What is Insolvency and Bankruptcy Code (IBC) 2016?

 

The Insolvency and Bankruptcy Code, 2016 (IBC) is an Indian law that creates a consolidated framework that governs insolvency and bankruptcy proceedings for companies, partnership firms, and individuals.

Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies, and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start-ups (other than partnership firms), small companies, and other companies (with assets less than Rs. 1 crore), the resolution process would be completed within 90 days of initiation of the request which may be extended by 45 days.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 has increased the mandatory upper Time limit of 330 days including time spent in the legal process to complete the resolution process.

Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.

Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:

(i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and

(ii) the Debt Recovery Tribunal for individuals and partnerships.

Insolvency and Bankruptcy Code (IBC) 2016 was implemented through an act of Parliament. It got Presidential assent in May 2016.

Centre introduced the IBC in 2016 to resolve claims involving insolvent companies.

The bankruptcy code is a one-stop solution for resolving insolvencies, which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. The IBC has 255 sections and 11 Schedules.

The insolvency and Bankruptcy Code was intended to tackle the bad loan problems that were affecting the banking system.

The Insolvency and Bankruptcy Code process has changed the debtor-creditor relationship. A number of major cases have been resolved in two years, while some others are in the advanced stages of resolution.

It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must take decisions to resolve insolvency. Under IBC, the debtor, and the creditor both can start 'recovery' proceedings against each other.

Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections to the extension. For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn't happen the company goes for liquidation.

The insolvency and Bankruptcy Code was intended to tackle the bad loan problems that were affecting the banking system.

The Insolvency and Bankruptcy Code process has changed the debtor-creditor relationship. A number of major cases have been resolved in two years, while some others are in the advanced stages of resolution.

It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must take decisions to resolve insolvency. Under IBC, the debtor, and the creditor both can start 'recovery' proceedings against each other.

Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections to the extension. For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. If debt resolution doesn't happen the company goes for liquidation.

 

How Turnaround and Transformation Consulting Can Help?

A question we get often is What Is Turnaround and Transformation Consulting?  Across the globe, nearly all industries and regions have been impacted by COVID-19, and many businesses need turnaround or transformation services.  

The disruption seen in businesses comes in many different forms, and sometimes can be seen across all aspects of a company. Using turnaround and transformation as a tool to help companies of all sizes can be the pivotal point for the future of a business.

However, it is vital to have experienced consultants implement such measures, as turnaround and transformation will lead to major changes, and successful changes require expertise and thoughtful strategy.  These changes can come in the form of overall company culture and mission, as well as short-term improvements to a business’s bottom line.  

Typically, these changes do require precise timing, and that is why many turnaround and transformation consulting attempts do not obtain the desired outcome. Resources and research on how to complete successful turnaround or transformations is minimal and are some of the reasons why it is so difficult to implement successfully.

 

What is the Difference between Turnaround and Transformation?

Turnaround typically entails an overhaul of a company, which can include; employee incentive plan review, pre-bankruptcy planning, working with creditors and negotiating, disposing of non-core assets, redesigning the business plan, and addressing liquidity issues. The goals of a turnaround usually include structural reductions, feasible short-term goals, and preparing a company for transformation.  When performing a turnaround, consultants need to be prepared to have the necessary tough conversations with leadership.  Business leaders need to be honest and transparent to help consultants quickly identify the most vulnerable areas of the business. The consultants play a vital role in critical thinking and imploring execution discipline, and a business must support the consulting team with whatever resources and information they need.

Transformations are major changes in the operating model, people, processes, and the overall organization. These consulting solutions focus on weaknesses or problems a company has and aim to achieve a drastic improvement.  Transformation usually involves a “selling” of a company vision, extensive changes to personnel, transitions of revenue models, and cash flow management.  In such scenarios, the most important aspect is to have a clear understanding of the goals and the company vision.  Transformation usually includes exploration and diagnostic work. When compared to turnaround consulting, there is typically a demand for more detailed direction when it comes to systems, structure, and strategy.

 

How R.K Associates Can Help:

To understand what your company needs, we start by interviewing leaders and asking a series of questions to identify the necessary changes that will create value.  If a company is in a dire situation, whether it is operations, capital structure, or strategy, a turnaround approach may be needed.  If on the other hand, a business is not on the brink of collapse but is looking to achieve a higher level of success, our transformational approach may be the right method to implement.  This would include preparing a bold vision for how your business must change based on our objective analysis of its core competencies and major hurdles.  

Importantly, we strive to provide a “realistic” timeline of what can be achieved in the near term versus long-term implementations.  Such a plan includes managing change from start to finish and aligning leadership goals with what is necessary to work through the disruptions.  Creating a transformation or turnaround plan is just the beginning, as the execution of such plans will require the right consulting approach.  The approach we take also depends on the type of organization your business has – whether it is centrally controlled by a few managers or a more distributed model.

While turnaround and transformation can come in many different forms, we view such consulting as a cross-functional effort to change the current trajectory of a company, whether it is operational, strategic, or financial in nature.  If you feel your company is not performing at its peak, we are here to guide you with a team effort that will culminate in improved and sustained performance.  Whether your company needs a complete overhaul, or simply additional guidance on some needed changes, we will be at your side until the goal is reached.