INSOLVENCY AND BANKRUPTCY LAWS UNIT V

The insolvency and bankruptcy framework in India has significantly evolved in recent years, aiming to create a more efficient approach to financial distress. With the introduction of the Insolvency and Bankruptcy Code (IBC), various authorities have taken on essential roles in the adjudication processes for both individuals and partnership firms. This post dives into the adjudicating authorities, their powers, the functions of the Insolvency and Bankruptcy Board of India (IBBI), the role of insolvency professionals, and the mechanisms for inspections and investigations.

INSOLVENCY AND BANKRUPTCY LAWS UNIT V

Authorities under the Code

• Adjudicating Authorities for Individual and Partnership Firms

• Powers of Civil Court and Appeals

• Insolvency and Bankruptcy Board of India – Constitution of the Board, Powers and

Functions

• Insolvency Professionals

• Inspection and Investigations

Adjudicating Authorities for Individual and Partnership Firms

1. Adjudicating Authorities for Individuals and Partnership Firms

• Debt Recovery Tribunal (DRT):

  • Jurisdiction over insolvency resolution and bankruptcy of individuals and partnership firms.

  • Appeals from DRT decisions lie to Debt Recovery Appellate Tribunal (DRAT).

• Relevant Sections:

  • Section 179 – Adjudicating Authority for individuals and firms.

  • Section 181 – Appeal to DRAT.

The IBC designates specific adjudicating authorities to oversee insolvency proceedings involving individuals and partnerships. The National Company Law Tribunal (NCLT) is the primary body for corporate insolvencies under the code. In contrast, the Debt Recovery Tribunals (DRTs) handle cases involving individuals and partnership firms.

Both NCLT and DRT are crucial in adjudicating petitions filed by creditors or debtors declaring insolvency. These authorities ensure that the law is applied consistently and disputes are resolved efficiently. Their procedures are designed to be transparent and timely, reducing the average time from application to resolution.

For example, a recent report highlighted that cases handled by the NCLT typically take around 270 days to resolve, significantly reducing the past averages of multiple years. This reflects the system's efficiency and commitment to timely justice.

The two authorities can initiate proceedings based on requests from both creditors and debtors. Once they accept jurisdiction, they assess the claims' authenticity and determine how assets will be distributed. The NCLT has the authority to appoint insolvency professionals to manage corporate insolvency processes, and similarly, DRT engages professionals for individual and partnership cases.

Powers of Civil Court and Appeals

2. Powers of Civil Court and Appeals

• Bar on Jurisdiction of Civil Courts:

  • Section 180 – Civil courts have no jurisdiction in matters which the DRT or DRAT is empowered to determine under the Code.

• Appeals:

  • DRT ➝ DRAT ➝ High Court (on question of law).

  • For companies, NCLT ➝ NCLAT ➝ Supreme Court (on question of law).

Adjudicating authorities possess powers similar to those of civil courts, enhancing the efficacy of the insolvency process. This includes the ability to summon individuals, enforce the attendance of witnesses, and compel document production essential for proceedings.

Moreover, these authorities can issue orders for debt collection and adjustment, streamlining the return of assets to creditors. Imposing penalties for non-compliance further strengthens the insolvency resolution framework.

When any party is dissatisfied with a ruling, the system allows for appeals to specific higher authorities. Appeals against DRT decisions can be made to the Debt Recovery Appellate Tribunal (DRAT), while appeals from NCLT decisions go to the National Company Law Appellate Tribunal (NCLAT). In certain cases, these appeals can escalate to the Supreme Court, ensuring there is a pathway for rectifying legal errors or perceived injustices.

Overview of the Insolvency and Bankruptcy Board of India

3. Insolvency and Bankruptcy Board of India (IBBI)

• Constitution of the Board:

  • Established under Section 188 of the Code.

  • Comprises a Chairperson and members from Finance Ministry, Law Ministry, RBI, and others.

• Powers and Functions (Section 196):

  • Registers and regulates Insolvency Professionals (IPs) and IP Agencies (IPAs).

  • Lays down regulations and standards for insolvency processes.

  • Conducts inspections and investigations.

  • Collects and maintains records/data.

  • Monitors performance of IPs and IPAs.

At the center of India's insolvency framework is the Insolvency and Bankruptcy Board of India (IBBI), established in 2016 as a regulatory authority overseeing insolvency proceedings. The IBBI ensures that these processes function smoothly and efficiently while addressing financial distress.

The board formulates regulations governing insolvency professionals, agencies, and resolution processes. For instance, in the 2022-2023 financial year, the IBBI registered over 1,400 insolvency professionals, highlighting its role in maintaining a skilled workforce in this field.

One of the core functions of the IBBI is to register and regulate insolvency professionals and agencies. These entities provide expertise and guidance during insolvency resolution, ensuring the integrity of the system.

Additionally, the IBBI conducts inspections to ensure compliance with established regulations and takes corrective actions when discrepancies arise. This proactive approach is crucial for instilling trust among stakeholders in the insolvency ecosystem.

Role of Insolvency Professionals

4. Insolvency Professionals (IPs)

• Role:

  • Act as Resolution Professionals (RPs), Liquidators, or Bankruptcy Trustees.

  • Manage the affairs of the debtor during insolvency resolution or liquidation.

• Regulation:

  • Registered with IBBI through Insolvency Professional Agencies (IPAs).

  • Must follow Code of Conduct and IBBI regulations.

Insolvency professionals are integral to the insolvency resolution process. Registered by the IBBI, they manage proceedings on behalf of debtors or creditors. Their responsibilities include assessing the debtor's financial situation, managing assets, and negotiating between involved parties.

These professionals act as intermediaries, facilitating communication and ensuring the process adheres to IBC regulations. They are critical to ensuring that resolving insolvency is efficient and compliant with legal frameworks.

For example, studies have shown that organizations working with experienced insolvency professionals report a 30% increase in successful resolutions compared to those without.

Insolvency professionals must maintain a strict code of conduct that champions integrity, transparency, and accountability. The guidelines provided by the IBBI ensure these professionals prioritize stakeholder interests without compromising their responsibilities.

Mechanisms for Inspection and Investigation

5. Inspection and Investigations

• Conducted by IBBI to ensure compliance:

  • Section 218–220 empower IBBI to conduct inspections or investigations against IPs, IPAs, or Information Utilities.

  • Disciplinary proceedings can be initiated for misconduct or violation of the Code.

  • May suspend or cancel registration of an IP or IPA.

The IBC provides solid mechanisms for inspections and investigations to ensure compliance. As part of its oversight functions, the IBBI can initiate inspections of insolvency professionals and agencies to assess adherence to regulations.

Inspections might be triggered by stakeholder complaints, reported irregularities, or routine audits. This capability is vital for holding professionals accountable and maintaining the integrity of the insolvency system.

The IBBI also conducts investigations when significant misconduct is suspected. These investigations are crucial for uncovering mismanagement or failures that could harm stakeholders involved in the insolvency process.

The outcomes of these inspections and investigations can lead to penalties against non-compliant professionals or firms, revocation of licenses, or even criminal proceedings in severe cases. Such strict enforcement bolsters confidence among stakeholders, reassuring them that there are checks and balances to protect their interests.

summarized table of the authorities and their functions

Authority/Entity	Relevant Sections	Jurisdiction/Function
Adjudicating Authority (Individuals & Firms)	Sec. 179	Debt Recovery Tribunal (DRT) handles cases of insolvency and bankruptcy of individuals and firms.
Appellate Authority	Sec. 181	Appeal from DRT lies to DRAT (Debt Recovery Appellate Tribunal).
Civil Court Jurisdiction Barred	Sec. 180	Civil courts cannot entertain matters under the jurisdiction of DRT/DRAT.
Insolvency and Bankruptcy Board of India (IBBI)	Sec. 188 (Constitution), Sec. 196 (Functions)	Regulates IPs, IPAs, IUs; sets standards; monitors performance; conducts investigations.
Insolvency Professionals (IPs)	Regulated by IBBI	Act as Resolution Professionals, Liquidators, Bankruptcy Trustees; manage insolvency processes.
Insolvency Professional Agencies (IPAs)	Sec. 199–201	Register and regulate IPs; ensure compliance with code of conduct.
Inspection & Investigation	Sec. 218–220	IBBI can inspect IPs/IPAs/IUs; initiate disciplinary action for misconduct or violations.

Final Thoughts

The insolvency and bankruptcy framework in India, influenced by the IBC, provides a structured system for managing financial distress while ensuring the integrity of financial markets. With various adjudicating authorities, civil court-like powers, oversight from the IBBI, and dedicated insolvency professionals, a robust approach to insolvency is in place.

Grasping these roles and powers is essential for anyone involved in insolvency processes. This knowledge helps stakeholders navigate the complexities of the landscape with confidence. As the framework continues to evolve, the commitment to fair and efficient resolutions remains central, signaling a forward-thinking shift in how financial distress is managed in India.

The combination of authorities and their respective roles exemplifies a dedication to not only resolving insolvency but also rehabilitating businesses, creating a supportive environment for economic renewal.