Introduction of Insolvency and Bankruptcy Code, 2016 - Definition / Legal Terminology and Intorduction - IBC

Introduction of Insolvency and Bankruptcy Code, 2016 Introduction The term of insolvency is used for both individuals and organization. Insolvency is state of not being able to pay off debts due to insufficient cash flow, and bankruptcy is a legal declaration of one's inability to pay off debt. Untreated insolvency will lead to bankruptcy for non-corporate and liquidation of corporate. The Insolvency and Bankruptcy Code, 2016 (Code/IBC) is the umbrella legislation for insolvency resolution of all entities in India both corporate and individuals. The insolvency and liquidation of corporate persons came into force on December 1, 2016. while those of insolvency resolution and bankruptcy of personal guarantors to corporate debtors (CDs) came into effect on December 1, 2019 . Insolvency and bankruptcy provisions for other category of individuals are yet to be notified (as on the date of this publication). Structure of the Insolvency and Bankruptcy Code, 2016, is structured into 5 parts comprising of sections 255 sections and 12 Schedules. A bankrupt would be a conclusive insolvent through resolution mechanism under the code and failed resolution mechanism would lead to liquidation process in relation to corporate and bankruptcy process in relation to individuals under the code. Prior to the IBC, the insolvency and bankruptcy laws in India were multilayered and fragmented. Individual insolvency and bankruptcy were covered under the two pre-independence legislations the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920. It should be noted that pending notification of the provisions relating to individual insolvency and bankruptcy under the Code, these statutes still continue to apply. For companies, the basic law dealing with their winding up or liquidation was the Companies Act, 1956. Although the Companies Act, 2013, replaced the Companies Act, 1956, the sections relating to winding up/liquidation under the 2013 act were not notified. Hence, till the enactment of the Code, provisions of the Companies Act, 1956, continued to govern winding up or liquidation of companies. Winding up could be triggered under the Companies Act, 1956, if a company was unable to pay its debt. Once winding up was triggered, liquidation would follow and there was no provision to mandatorily attempt rehabilitation or reorganization of the company prior to this. Further, liquidation itself would take several years (in the absence of any time-bound closure process). Now, with the enactment of the IBC, winding up due to an inability to pay debt cannot be triggered under the Companies Act, 1956, or the Companies Act, 2013. However, involuntary winding up of companies for non-insolvency-related reasons (for instance, if the company has defaulted on filing financial statements or annual returns for five consecutive financial years) can still be undertaken under the Companies Act, 2013. The Companies Act, 2013, also contains provisions for schemes of financial reconstruction, approved by the National Company Law Tribunals these are voluntary schemes of arrangement and compromise with the creditors and/or shareholders that are typically outside the insolvency regime (though these schemes can also be made applicable during liquidation).