Insolvency and Bankruptcy Code (IBC): Meaning, Importance, and Practical Insights

Definition of Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) is a comprehensive law enacted in 2016 by the Government of India to consolidate and amend the laws relating to insolvency, reorganization, and bankruptcy of individuals, partnerships, and companies in a time-bound manner.

Meaning of Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) provides a structured legal framework to resolve cases of insolvency and bankruptcy. Insolvency occurs when individuals or companies cannot meet their financial obligations, while bankruptcy refers to the legal declaration of insolvency. Before the IBC, India had multiple fragmented laws to handle insolvency, which led to delays, uncertainty, and huge losses to creditors.

IBC streamlines this process by ensuring faster resolution, protecting creditors’ rights, and improving the overall ease of doing business in India. It applies to companies, Limited Liability Partnerships (LLPs), partnership firms, and individuals.

Key Sub-Sections of IBC

To make the concept clearer, let’s break it down:

Insolvency

A situation where a debtor is unable to meet debt obligations as they become due.

Bankruptcy

A legal status declared by a court or tribunal when insolvency is beyond repair.

Resolution Process

The Corporate Insolvency Resolution Process (CIRP) is the structured timeline under IBC that ensures debt resolution within 180 to 330 days.

Adjudicating Authorities

National Company Law Tribunal (NCLT): For companies and LLPs.
Debt Recovery Tribunal (DRT): For individuals and partnership firms.

Insolvency Professionals

Licensed individuals appointed to manage the debtor’s assets, run the company during resolution, and protect creditor interests.

Formula / Calculation under IBC

While IBC doesn’t have a strict mathematical formula, the repayment priority waterfall under Section 53 of IBC can be considered as its “calculation framework”:

Repayment Priority = Resolution/ Liquidation Value – Costs – Secured Creditors – Workmen Dues – Employees’ Dues – Unsecured Creditors – Government Dues – Shareholders.

Example Calculation

Suppose a company under IBC has total liquidation proceeds of ₹100 crore. Distribution will follow the waterfall mechanism:

Insolvency Resolution Costs = ₹5 crore
Secured Creditors = ₹40 crore
Workmen dues = ₹10 crore
Employees’ dues = ₹5 crore
Unsecured creditors = ₹20 crore
Government dues = ₹15 crore
Shareholders = Remaining balance

Distribution:

Resolution costs = ₹5 crore
Secured creditors = ₹40 crore
Workmen dues = ₹10 crore
Employees’ dues = ₹5 crore
Unsecured creditors = ₹20 crore
Government dues = ₹15 crore
Shareholders = ₹5 crore (residual)

Journal Entry Example in Accounting Context

When a company enters insolvency proceedings, journal entries may include:

Example:
A company owes ₹50,00,000 to creditors but can only pay ₹30,00,000 during IBC settlement.


Creditors A/c          Dr.   50,00,000  
   To Bank A/c                  30,00,000  
   To Capital Reserve A/c       20,00,000

Here, the unpaid portion is transferred to Capital Reserve due to waiver/write-off under IBC settlement.

Detailed Illustration

Suppose Company X owes ₹10 crore to banks. Under the resolution plan, creditors agree to settle for ₹7 crore.

Bank Loan Liability: ₹10 crore
Settlement Payment: ₹7 crore
Waived Amount: ₹3 crore

Entry:


Bank Loan A/c          Dr.   10,00,00,000  
   To Cash/Bank A/c             7,00,00,000  
   To Capital Reserve A/c        3,00,00,000

Key Features of IBC

Covers corporate, partnership, and individual insolvency.
Time-bound resolution process (180–330 days).
Appointment of Insolvency Professionals.
Moratorium on legal proceedings during CIRP.
Creditor-in-control model, not debtor-in-possession.
Clear repayment waterfall.
Adjudication by NCLT/DRT.

Importance of IBC in Business

Restores creditor confidence.
Enhances India’s ranking in Ease of Doing Business.
Ensures faster debt recovery.
Revives distressed companies instead of direct liquidation.
Protects employee interests and reduces NPAs in banking.

Advantages and Disadvantages

Advantages:

Speedy resolution.
Transparency and fairness in repayment.
Revives businesses and saves jobs.
Reduces burden of bad loans.

Disadvantages:

Heavy reliance on NCLT capacity (delays due to case load).
Complex legal proceedings for small businesses.
Possibility of misuse by operational creditors.

Usage of IBC

For companies unable to repay debts.
For banks to recover NPAs.
For restructuring distressed businesses.
For employees to claim unpaid salaries.

Case Studies under IBC

Jet Airways (2019)

India’s second-largest airline was admitted under IBC due to unpaid debts of over ₹8,000 crore. Resolution involved lenders, foreign investors, and employees.

Essar Steel India Limited (2017)

Debt of over ₹42,000 crore was resolved under IBC. ArcelorMittal took over after lengthy proceedings, showcasing IBC’s strength.

Bhushan Steel (2017)

Acquired by Tata Steel under IBC resolution, saving thousands of jobs.

Practical Example

A small manufacturing firm owing ₹20 crore to banks applies for resolution under IBC. Within 180 days, lenders accept a plan where investors take over operations and repay creditors ₹15 crore. The firm is revived instead of being liquidated.

Common Mistakes or Misunderstandings

Confusing insolvency with bankruptcy.
Believing IBC always leads to liquidation (revival is the first priority).
Assuming government dues have higher priority (secured creditors come first).
Considering it only for large corporates (also applies to individuals & partnerships).

Real-Life Applications and Legal Implications

Resolving Non-Performing Assets (NPAs).
Encouraging foreign investment by ensuring debt recovery.
Protecting employees’ dues legally.
Giving creditors stronger rights.
Reducing lengthy litigation under multiple pre-IBC laws.

FAQs on IBC

What is the main purpose of IBC?
To provide a time-bound resolution of insolvency and bankruptcy cases in India.

Who governs IBC?
The Insolvency and Bankruptcy Board of India (IBBI).

How long does the insolvency resolution take?
180 days, extendable up to 330 days.

Does IBC apply to individuals?
Yes, IBC covers companies, LLPs, partnerships, and individuals.

What is the role of NCLT under IBC?
NCLT is the adjudicating authority for corporate insolvency.

Expert Tip from Learn with Manika

When dealing with insolvency issues, always focus on revival first instead of liquidation. A well-structured resolution plan not only protects creditors but also preserves jobs, builds trust in the financial system, and enhances long-term business sustainability.

Related Terms

Insolvency Resolution Process
Liquidation
Non-Performing Assets (NPAs)
Debt Recovery Tribunal (DRT)
Corporate Debt Restructuring (CDR)
Capital Reserve
Creditor-in-Control