IBC- the much talked about Legislation and the road built towards Resolution and certainty
Executive Overview & Statutory Objective
“The Insolvency and Bankruptcy Code, 2016 (IBC or the Code) which is one of the significant reforms being implemented in the economic landscape of the country has set up a decisive and strong regime in the insolvency resolution arena. IBC since its inception over the years has been much talked about and discussed subject by several experts, professionals, academicians, columnists etc. The wide deliberations and immense interest are understandable as the main purpose of the Code includes implementation of the insolvency resolution process in a time bound manner, maximization of value of assets of stakeholders, promote entrepreneurship, increase availability of credit and balance the interest of all stakeholders. The primary objective under IBC remains to revive the businesses through resolution of insolvency but under certain circumstances when it does not happen then orderly exit is available in the Code.”
1. The Institutional Architecture & Judicial Repository
The country is witnessing today the results of the successful implementation of IBC which has been possible because of the establishment of effective institutional set-up and the various judgements pronounced by Supreme Court, High Courts, NCLAT and NCLT benches. The judicial pronouncements are an important repository to understand the aspects in operationalization and in providing clarification on important provisions and issues under IBC.
The Journey of this Code includes many developments, amendments and achievements and recently a number of amendments have also been brought out in the Regulations under the Code. Before discussing on the recent changes, it is pertinent to mention that the salient features of the Code have brought to the fore important phrases/words which are often and commonly used in various platforms like Corporate Debtor (CD), Financial Creditor (FC), Operational Creditor (OC), Committee of Creditors (CoC), Personal Guarantor, Resolution Applicant, Resolution plan, Default, Moratorium, Interim Resolution Professional (IRP), Resolution Professional (RP) and so on.
One should know about the significant developments for which a recapitulation of the same is being made here.
2. Corporate Insolvency Resolution Process (CIRP) – The Journey So Far
If we look at statistics, since the inception of the Code in December 2016, a total of 5893 CIRPs have commenced by the end of September, 2022 as per IBBI data. Out of these, 3946 have been closed. The Code has rescued 553 Corporate Debtors (CDs) as on September, 2022 through resolution plans. They owed Rs. 7.91 lakh crore to creditors under the Code and the creditors have realised Rs. 2.43 lakh crore which is about 178% of the liquidation value of the assets of the CDs. Realisation by financial creditors in comparison to their claims is around 33%. The Realisation for all classes of creditors, as compared to their claims, is around 30.8%.
Table 1: Sector-Wise Distribution of CIRP Admissions (as on September 2022)
Maximum admission of CIRPs has taken place in the Manufacturing Sector followed by the Real Estate Sector:
| Sr. No. | Sector / Industry Classification | Percentage Share of Admissions (%) |
|---|---|---|
| 1 | Manufacturing | 39% |
| 2 | Real Estate, Renting & Business Activities | 21% |
| 3 | Construction | 11% |
| 4 | Wholesale & Retail Trade | 10% |
| 5 | Electricity & Others | 3% |
| 6 | Transport, Storage & Communications | 3% |
| 7 | Hotels & Restaurants | 2% |
| 8 | Others | 11% |
| – | Total Admitted CIRPs | 100% |
Table 2: Initiation of CIRP – Stakeholder Wise
| Initiating Stakeholder | Exact Share | Rounded |
|---|---|---|
| Operational Creditors (OCs) | 51.08% | 51% |
| Financial Creditors (FCs) | 42.98% | 43% |
| Corporate Debtors (CDs) | 5.94% | 6% |
| Total | 100.00% | 100% |
Table 3: Mode of Closure of CIRPs (as on 30th Sept 2022)
| Mode of Closure | Percentage Share |
|---|---|
| Commencement of Liquidation | 46% |
| Appeal / Review / Settled | 21% |
| Withdrawal under Section 12A | 19% |
| Approval of Resolution Plan | 14% |
| Total Closed CIRPs | 100% |
3. Economic Survey Report on IBC – Birth of Two Professions & Behavioral Change of Debtors
The Report of Economic Survey 2021-2022 has highlighted the birth of two professions due to enactment of IBC and further emphasised the profound change of behaviour of debtors due to the statutory discipline imposed by the Code.
“The Insolvency and Bankruptcy Code (IBC) has created a cohesive and comprehensive insolvency ecosystem. With the enactment of IBC, India has witnessed the birth of two professions, namely, the insolvency profession and the valuation profession that have professionalised insolvency services. The Code has opened possibilities of the resolution, including merger, amalgamation and restructuring of any kind, which often requires professional help. This has created markets for services of Insolvency Professionals, Registered Valuers, Insolvency Professional Entities and expanded the scope of services of Advocates, Accountants and other professionals.”
“Distressed assets have a life cycle and their value gradually declines with time. The fact that a CD may change hands has changed the behaviour of debtors. Thousands of debtors are resolving distress in the early stages of distress, either when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application, and making best effort to avoid consequences of the resolution process.”
4. Insolvency Professionals – Key to Resolution Process & ICAI Leadership
The Insolvency Professionals (IPs) as we know play a key role under IBC on which rests the effective and timely mechanism of the insolvency resolution process.
IBBI Registration Metrics & Dominance of ICAI Members (as on 30th September 2022):
- 4,225 Total Registered IPs: As on date as per IBBI data, a total of 4,225 Insolvency Professionals have been registered with the Insolvency and Bankruptcy Board of India.
- 2,665 Enrolled with IIIPI (>63%): Out of the total registered IPs, 2,665 Insolvency Professionals are enrolled with the Indian Institute of Insolvency Professionals of ICAI (IIIPI) — demonstrating that more than 63% of all registered Insolvency Professionals in India are members of IIIPI.
- Over 55% are Chartered Accountants: Looking at the distribution of Insolvency Professionals as per their primary professional eligibility as on 30th September 2022, over 55% of all IPs are members of the Institute of Chartered Accountants of India (ICAI).
5. Six Major Legislative Amendments – Improving and Extending the Scope of the Code
The Code has been amended six times after its enactment to address emerging structural challenges, plug loopholes, protect vulnerable stakeholders, and fine-tune operational efficiency. Highlights of major amendments include:
New Section 29A was inserted to prescribe comprehensive disqualifications, barring persons (such as wilful defaulters, promoters of NPA accounts over one year, and disqualified persons) from submitting a resolution plan to regain control of the debtor.
MSME Sector provided with a special dispensation under Section 240A. It exempts promoters of micro, small, and medium enterprises undergoing CIRP from disqualification under clauses (c) and (h) of Section 29A, permitting them to bid for their enterprise provided they are not wilful defaulters.
Homebuyers in real estate projects were expressly included within the definition of Financial Creditors under Section 5(8)(f), securing their seat and statutory voting representation in the Committee of Creditors (CoC) via authorized representatives.
New Section 12A inserted wherein withdrawal of an application admitted under Section 7, 9, or 10 is permissible only with the stringent supermajority approval of the Committee of Creditors with 90% of the voting share.
Voting threshold in the CoC brought down from 75% to 66% for the approval of resolution plans, appointment of RP, and extensions. Routine commercial decisions require a simple majority of 51%.
Clarification enacted under Section 14(3) that the statutory moratorium does not apply to a surety or guarantor in a contract of guarantee to a Corporate Debtor, permitting concurrent enforcement against corporate and personal guarantors.
Mandatory outer time limit under Section 12(3) restricting the corporate insolvency resolution process to 330 days, explicitly encompassing the time taken in legal proceedings and litigation.
Amendment to Section 31(1) making the approved resolution plan binding on the Central Government, any State Government, or any local authority to whom a debt in respect of payment of dues arising under any law is owed.
Introduction of Chapter III-A enacting the Pre-Packaged Insolvency Resolution Process (PPIRP) under IBC for MSMEs only, mandating full completion within a swift statutory timeline of 120 days from commencement.
6. COVID-19 Pandemic – Relief Measures Undertaken in Insolvency Sphere
To safeguard people, business enterprises, and all stakeholders during the unprecedented disruptions caused by the COVID-19 pandemic, concerted actions were undertaken by the Hon’ble Courts, the Central Government, and the Regulator (IBBI). Notable amongst those actions were:
- Revision of Default Threshold to Rs. 1 Crore: The Central Government by notification dated 24th March 2020 revised the minimum amount of default to trigger insolvency under Section 4 of the Code to Rs. 1 crore (elevated from the earlier Rs. 1 lakh threshold). This provided immediate immunity to the MSME sector from being dragged into insolvency for pandemic-induced temporary distress.
- Suspension of Fresh CIRP Initiation for One Full Year: Insertion of Section 10A suspended the initiation of corporate insolvency resolution process under Sections 7, 9, and 10 for defaults arising on or after 25th March 2020 to 24th March 2021, establishing an absolute statutory shielding period.
- Enactment of IBC (Amendment) Act, 2021: The Parliament enacted the Insolvency and Bankruptcy Code (Amendment) Act, 2021, repealing the earlier Ordinance to provide a codified, alternative resolution framework known as the Pre-packaged Insolvency Resolution Process (PPIRP) specifically targeted at corporate MSMEs.
7. Alternative Resolution Mechanism for MSMEs – Pre-Packaged Insolvency (PPIRP)
“Micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population.”
The fundamental legislative purpose behind introducing a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises includes:
- Mitigating Pandemic Distress: To mitigate the distress caused by the COVID-19 pandemic which heavily impacted the business operations of micro, small and medium enterprises and exposed many of them to financial distress.
- Quicker, Cost-Effective & Non-Disruptive Resolution: To provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the IBC, ensuring quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.
8. Recent Regulatory Overhaul – Amendments in IBBI Regulations
The Insolvency and Bankruptcy Board of India (IBBI) notified substantial regulatory amendments across the CIRP Regulations, Liquidation Process Regulations, and Insolvency Professional Regulations towards effective and streamlined implementation:
PART A Amendments to IBBI (Insolvency Resolution Process for Corporate Persons) Regulations
- Mandatory GST Extracts for Operational Creditors: Operational Creditors registered under Goods and Services Tax must provide relevant extracts of GSTR-1 (contains detailed information of all outward goods and services of a business) and GSTR-3B (simplified summary return declaring GST liabilities for a tax period) with the CIRP application as indisputable evidence of default.
- Mandatory PAN & Email ID: Financial Creditors and Operational Creditors, while filing a CIRP application before the Adjudicating Authority (NCLT), must mandatorily furnish their PAN and email ID.
- Regulatory Fee to IBBI (Reg. 31A): Under Regulation 31A, regulatory fees payable to IBBI at the rate of 0.25% of the realisable value to creditors under the approved resolution plan shall form part of the Insolvency Resolution Process Cost (IRPC).
- Re-issuance of RFRP for Part Assets: If a resolution plan is not received for the Corporate Debtor as a whole from any Resolution Applicant, the RP and CoC are empowered to re-issue the Request for Resolution Plan (RFRP) for the sale of part of the assets of the CD.
- Prescribed Minimum Monthly Fee for Resolution Professionals: A statutory minimum fee is prescribed for an Insolvency Professional performing as an RP during CIRP, scaling from Rs. 1 lakh to Rs. 5 lakh per month depending upon the quantum of admitted claims.
- Performance-Linked Incentive Fee (Cap of Rs. 5 Crore): For resolution plans approved by the CoC on or after 1st October 2022, the committee may decide, at its discretion, to pay a performance-linked incentive fee not exceeding Rs. 5 crore to the Resolution Professional for achieving Value Maximisation and Timely Resolution.
PART B Amendments to IBBI (Liquidation Process) Regulations
- CoC Functioning as SCC for First 60 Days: The Committee of Creditors (CoC) constituted during CIRP shall function as the Stakeholders Consultation Committee (SCC) during the first 60 days from the Liquidation Commencement Date. After claim adjudication and within 60 days of initiation, the SCC shall be reconstituted based upon admitted claims.
- Fixation of Liquidator Fees by SCC: The Stakeholders Consultation Committee may fix the fees of the liquidator if the CoC failed to fix the same under Regulation 39D of the CIRP Regulations during its first meeting.
- Deemed Claims Submission under Section 38: If any claim is not filed during the liquidation process, claims collated during CIRP shall be deemed to have been submitted for the purpose of Section 38 of the Code. The Liquidator is obligated to verify all claims — i.e., claims submitted during liquidation as well as claims collated during CIRP.
- Replacement of Liquidator by 66% SCC Vote: Whereas previously there was no provision for replacing a liquidator, the SCC may now propose to replace the liquidator by a vote of not less than 66% of voting share, followed by an application before the Adjudicating Authority (NCLT).
- Going Concern Asset Sale Restricted to First Auction: The liquidator may sell the assets of the corporate debtor as a going concern exclusively only at the first auction.
PART C Amendments to IBBI (Insolvency Professionals) Regulations
- Registration of Insolvency Professional Entities (IPEs) as IPs: Earlier, only individual professionals could take registration as an Insolvency Professional (IP). Under the amended regulations, an Insolvency Professional Entity (IPE) can also seek institutional registration as an IP with the Board (IBBI), by making an application in the specified form accompanied by a non-refundable application fee of Rs. 2 lakh.
9. Important Reforms Envisioned for the Future
Cross Border Insolvency Framework & UNCITRAL Model Law
The Insolvency Law Committee (ILC) constituted by the Ministry of Corporate Affairs submitted its comprehensive Report on Cross Border Insolvency in October 2018. Earlier, in its March 2018 report, the Committee observed that the existing bilateral treaty mechanism under Section 234 and Section 235 of the IBC does not provide an adequate or comprehensive framework for complex cross-border insolvency matters.
The ILC recommended the adoption of the UNCITRAL Model Law on Cross Border Insolvency, 1997 with necessary carve-outs to preserve harmony with the domestic insolvency framework. The Model Law has been adopted in as many as 44 countries, forming international best practice.
The Model Law deals with four major principles of cross-border insolvency:
- Direct Access: Foreign insolvency professionals and foreign creditors have direct access to participate in or commence domestic insolvency proceedings against a defaulting debtor.
- Recognition of Foreign Proceedings: Structured judicial recognition of foreign main and non-main proceedings and provision of appropriate interim and permanent remedies.
- Judicial & Administrative Cooperation: Transparent cooperation between domestic and foreign courts, and between domestic and foreign insolvency practitioners.
- Coordination of Concurrent Proceedings: Seamless coordination between two or more concurrent insolvency proceedings in different jurisdictions.
The main proceeding is determined by the concept of Centre of Main Interests (COMI). The necessity arises because Indian companies operate with a global footprint, and foreign corporations maintain multi-jurisdictional presences in India. Enacting this chapter will bring Indian insolvency law on par with mature global jurisdictions.
Group Insolvency Framework
The Group Insolvency Framework is anticipated to be introduced under the IBC. The Code presently provides a detailed framework to deal with the insolvency of a company in distress on a standalone basis. It currently lacks a statutory framework to resolve insolvency proceedings of different corporate debtors in a corporate group or resolve their insolvencies together, though the judiciary has permitted group consolidation and coordination in select cases.
In this regard, the Insolvency and Bankruptcy Board of India (IBBI) constituted a dedicated Working Group to recommend a comprehensive statutory framework facilitating the insolvency resolution and liquidation of corporate debtors in a group. The Working Group submitted its Report in September 2019, laying down principles for procedural coordination, substantive consolidation, and group committee dynamics.
10. Conclusion & The Pioneering Role of ICAI
IBC has contributed towards building a strong ecosystem in the country. For the effective and smooth implementation of the Code, amendments have been brought out in the Code regularly and amendments in Regulations too were brought by the Regulator. The Code is evolving constantly and has built a robust insolvency regime which included various developments and achievements.
For taking forward the unitary codified legislation — The Insolvency and Bankruptcy Code, 2016 — and being an important Partner in Nation Building, The Institute of Chartered Accountants of India (ICAI) has constituted a dedicated Committee to give specific focus on Insolvency and Bankruptcy Laws and to bring in awareness among members at large about the new area of practice in the insolvency resolution sphere under the Insolvency and Bankruptcy Code, 2016 and to facilitate in educating the members on the practical aspects and procedures of the law.
“ICAI has the distinction to form the first Insolvency Professional Agency (IPA) in the country, which as on date has more than 63% of Insolvency Professionals (IPs) as its members. ICAI is continuously playing a key role in the implementation of IBC and its journey towards resolution and certainty.” ■■■