What is the Insolvency and Bankruptcy Code?

The Government of India brought a new Insolvency and Bankruptcy Code in 2016 (IBC) to help the manufacturers and service providers with bad debt issues. Before the introduction of this Code, the manufacturers who have supplied goods or creditors who have given the loan to the defaulter company would suffer due to non-recovery.

Benefits of the Code

The Insolvency & Bankruptcy act, 2016 has been revamped with new provisions to provide relief to small manufacturers, creditors, and small businesses that have given loans or provided services. This is a great diversion from the previous provisions in the law where only the Debtor could initiate insolvency but with the new Code, even a Creditor whose debt exceeds One Lakh can initiate the insolvency process. Here are the main features of the code

  • With this code now even the creditor can initiate the insolvency process to recover their debt.
  • The rights given to the creditors in the new code save them from the trouble of approaching Court for recovery of debt
  • Because of this, the whole process of resolving debt issues has become efficient and the casers are now dispersed in a specific period. 
  • Referring to the case of B.K Educational Services vs. Parag Gupta and Associates, 2017, the Limitation Period for filing the claim in NCLT is set at 3 Years. 

How this Code Works?

  • A time period of 10 days is given to the Debtors to settle/pay the disputed amount.
  •  When the debtors are unable to pay the disputed amount to the Creditors through Traders, Employees, or Manufacturers, then the Insolvency Petition against the aforementioned persons are filed in the respective NCLT under Section 9 of the IBC, 2016. 
  • No demand notice is served to the opposite party before filing the petition.
  • If the default exceeds one lakh rupees then the Creditor may initiate the insolvency process.

The Code specifies two stages for this-

1. Insolvency Resolution– The financial/operational creditors assess if there may be chances of rescue & resurrection of the debtor’s business.

2. Liquidation– If the insolvency resolution does not work, then the financial creditors decide to wind up the business & distribute the assets of the company among themselves for recovery of the credit.

In case of liquidation, the Code mentions a priority list and based on it the proceeds may be distributed. To the defaulters, only this can be said,

“In the long run, we shall have to pay our debts at a time that may be very inconvenient for our survival.”

-Norbert Wiener

Through two easy steps, you can recover your money within a limited period and without any hassles.

Author: Adv Sharlee Garg
Muds Management Private Limited
Mobile number: 91-9599653306
Email id: [email protected]

*The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article*