Context- According to a notification by the government, an ordinance was promulgated to amend the Insolvency and Bankruptcy Code (IBC) on April 4, 2021.
- The move comes less than two weeks after the suspension of certain IBC provisions ended.
- The suspension- wherein fresh insolvency proceedings were not allowed for a year starting from March 25, 2020, was implemented amid the coronavirus pandemic disrupting economic activities.
- As per the ordinance, it is considered necessary to urgently address the specific requirements of Micro, Small and Medium enterprises (MSMEs) relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures.
- According to the ordinance, it is considered expedient to provide an effective alternative insolvency resolution process for MSMEs to ensure quicker, cost effective and value maximizing outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.
- The amendment is modeled on a debtor in possession approach and vests significant consent rights to the financial creditors, such that the mechanism cannot be misused by errant promoters.
- Further, adopting the plan evaluation process akin to Swiss challenge, greeting competitive tension such that promoters proposed plans with least impairment to rights and claims of creditors.
THE INSOLVENCY AND BANKRUPTCY CODE
- Insolvency- it refers to a situation where individuals or companies are unable to repay their outstanding debts.
- Bankruptcy- it refers to a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having past appropriate orders to resolve it and protect the rights of the creditors. This means it is a legal declaration that reflects one's inability to pay off debts.
- The insolvency and Bankruptcy Code, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. the code aims to streamline and speed up the resolution process of the failed businesses.
Objectives of IBC
- To consolidate and amend all the existing insolvency laws in India.
- Simplification and expedition of the insolvency and bankruptcy proceedings in India
- Protection of the interests of the creditors including the stakeholders in a company
- Promotion of entrepreneurship
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or the individuals
- Setting up off an Insolvency and Bankruptcy Board of India
- Maximization of the value of assets of corporate persons
AIM OF IBC
- The code seeks to provide a time bound process for the purpose of resolution of insolvency.
- It stipulates the resolution procedure of a stressed company to be completed within 180 days or within the extended period of 90 days and mandatorily to be completed within 330 days.
Significance of IBC
- It provides for a stipulated time frame for the resolution of cases of insolvency by stressed companies. Before IBC, resolution processes took an average of 4-6 years, after the enactment of IBC they came down to 317 days.
- It has helped in bringing down the rising NPAs in the economy because of the defaulting companies. Non-performing assets (NPAs) recovered by Scheduled Commercial Banks (SBCBs) through the Insolvency and Bankruptcy Code (IBC) channel increased to about 61 per cent of the total amount recovered through various channels in 2019-20.
- According to a statement by the World Bank, IBC has improved the recovery rate of stressed assets in India to 48% in two years from 26% in the pre-IBC period.
- It provides a mechanism to companies that facilitate an easy exit from the market, if they are not running properly or if they become nonviable.
- Since it consolidates provisions of the earlier legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency, the process of resolution has become much easier.
- According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018. The recovery rate has increased from 26.5% in 2018 to 71.6% in 2019 and time taken in recovery has improved from 4.3 years in 2018 to 1.6 years in 2019.
Institutions facilitating the Resolution of Insolvency under IBC
- Insolvency Professionals (IPs)
- The insolvency professionals are appointed to administer the resolution process, manage the assets of the debtor, and provide information to the creditors to assist them in decision-making.
- They have the power to furnish performance bonds equal to assets of the company under insolvency resolutions.
- Insolvency Professional Agencies (IPAs)
- The insolvency professional agencies are responsible for conducting examinations to certify the insolvency professionals and enforcing a code of conduct for their performance.
- Information Utilities
- Creditors will report the financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
- Adjudicating Authorities
- There are two adjudicating authorities responsible for the proceedings of the resolution process- the National Company Law Tribunal or NCLT for the companies and Debt Recovery Tribunal or DRT for the individuals and partnership firms other than limited liability partnerships.
- These authorities have the duty to provide approval to initiate the resolution process, appoint the insolvency professional and approve the final decision of the creditors.
- Insolvency and Bankruptcy Board of India
- The board seeks to regulate insolvency professionals, insolvency professional agencies and information utilities that are set up under the code.
- It consists of representatives from the Reserve Bank of India and the Ministries of Finance, Corporate Affairs and Law.
- It promotes transparency and governance in the administration of the IBC and is involved in setting up the infrastructure and accrediting insolvency professionals and information utilities.
- Lack of operational NCLT benches- Though the government had announced setting up of 25 additional single and division benches of NCLT at various places in July 2019, most of these remain non-operational or partly operational due to lack of proper infrastructure or adequate support staff.
- Lower rate of approval for the resolution plans- According to a report by the Insolvency and Bankruptcy Board of India (IBBI), out of the 2,542 corporate insolvency cases filed between December 1, 2016 and September 30, 2019, only about 156 have ended in approval of resolution plans i.e., only 15%.
- High number of liquidations- They become a major cause of worry for the companies as they violate the principal objective of IBC i.e., resolving bankruptcy.
- Slow judicial process in India due to which the resolution processes drag on; this was the same reason for limited success of the previous laws- Sick Industrial Companies Act (SICA) or Recovery of Debts Due to Banks (RBBD).
The IBC has been a phenomenal step that has improved India’s performance in the Ease of Doing Business but there have been several factors that undermine the effective functioning of the Code. It is definitely a big leap compared to previous insolvency laws. However, a lot more needs to be done for its successful implementation. Timely amendments, which provide more teeth to the Code, can only rescue the process.
Source: The Hindu