The Code applies to companies, partnerships and individuals. The main aim of the code is to resolve insolvency related process within a time frame. It provides for a time-bound process. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period. It means a debtor cannot prolong a payment default status to more than 6 months, the creditor may start IBC proceedings.
Resolutions doesn’t mean selling the assets and killing the debtors business. It is aimed at resolving the issue and make maximum endeavour to make the company running again. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency. Under IBC debtor and creditor both can start 'recovery' proceedings against each other.
The main objective of this Code is:-
Consolidate and amend all existing insolvency laws in India
To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
To protect the interest of creditors including stakeholders in a company.
To revive the company in a time-bound manner.
To promote entrepreneurship.
To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
To set up an Insolvency and Bankruptcy Board of India.
Maximization of the value of assets of corporate persons.
Advantage to lenders for resorting to IBC
Creditors in control as most decision makers with the lenders.
Time bound and quick solution for stressed and NPA accounts.
Change of management possible that may not be always the case.
Brings financial lenders to a platform – enabling quick decision making and arriving at consensus quickly. This is one of the main provision under IBC process, as in the most cases the lenders and borrowers become enemies when default occurs. This will reduce the chance for amicable settlement.
Prepare and examine resolution plan by professionals appointed by creditors ensuring fearless decision making. The process is not mediated or done by ordinary people but by experienced professionals.
Final approval by NCLT (a legal entity) which ensures accountability and vigilance.
Chance to viable and sustainable entities for time bound revival. In case of unviable accounts, faster, transparent and smooth liquidation process. So this may give rebirth opportunity to the entities and can avoid closure.
Clear and fair distribution of funds in case of liquidation. Government / Statutory dues do not get priority. This is another important provision, where all lenders and creditors including government stand in same food and none get priority.
Protection of assets of secured borrowers with maximization of realization.
Positive support from government for realization and resolution of NPAs.
Advantage to Borrowers to approach NCLT
Reduced costs of resolving process - There is no need to pay Court Fee in NCLT (which is 5% or more in courts)
In Courts generally it takes 3-4 years but not in NCLT because in NCLT as the companies are not approaching for recovery of money.
In most cases the legal fights results in compromises, in IBC process there are less chances for settlement in less amount.
Provides for time bound resolution forcing lenders to take a decisive action. Even the lenders can not prolong the action endlessly.
A Resolution plan approved by NCLT has legal sanction and is binding on all stakeholders. This is a decision by Tribunal and will be implemented.
Transparent process under judicial supervision which is expected to improve decision making.
Pre-empt all creditors, legal cases and other recovery actions during moratorium period. So no more new cases till the process completes.
Not only loans, but all types of debt, including operational creditors and government dues can be restructured/realigned/reduced under the Code. This will help the entity to rewrite its future. An opportunity to re assess everything.
The Borrower has the option of applying himself under the code in which case borrowers’ proposed Insolvency Professional would be appointed as Insolvency Resolution Professional.
Company to work under the control of IRP/RP who are supposed to preserve the economic value of the company as a going concern entity.
It can be used as a measure of last resort when other options like Corporate Debt Restructuring. - CDR, Strategic Debt Restructuring - SDR, 'Scheme for Sustainable Structuring of Stressed Assets' (S4A) have been exhausted.
As this will improve the investor confidence, attracting investor (financial / strategic/ JV Partner) would be easier particularly in case of unlisted companies.