The Insolvency and Bankruptcy Code, 2016 – Explained

The insolvency and Bankruptcy Code which makes it easier to wind up operations of a company has been in the news for some time. Let’s have a look at what it is.

What do you mean by insolvency and bankruptcy?

Insolvency is the inability to pay the debts owned and Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt obligations.

A company is bankrupt if it is unable to repay debts to its creditors (banks, suppliers etc).

What is the Insolvency and Bankruptcy code?

  • India’s new Bankruptcy Bill aims to  create a formal insolvency resolution process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation.
  • Under the law, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority that has passed a bankruptcy order.
  • The adjudicating authority would be the National Company Law Tribunal (NCLT) for companies and limited liability partnerships, and the Debt Recovery Tribunal (DRT) for individuals and partnership firms.

What does The Insolvency and Bankruptcy Code, 2016 contain?

  • The Bill envisages a new regulator — the Insolvency and Bankruptcy Board of India
  • The Code creates time-bound processes for insolvency resolution of companies and individuals. 
  • It consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

What exactly will the new law do that is different?

The new Bill seeks to consolidate all existing laws  and it specifies a timeframe — 180 days after the process is initiated, plus a 90-day extension — for resolving insolvency.

It proposes to do this by creating a host of new institutions. These would include:

  1. Insolvency Professionals, who will conduct the insolvency resolution process, take over the management of a company, assist creditors in the collection of relevant information, and manage the liquidation process.
  2. Insolvency Professional Agencies, who will examine and certify these professionals.
  3. Information Utilities, which will collect, collate and disseminate financial information related to debtors.
  4. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

Who can initiate the Insolvency Resolution Process?

  1. A business or debtor who has defaulted on dues can initiate the IRP.
  2. Lenders and creditors to a firm, including employees — either secured or unsecured.

The government had recently amended the RBI Act, which gave powers to the central bank to direct banks to take punitive action against individual accounts under IBC. This may help in resolving the NPA crisis

How does the process work under Insolvency and Bankruptcy Code?

  1. One, when a loan default occurs, and either the borrower or the lender approaches the NCLT or DRT for initiating the resolution process. There is 14-day time period for admission or rejection of a case by National Company Law Tribunal.
  2. The creditors appoint an interim Insolvency Professional (IP) to take control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities, and constitute the creditors’ committee. The insolvency practitioners will look at various possibilities including revival of projects or liquidation.A creditors committee is formed to represent the interest of lenders and any other party that have been affected due to the default by the company.
  3. The committee has to then take decisions regarding insolvency resolution by a 75% majority. Within 180 days, 75 per cent of the creditors must agree to a revival plan. If this minimum threshold is not met, the firm automatically goes into liquidation.
  4. If three-fourths of the creditors decide that the case is complex and cannot be addressed within 180 days, the adjudicator can grant a one-time extension of up to 90 days on the process.
  5. The resolution plan will be sent to the tribunal for final approval, and implemented once approved.

Why do we need a new law?

  1. As of 2015, insolvency resolution in India took 4.3 years on an average.  The entire process of winding up a firm is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process and confusion prevailing due to a lack of clarity about the current bankruptcy framework.
  2. India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.

Earlier laws addressing bankruptcy proceedings

  • Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on.
  • The new Code streamlines and consolidates all these laws to make the process simpler.
  • The multiplicity of laws has been a problem in the way of banks failing to recover their loans. For example, DRTs are dealing with a backlog of Rs 4 trillion worth of cases. For the last three financial years, less than 20% of cases taken up by various channels such as DRTs, Lok Adalats and SARFAESI courts have been successfully resolved.

What lies ahead

  • The law, can ensure quicker resolution of the bad loan problems dogging PSU banks. Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to get a fresh start.
  • The success of the bankruptcy law will depend on the jurisprudence that develops under the Insolvency and Bankruptcy Code
  • India has a mixed track record of regulating professional services, and the quality and independence of the IPs is critical to the successful implementation of the IBA.

Concluding remarks  Insolvency and Bankruptcy code

We have to wait and watch how the various players, including bankers, promoters, the government, IPs, auditors, lawyers, valuers and liquidators, behave in the next few cases. The hope is that institutional capacity will strengthen; there will be greater alignment in the interests of the promoters, creditors and buyers of distressed assets; and, finally, the government and banks will show a strong political will to settle a few cases quickly and transparently. Only then can the value of the distressed assets be maximised and capital and other productive resources get redeployed efficiently.

UPSC Corner

Prelims : Economic and Social Development – Sustainable Development, Poverty, Inclusion, Demographics, Social Sector initiatives, etc.

Mains   : GS 3  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims Perspective

Model Questions

Which of the following statements about The Insolvency and Bankruptcy Code is/are correct?

  1. It will create licensed professional called Insolvency Professionals.
  2. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for individual

Select the correct answer using the code given below.

a. 1 only

b. 2 only

c. Both 1 and 2

d. Neither 1 nor 2

Mains Perspective

Model questions

Instead of facilitating ease of doing business, unwittingly The Insolvency and Bankruptcy Code would facilitate ease of undoing business. Ultimately, only better corporate governance and risk mitigation measures can ensure ease of doing business. Critically evaluate.

Sources: The Hindu pib The Hindu The Hindu PRS The Indian Express The Hindu BusinessLine The Hindu

This resource was published by selflearnadmin
28 June 2017