Indian Economy – Insolvency and Bankruptcy Code: Article Analysis

Insolvency and Bankruptcy Code: Article Analysis

Background

• India did not have a single bankruptcy code in the past. What we had were age-old laws which are in conflict with each other. Lack of an insolvency and bankruptcy code had proved costly for the creditors (mainly banks) in many cases like the recent Kingfisher Airlines case. The Insolvency and Bankruptcy Code seeks to create a unified framework to resolve insolvency and bankruptcy in India.
• The Code covers insolvency, liquidation, voluntary liquidation and bankruptcy. The bill makes it easier for weak companies to exit or restructure their businesses. The code seeks to amend 11 laws, including the Companies Act, 2013 and the Sick Industrial Companies (Special Provisions) Repeal Act, 2003.

The Insolvency and Bankruptcy Code, 2016 (IBC)

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016.
• The Code received the assent of the President of India on 28 May 2016.Certain provisions of the Act have come into force from 5 August and 19 August 2016.
• The bankruptcy code is a one stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement.
• A strong insolvency framework where the cost and the time incurred is minimised in attaining liquidation has been long overdue in India. The code will be able to protect the interests of small investors and make the process of doing business a less cumbersome process.

Key features

• Insolvency Resolution : The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.The process may be initiated by either the debtor or the creditors.
• A maximum time limit, for completion of the insolvency resolution process,has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start ups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
• Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
• Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.
• Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies: (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships

What are Insolvency and Bankruptcy?

• Insolvency is the situation where the debtor is not in a position to pay back the creditor. For a corporate firm, the signs of this could be a slow-down in sales, missing of payment deadlines etc.
• Bankruptcy is the legal declaration of Insolvency. So the former is a financial condition and latter is a legal position. All insolvencies need not lead to bankruptcy. The new code has a sequential procedure of Insolvency resolution, failing which, it leads to Bankruptcy (following liquidation of assets).

Key aspects of the Insolvency and Bankruptcy Code

• IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
• IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the Companies Act.
• The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
• Moratorium period of 180 days (extendable up to 270 days) for the Company. For startups and small companies the resolution time period is 90 days which can be extended by 45 days.
• Introduce a qualified insolvency professional (IP) as intermediaries to oversee the Process
• Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.

The success of IBC

• 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.
• 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.

Amendments in IBC:

• The President has assented to the promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 on June 6, 2018. The two key amendments would help both the real estate sector and the MSMEs
• Homebuyers Recognized as Financial Creditors- giving them due to representation in the Committee of Creditors (CoC). Thus, now home buyers will be an integral part of the decision making process.
• Special Provisions for MSME- now, the promoters of MSMEs are allowed to bid for their companies as long as they are not willful defaulters and don’t attract any other related disqualification. This has corrected the anomaly in the section 29A of the existing act which had barred promoters of defaulting assets from bidding for their assets.

Source: Wikipedia and Hindu business line