Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) is a noble law since it attempts to address the stress of a company when it is unable to repay the debt in time. This implies that it has assets less than the claims of creditors. In this regard, IBC provides for the organisation to rescue such a company if its business is viable or close it if found unviable through a market process. In case of rescue, the company is reorganised as a going concern and the claims of creditors are restructured, which may be paid to them immediately and/or over time.

Similarly, in case of closure, the assets of the company are sold, and the proceeds are distributed to creditors immediately, as per the priority rule.    The IBC entrusts the responsibility of reorganisation of a stressed company to financial creditors (FCs) to rescue a company having a going concern surplus.

The Code is based on its six foundational objectives, which include: the resolution of stress in a time-bound manner, maximisation of the value of assets, promoting entrepreneurship, enhancing the availability of credit, balancing the interests of all stakeholders and establishing an insolvency ecosystem. Recently, IBC completed a period of 5 years which calls for assessing performance in its initial phase to identify issues, if any, and offer suggestions.

Origin of IBC

Before the introduction of IBC in India in 2016, Public Sector Banks (PSBs) were facing a crisis due to poor asset quality, which was posing a challenge to their profitability and survival. As of March end, 2016, gross Non Performing Assets (GNPAs) in relation to gross assets of PSBs were as high as 11 percent (1).

These banks experienced a multi-fold rise in NPAs, despite initiating several regulatory recovery measures such as under the Sick Industrial Companies Act (SICA), Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.