Corporate Insolvency and Liquidation in IBC

After 11 erstwhile projects of amendments, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted and came into force on 28th of May, 2016. IBC consolidates and amends the laws relating to reorganization and insolvency of corporations, partnerships and individuals.

We hereby introduce main points about the new IBC.

1. Corporate insolvency process

Insolvency application – Any financial or operational creditor(s) can apply for insolvency on default of debt of interest payment.

Appointment of IP – IP should be appointed by the regulator and approved by the creditor committee. IP will take over the running of the company.

From date of appointment of IP, power of board of directors shall be suspended and vested in the IP, IP shall have immunity from criminal prosecution and any other liability for anything done in good faith.

Moratorium period – Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the company on more profound basis. A resolution plan should be prepared and approved by the committee of creditors.

Credit committee – A credit committee of creditors will be constituted. Related party should be excluded from the committee. Each creditor shall vote in accordance to voting share assigned. If 75% of creditors approve the resolution, named plan can be implemented.

2. Liquidation process

Initiation – Failure to approve resolution plan within specific days will cause initiation of liquidation.

Liquidator – The liquidator shall form a consolidated balance sheet, and define, verify, admit and decide the value of creditors’ claims.

Clearly, the IBC made several significant changes. It proposes a paradigm shift from the existing ‘debtor in possession’ to a ‘Creditor in control’ regime and its aims at consolidating all existing insolvency related laws as well as amending projects. Court can ask for information about previous deals in order to prevent illegal transfer of asset.

IBC is a forward looking law and builds legal basis for future work in this area.

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