Insolvency Code and Bankruptcy, 2016
By Team Legistify / 2016-05-18
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016.

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As a silver lining in the dark sky of debt evasion, comes the Bankruptcy and Insolvency Code, 2016, which has focused on the basics i.e. debt and equity ratio which defines the total value of the firm, the ratio reveals the relative proportions of debt and equity financing that a business employs. It is closely monitored by lenders and creditors since it can provide an early warning that an organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a funding issue, whatever the reason for debt usage, the outcome can be catastrophic if corporate cash flows are not sufficient to make ongoing debt payments. This is a concern to lenders, whose loans may not be paid back.

Suppliers are concerned about the ratio for the same reason. A lender can protect its interests by imposing collateral requirements or restrictive covenants; suppliers usually offer credit with less restrictive terms, and so can suffer more if a company is unable to meet its payment obligations to them. The present enactment has thus mainly focussed on the credit defaulters on which the Hon’ble Supreme Court also expressed its concern by demanding the Reserve Bank of India (RBI) for a list of companies that are in default of bank loans of more than Rs 500 crores, or whose loans have been restructured under corporate debt restructuring schemes.

The Need for The Insolvency Code

The prior laws such as the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 stands repealed. In addition to it, the Code makes amendments in eleven laws, more importantly, Companies Act 2013. There are various cravings why this law is required,

  • Mainly to wind up companies faster if the resolution isn't feasible,
  • Indian banks have piled up huge bad debts with a total Rs 4 lakh crore gross NPAs and an equal amount of restructured loans. Majority of the stressed assets, which constitute 11 percent of the total loans given by banks, are from loans given to large corporations.
  • Impose debt deadlines on failed firms
  • The pendency and disposal rate of DRTs(Debt Recovery Tribunals)
  • To boost up the start-up businesses by increasing the ease of doing business
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016.

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