation if it is not financially viable.

The solution must be quick and sensible to ensure that the business doesn’t stagnate. The new code replaces existing bankruptcy laws and applies to corporations, limited liability companies, corporations, other corporations and individuals, and all other government-mandated authorities. There is the Law on Sick Industrial Enterprises, the Law on Debt Collection by Banks and Financial Institutions, and the Law on the Securitization and Reconstruction of Financial Assets and Compliance with the Interest Guarantee of 2002 (SARFAESI). In addition, DRTs and Lok Adalats also deal with bankruptcy proceedings. All of this is being replaced/managed by the Bankruptcy and Bankruptcy Act as it consolidates/improves existing laws.

This article is authored by Udita Prakash, Second-Year, BBA LLB at UPES, Dehradun 

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