The Four Pillars of the Insolvency and Bankruptcy Code, 2016 (IBC), is a legislative framework for corporate debtors’ insolvency, bankruptcy, or liquidation. This framework consists of four pillars that have important roles during the corporate insolvency resolution process (CIRP). In this blog, we will delve into the four pillars of this institutional infrastructure and understand their significance in the resolution process.
The Four Pillars of IBC
The Four Pillars of the Insolvency and Bankruptcy Code, the Adjudicating Authority, insolvency professionals, and information utilities:
Insolvency and Bankruptcy Board of India:
The Insolvency and Bankruptcy Board of India (IBBI) regulates and supervises proceedings under the IBC. It is a key pillar as it has the responsibility for implementing the IBC. The IBBI plays an important role in ensuring the CIRP is conducted in a timely manner by enforcing rules for the resolution process, regulating insolvency professionals, monitoring the activities of information utilities (IUs) and registered valuers, etc.
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Adjudicating Authorities:
Under the IBC the Adjudicating Authorities are the National Company Law Tribunal (NCLT) for corporate insolvency cases and the Debt Recovery Tribunal (DRT) for individual insolvency cases. These Authorities have the primary function of determining insolvency matters, which include reviewing applications for CIRP, appointing insolvency professionals, approving resolution plans, and monitoring the insolvency, bankruptcy, or liquidation process.
Insolvency Professionals:
Insolvency professionals are a class of regulated professionals who are licensed by the IBBI and Insolvency Professional Agencies (IPAs). IPs have the role of managing the insolvency process, protecting the assets of the corporate debtor, and balancing the interests of all stakeholders. Hence, they act as intermediaries managing the resolution and liquidation processes facilitating transparency, preparing Information Memorandums, and managing creditor meetings.
Information Utilities:
IUs act a central repository for accurate and comprehensive financial information about the corporate debtor. This ensures that the insolvency process is efficient and transparent by providing readily accessible data to creditors and insolvency professionals. However, it is an underutilised pillar because of the lack of awareness and limiting filings.
Information Utilities: The Untapped Potential
An IU is an entity registered under section 210 of IBC, providing accurate and authenticated. However, the full potential of IUs is often considered ‘untapped’ as not all creditors and debtors consistently utilise the IUs system, which leads to incomplete data and delays the resolution process. As per the IBC provisions, it must have accurate and up-to-date information, however maintaining such information with IUs requires active participation and commitment from all parties involved. Some stakeholders may not be fully aware of the benefits of using IUs and how to effectively utilise them hinders the adoption of IUs.
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Advantages of IUs:
IUs provide a centralised platform for accessing and verifying crucial information about the corporate debtor. Hence, it makes the resolution process is more efficient and transparent. Having updated and accurate IUs throughout the insolvency process, the Adjudicating Authority and insolvency professionals will have quick access to accurate financial data, minimising the delays in cases. Having easy access to verified financial data through IUs can instill greater confidence in creditors, encouraging them to participate actively in the process. Providing a comprehensive view of the corporate debtor’s financial position, IUs can help identify potential fraudulent activities and deter corporate debtors from engaging in deceptive practices.
Challenges in IU Adoption:
Despite being a pillar of IBC, IUs have many challenges in being adopted properly. This is a result of issues such as data accuracy, lack of trust among stakeholders, difficulties in being integrated into the existing system, there may be resistance to sharing certain financial information, and inadequate awareness about its functions. Such challenges lead to delays and hindrances in the insolvency or bankruptcy process.
Case Study: IU Effectiveness in Insolvency Resolution –
An example of how IUs have expedited claims validation in insolvency proceedings, where a centralised platform like National E-Governance Services Limited (NeSL) in India allows creditors to submit their debt claims against a company undergoing insolvency. Then such are verified against the company’s financial records stored with the IU, providing immediate access to accurate information for the insolvency professional to quickly access and validate claims. Hence there is a significant reduction in the time for claim verification, compared to the traditional process.
Importance of a Synergistic Approach:
IUs collect and store all relevant financial data about the corporate debtor, loans, defaults, security interests, etc. Therefore, creditors and insolvency professionals access such information readily on one platform, facilitating timely assessment of the financial situation of the corporate debtor and enabling informed decision-making during the insolvency process. The Adjudicating Authorities, the NCLT, and DRTs, s must rely on accurate IU data for quicker resolution decisions. Insolvency professionals benefit from IUs, as the financial information helps them prepare resolution plans.
Legal Framework Supporting IUs:
Sections 209-216 outline the establishment and operation of IUs under the IBC. They are entities registered with the IBBI under section 210 of the IBC, as per the eligibility criteria, and act as data repositories of financial information that receive, authenticate, maintain, and deliver financial information about a corporate debtor. IUs have the main role of accepting financial information from required parties in electronic form, authenticating financial information from all parties, storing financial information in a universally accessible format, providing access to financial information to authorised parties, publishing statistical information, etc.
Implications for Insolvency Professionals and Aspirants
Insolvency Professionals must understand IU operations to improve case outcomes. They need to enhance their skills in leveraging IU data for resolution processes but may face implications, such as:
- Regulatory Compliance: The transparent nature of IUs holds all stakeholders accountable, including insolvency professionals, as their actions and decisions may be scrutinised on the information under IUs. Insolvency professionals have an important role in ensuring compliance with mandatory filings under the IBC provisions, regulations, and rules. Aspirants should familiarise themselves with the concept of IUs, understand their functionalities, and gain practical experience in accessing and using such data.
- Opportunities for Growth: The growing need for IUs within the resolution process creates new opportunities for insolvency professionals and aspirants. This is because IUs provide centralised debt information and accurate data verification. Hence, insolvency professionals and aspirants should develop a specialised skillset to analyse debt data, identify potential issues, and provide the interested parties with optimal strategies during insolvency proceedings.
Conclusion
The four pillars of the IBC framework, the IBBI, the Adjudicating Authorities, insolvency professionals, and information utilities, are indispensable for successful insolvency resolutions. However, there is a need for stronger enforcement mechanisms to mandate data sharing with IUs. Insolvency Professional Agencies should promote IU usage through training and guidelines.
FAQs
What are the four pillars of IBC?
The four pillars of IBC are the Insolvency and Bankruptcy Board of India, the Adjudicating Authority, insolvency professionals, and information utilities.
Why are information utilities important?
Information utilities are important because they provide accurate and updated financial information about the corporate debtor.
How can IUs be better utilized?
IUs can be better utilised by ensuring that the information provided is authentic, done in a time-bound process, and adhering to the fairness and transparency under IBC to ensure that the resolution process is streamlined.