Syllabus: GS3/ Economy
Context
- Videocon’s former promoter Venugopal Dhoot has been declared bankrupt by the National Company Law Tribunal (NCLT) on personal guarantees for loans of ₹12,668 crore taken by Videocon firms.
About
- Insolvency is the inability of a person or company to pay debts as they come due.
- Bankruptcy is the formal legal process through which an insolvent individual is declared bankrupt, allowing their assets to be distributed among creditors to repay outstanding debts.
- The Insolvency and Bankruptcy Code (IBC), 2016, provides a time-bound framework for resolving insolvency and maximising asset value.
- The provisions relating to insolvency resolution and bankruptcy of personal guarantors to corporate debtors were brought into force in December 2019.
Categories of Insolvency under the IBC
- Corporate Insolvency: Applicable to companies and Limited Liability Partnerships (LLPs).
- When a company defaults on its debt, financial or operational creditors can approach the NCLT to initiate the Corporate Insolvency Resolution Process (CIRP).
- The objective is to resolve the company’s financial distress through a resolution plan rather than immediately liquidating it.
- If resolution fails, the company may undergo liquidation, with its assets sold to repay creditors.
- Personal Insolvency: Personal insolvency deals with individuals and partnership firms unable to repay their debts. Under the IBC, it broadly covers two categories:
- Personal Guarantors to Corporate Debtors: Individuals (usually promoters or directors) who personally guarantee loans taken by a company. If the company defaults, lenders can initiate insolvency proceedings against the guarantor.
- NCLT handles insolvency proceedings of personal guarantors to corporate debtors.
- Other Individuals and Partnership Firms: Individuals unable to repay personal borrowings and partnership firms unable to meet their financial obligations.
- Debt Recovery Tribunal (DRT) handles proceedings relating to other individuals and partnership firms.
- Personal Guarantors to Corporate Debtors: Individuals (usually promoters or directors) who personally guarantee loans taken by a company. If the company defaults, lenders can initiate insolvency proceedings against the guarantor.
Process of Personal Insolvency of a Guarantor
- Initiation: Creditors can initiate proceedings under Section 95, while the guarantor can apply voluntarily under Section 94.
- The NCLT appoints a Resolution Professional to examine the application, verify the debt and submit a report.
- Repayment Plan: The guarantor may submit a repayment plan outlining how the outstanding debt will be repaid.
- Creditors consider the plan and may approve or reject it.
- If the repayment plan fails or is rejected, bankruptcy proceedings may be initiated under Section 121 of the IBC.
- A bankruptcy trustee administers and realises the guarantor’s assets to repay creditors according to the prescribed priority.
Insolvency and Bankruptcy Code (IBC) 2016
- IBC was introduced in 2016 to address rising Non Performing Assets and ineffective debt recovery mechanisms in India.
- Objectives of the IBC resolution are;
- Business Revival: To save businesses through restructuring, changes in ownership, or mergers,
- Maximization of Asset Value: To preserve and maximize the value of the debtor’s assets,
- Promoting Entrepreneurship and Credit: To encourage entrepreneurship, improve credit availability, and balance the interests of stakeholders, including creditors and debtors.
- Currently a maximum 330 days is allowed to find a resolution for a company admitted into the insolvency resolution process.
- Otherwise, the company goes into liquidation.
Institutional Framework
- Insolvency and Bankruptcy Board of India (IBBI): The apex regulatory body established to oversee the functioning of insolvency professionals, insolvency professional agencies, and information utilities.
- National Company Law Tribunal (NCLT): The adjudicating authority that takes up insolvency applications, imposes moratoriums and sanctions resolution plans for firms and LLPs.
- Insolvency Professionals (IPs): IPs are the people who deal with the affairs of troubled entities, protect assets and convene meetings of creditors.
- Committee of Creditors (CoC): The top decision-making body that includes the distressed entity’s financial creditors. They examine, vote on and adopt the resolution plan.
Source: IE
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