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Insolvency and Bankruptcy code

Insolvency and Bankruptcy code

What Is Insolvency And Bankruptcy?

  • Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
  • The legal status of an entity or a person where the debt owed to the creditors cannot be repaid is known as Bankruptcy.
  • A court order imposes bankruptcy in most of the jurisdictions. It is mostly initiated by the debtor.
  • It is important to note that bankruptcy is not synonymous with insolvency. It is not the only legal status that could be applicable to an insolvent individual or an entity.
  • In countries like the UK, bankruptcy is exclusive to individuals.
  • Liquidation, administration and other such insolvency proceedings are applicable to entities and companies.

About Insolvency and Bankruptcy code 2016

  • The Central government introduced the Insolvency and Bankruptcy Code(IBC) in 2016 to resolve claims involving insolvent companies. This was intended to tackle the bad loan problems that were affecting the banking system. Two years on the IBC has succeeded in a large measure in preventing corporates from defaulting on their loans. The IBC process has changed the debtor-creditor relationship. A number of major cases have been resolved in two years, while some others are in advanced stages of resolution.
  • Insolvency and Bankruptcy Code, 2016 is considered as one of the biggest insolvency reforms in the economic history of India.
  • This was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons.

Background  

  • The era before IBC had various scattered laws relating to insolvency and bankruptcy which caused inadequate and ineffective results with undue delays. For example,
  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act SARFAESI –for security enforcement.
  • The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) for debt recovery by banks and financial institutions.
  • Companies Act for liquidation and winding up of the company.
  • Ineffective implementation, conflict in one of these laws and the time-consuming procedure in the aforementioned laws, made the Bankruptcy Law Reform Committee draft and introduce Insolvency and Bankruptcy Law bill.

Current Insolvency Mechanisms Or Laws

  • Securitisation and Enforcement of Security.
  • Corporate Debt Restructuring or CDR.
  • Sick Industrial Companies Act or SICA.

Objectives of IBC

  • To promote entrepreneurship.
  • To consolidate and amend all existing insolvency laws in India.
  • To set up an Insolvency and Bankruptcy Board of India.
  • To protect the interest of creditors including stakeholders in a company.
  • To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
  • To revive the company in a time-bound manner.
  • To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
  • To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
  • Maximization of the value of assets of corporate persons.

Salient features of the Insolvency and Bankruptcy Code:

  • The Insolvency and Bankruptcy Code 2016 is a comprehensive law and covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
  • The adjudicating authority is National Company Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunal (DRT) for individuals and partnership firms.
  • The insolvency resolution process can be initiated by any of the stakeholders of the firm: firm/ debtors/ creditors/ employees.
  • If the adjudicating authority accepts, an Insolvency resolution professional or IP is appointed.
  • The power of the management and the board of the firm is transferred to the committee of creditors (CoC). They act through the IP.
  • The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
  • If they decide to revive, they have to find someone willing to buy the firm.
  • The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
  • They invite open bids from the interested parties to buy the firm.
  • They choose the party with the best resolution plan, that is acceptable to the majority of the creditors (75 % in CoC), to take over the management of the firm.

Aims  

  • The 2016 Code 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 make decisions to resolve insolvency within a 180-day period.
  • To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period.
  • The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

Issues with IBC 2016

  • Missing the deadline: IBC mandates that an insolvent asset must be resolved in 270 days. Out of the 12 big accounts initially referred to IBC, five cases are pending for more than 600 days due to continuous litigation by some party or the other. Among the most prominent examples of this chequered journey for the IBC is the Essar Steel insolvency. It has been more than 600 days since the Rs 50,000-crore account entered the IBC.   (Insolvency and Bankruptcy code)
  • Lack of benches and judges: India has 14 NCLTs, and two are yet to start functioning. The government had a couple of years back announced to set up 24 bankruptcy courts. The NCLT judge roster shows 27 members have been sharing the workload against the target of appointing 60 judicial and technical members. Delhi and Kolkata are sharing the workloads of Jaipur, Chandigarh, Guwahati and Cuttack benches. Recently the government highlighted that it has been taking steps to increase capacity of National Company Law Tribunal (NCLT) and increased its benches from 10 to 15. Also, 26 new members have been added taking total strength to 52.
  • Haircuts: It is the extent of write off that banks undertake as part of a resolution plan to get the company back on track. So far financial creditors have got 43 per cent of their claims and 188 per cent of the liquidation value. Steps should be taken so that haircuts are reduced.

Insolvency and Bankruptcy Code (Amendment) Bill 2019

  • The Code provides a time-bound process for resolving insolvency in companies and among individuals. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
  • Under the Code, a financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. The NCLT must find the existence of default within 14 days. Thereafter, a Committee of Creditors (CoC) consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution. The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets.
  • The CoC will appoint a resolution professional who will present a resolution plan to the CoC. The CoC must approve a resolution plan, and the resolution process must be completed within 180 days. This may be extended by a period of up to 90 days if the extension is approved by NCLT.
  • If the resolution plan is rejected by the CoC, the debtor will go into liquidation. The Code provides an order of priority for the distribution of assets in case of liquidation of the debtor. This order places financial creditors ahead of operational creditors (e.g., suppliers). In a 2018 Amendment, homebuyers who paid advances to a developer were to be considered as financial creditors. They would be represented by an insolvency professional appointed by NCLT.
  • The Bill addresses three issues. First, it strengthens provisions related to time-limits. Second, it specifies the minimum payouts to operational creditors in any resolution plan. Third, it specifies the manner in which the representative of a group of financial creditors (such as home-buyers) should vote.

Success of IBC so far  

  • Due to the institution of IBC, we have seen that many business entities are paying up front before being declared insolvent. The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
  • 4452 cases were dismissed at the pre-admission stage. Hence, it shows the effectiveness of IBC.
  • Presently, there are 1332 cases before NCLT.  (Insolvency and Bankruptcy code)
  • Realization by creditors around Rs 80,000cr in resolution cases.
  • Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
  • The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
  • 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr

Conclusion

  • The Supreme Court’s ruling in January, is a welcome one that should circumvent efforts by vested interests to try and stymie the revival of debt-laden companies, and will go a long way in enhancing India’s stature as a good place to do business in.
  • IBC as a structural reform has demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders, it is the IBC or the insolvency law which has trumped even the GST.

ALSO READ ; https://www.brainyias.com/examining-the-rise-of-non-performing-assets-in-india/

Indian Economy

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