Insolvency And Bankruptcy Board Of India - Powers, Functions, And Responsibilities

Key Takeaways

• The Insolvency and Bankruptcy Board of India was created to supervise and control the nation's bankruptcy and insolvency resolution procedures.
• The IBBI is responsible for developing and implementing regulations, guidelines, and codes of conduct to ensure the efficiency and integrity of the insolvency resolution process. It also provides a grievance redressal mechanism for stakeholders to address any concerns or complaints related to the insolvency proceedings.
• It faces challenges in capacity building and infrastructure to handle the increasing volume of insolvency cases, as well as ensuring coordination between the regulatory framework and the judicial process.
• The IBBI can contribute to India's economy by balancing its regulatory functions with an efficient insolvency resolution ecosystem.

Introduction

India's economy can be significantly impacted by insolvency and bankruptcy, which can result in lost jobs, a decline in creditworthiness, and a decrease in asset value. Scheduled Commercial Banks (SCBs) were able to recover 45.5% of the amount involved through IBC for the financial year 2019–20, which is the highest recovery rate when compared to recovery under other modes and laws, according to the Economic Survey 2020–21, which quotes RBI data. As a result, the company's creditors, employees, and suppliers may suffer, which could have an adverse effect on the entire economy. According to the Economic Survey 2020–21, according to RBI.

The Insolvency and Bankruptcy Board of India was constituted on October 1st, 2016 as per the Insolvency and Bankruptcy Code, 2016. It was created to supervise and control the nation's bankruptcy and insolvency resolution procedures. A person or corporation may file for bankruptcy if they are unable to pay their debts or other commitments. A petition is filed, either on behalf of the debtor or on behalf of creditors to start the bankruptcy process. All of the debtor's assets have been measured and assessed, and some or all of the debt may be repaid with the help of the assets. 

It is a single regulatory body that writes and upholds rules for procedures including business insolvency settlement, corporate liquidation, personal insolvency resolution, and individual bankruptcy. In addition, it has been appointed as the 'Authority' under the Companies (Registered Valuers and Valuation Rules), 2017 for the regulation and advancement of the appraisal sector in the nation.

Evolution of Laws

Older Laws: Individual bankruptcies and insolvency processes in India were previously governed by a number of laws, including the Sick Industrial Companies (Special Provisions) Act, 1985, the Provincial Insolvency Act, and the Presidency Towns Insolvency Act, all of which were enacted before the Insolvency and Bankruptcy Code, 2016 (IBC). These laws had gaps and included a number of restrictions. In order to formalize and simplify the rules governing insolvency and bankruptcy in India, the Insolvency and Bankruptcy Code, 2016 (IBC) was passed in 2016.

 In its circular dated February 12, 2018, the RBI published a fresh framework for the settlement of stressed assets, which prompted the removal of all earlier processes.

The Supreme Court ruled on April 2, 2019, in the case of Dharani Sugars & Chemicals Ltd. vs. Union of India & Others in Transfer Petition (Civil) No. 1399 of 2018 with several Writ Petitions and Transferred Cases and an SLP], that section 35AA of the Banking Regulation Act, 1949, does not permit the RBI to give instructions to banks regarding stressed assets apart from the authorization by Central government.

In December 2019, the Indian government added a new section to the Indian Business Code (IBC) called Personal Guarantors to Corporate Debtors, which permits creditors to file bankruptcy actions against individuals who have offered guarantees for corporate debts, and Act of 2020 titled "Insolvency and Bankruptcy Code (Second Amendment)" took effect from June 5, 2020.

Individual Insolvency Procedure: The IBC established a formal procedure for resolving insolvency difficulties for individuals. A natural person or partnership entity can begin insolvency proceedings under the IBC by submitting an application to the National Company Law Tribunal (NCLT) - An insolvency expert is chosen by the NCLT to direct the resolution procedure

Responsibilities of IBBI

Section 189 of the IBC provides for the constitution of the IBBI, consisting of a chairperson, three members from the Central Government, one member nominated by the Reserve Bank of India (RBI), and five members nominated by the Central Government, of whom at least three are fulltime members. 

The organization also deals with the restructuring and bankruptcy resolution of partnership businesses, corporate debtors (CDs), and even private persons. A company that has defaulted on its debts is known as a CD. The IBC also offers a voluntary liquidation process as an exit strategy for a business person who has not defaulted.

Under Section 196, IBBI regulates the conduct and functioning of insolvency professionals (IPs) to establish a grievance redressal mechanism and regulates information utilities (IUs) to maintain a repository of financial and credit-related information of borrowers during bankruptcy proceedings, and sets standards for IPs' professional conduct, promotes their continuous education and development. No IU may conduct business under the IBC, according to Section 209 of the IBC, unless it has a certificate of registration from the IBBI. Once granted, the certificate is good for five years from the date of issuance.

The IBC's Section 210 outlines the procedure for registering an IU. The eligibility requirements and procedure for registering an IU with the IBBI are laid out in the IU Regulations released by the IBBI.

Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) pertains to the initiation of the corporate insolvency resolution process (CIRP) by financial creditors. It applies to corporate debtors, which include companies, limited liability partnerships (LLPs), and any other entity classified as a corporate person under the Companies Act, 2013. To trigger the CIRP, the financial creditor must establish that the corporate debtor has committed a default on the financial debt. The financial creditor must file an application before the National Company Law Tribunal (NCLT), which serves as the Adjudicating Authority. The NCLT examines the application and, if satisfied, admits it, as seen in the case of -

1) M. Suresh Kumar Reddy Vs. Canara Bank & Ors. 

The Hyderabad bench of the Adjudicating Authority (AA) admitted M/s Kranthi Edifice Pvt. Ltd (CD) into insolvency (26/06/22) based on an application filed by Canara Bank/FC under section 7 of the Insolvency and Bankruptcy Code. The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal against this admission order. The appellant contended that the circumstances of this case are comparable to those in the Supreme Court's decision in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. and that AA was not required to consider the application under Section 7 of the code.

The Supreme Court made several findings and observations, emphasizing that once the AA is satisfied with the evidence of default, it has limited discretion to refuse admission under section 7. The court dismissed the appeal and clarified that its decision in the Vidarbha Industries case should not be interpreted as contrary to previous judgments on the matter.

(11th May 2023)

Authority of IBBI

Section 196(1) of the IBC provides a clear definition of the IBBI's duties. They operate under the overall control of the central government. They consist of registering IPAs, IPs, and IUs, as well as renewing, withdrawing, suspending, and canceling their registrations; establishing minimum eligibility standards and rules for them; and, if necessary, monitoring and probing them.

The IBBI has equivalent authority as a civil court under the Code of Civil Procedure, 1908, under Section 196(3) of the IBC when a case is being tried. These include the authority to demand access to and production of any person's books of accounts, other registers, and documents at any time or location the IBBI designates; the authority to issue summons and enforce the presence of those it wishes to question under oath; and the authority to issue an order to examine witnesses or records.

According to IBC Section 230, the IBBI may also grant any of its members or officials any authority and responsibility it sees fit. Additionally, the order may outline the requirements for delegation. The IBBI is authorized to create regulations (consistent with the IBC and its rules) under section 240(1) of the IBC in order to carry out the provisions of the IBC. A variety of subjects are listed in Section 240(2) as subject to regulation. Its goal is to uphold transparency and promote stakeholder participation.

The IBBI (Mechanism for Issuing Regulations) Regulations, 2018, enable public input and economic research before approving proposed regulations.

Aggrievances and Redressal

A complaint against an IP, IPA, or IU may be made to the IBBI under Section 217. The IBBI may order an investigating authority to conduct an inspection or investigation (Section 218) if it has reasonable grounds to suspect a breach has occurred. The investigating authority has the right to enter a location, enter a person's property, search it, and seize any relevant documents, records, or information. The IBBI must then receive a thorough report on the inspection or investigation. 

A disciplinary committee may be appointed under Section 220 of the IBBI to review the reports of the investigating authority. If the committee determines that there is sufficient justification, it has the authority to suspend or revoke the registration of an IP, IPA, or IU and/or to impose a fine equal to the greater of three times the loss caused by the violation or three times the amount of unlawful gain made by the violation, whichever is higher. The total fine should not be more than 10 million Indian rupees if the loss or illegal gain is not quantifiable.

Challenges Faced

The Insolvency and Bankruptcy Board of India (IBBI) faces several challenges in carrying out its mandate effectively. The key challenges are:

1. Capacity and Infrastructure: One of the major challenges for the IBBI is building and maintaining the necessary capacity and infrastructure to handle the increasing volume of insolvency cases. This includes having an adequate number of trained insolvency professionals, information utilities, and support staff to efficiently process and manage the resolution process.

2. Legal Interpretation: The interpretation of various provisions of the Insolvency and Bankruptcy Code (IBC) can be complex and subject to different interpretations. The IBBI faces the challenge of providing clear and consistent guidelines to stakeholders, including insolvency professionals, creditors, and debtors, to ensure uniformity in the implementation of the law.

3. Time-bound Resolution: The IBC emphasizes time-bound resolution of insolvency cases to promote efficiency and maximize value for stakeholders. However, achieving timely resolution remains a challenge due to delays in legal proceedings, lengthy court processes, and other factors beyond the control of the IBBI

Conclusion

The Insolvency and Bankruptcy Board of India (IBBI) holds significant power and responsibility in overseeing the insolvency and bankruptcy proceedings in the country. Its power lies in its ability to register and regulate insolvency professionals, insolvency professional agencies, and information utilities. However, the IBBI faces obstacles such as capacity building, legal interpretation, time-bound resolution, judicial coordination, stakeholder awareness, etc. To address these issues, the IBBI must strengthen infrastructure, provide clarity in legal interpretation, expedite processes, enhance coordination, and promote awareness among stakeholders. By striking a balance between its regulatory functions and the need for a robust and efficient insolvency resolution ecosystem, the IBBI can contribute to the growth and stability of India's economy.