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Challenges in the Implementation of Insolvency and Bankruptcy Code

Context:

The Insolvency and Bankruptcy Code (IBC), enacted in 2016, aimed to fulfill diverse objectives, yet recent events have sparked concerns regarding its efficacy and the resolution process.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Key Concerns with the Implementation of IBC
  2. Regulatory Concerns in Corporate Insolvency Process
  3. Key Highlights of the Insolvency and Bankruptcy Code, 2016

Key Concerns with the Implementation of IBC

The Insolvency and Bankruptcy Code (IBC), designed to achieve various objectives, faces critical issues in its implementation, raising doubts about its effectiveness. Here are the key concerns:

Delayed and Ineffective Repayment Process:

  • The resolution plan approval process involves approximately 15% payment by the purchaser.
  • Repayment periods extend for years, with no additional interest collected by banks.

Low Settlement Amounts and Prolonged Resolutions:

  • Recent cases, like Reliance Communications Infrastructure Ltd. (RCIL), witnessed low settlement amounts and extended resolution periods.
  • RCIL settlement amounted to only 0.92% of the debt and took four years, exceeding the stipulated maximum of 330 days.
  • Financial creditors (FCs) ideally expect principal and interest.

Challenges in Identifying and Acknowledging Defaults:

  • Time-consuming processes in recognizing defaults lead to reduced recovery rates.
  • Timely initiation of resolution proceedings is hampered.

Promoters Exploiting “Haircuts” Concept:

  • “Haircuts” involving loan and interest write-offs are being exploited by promoters.
  • Promoters benefit significantly, leaving lenders with reduced recovery rates.

Low Realizable Value to Creditors:

  • The RBI’s 2023 Financial Stability Report (FSR) highlights low realizable value to creditors.
  • Banks recover only 10-15% in NCLT-settled cases, while creditors realize 168.5% of liquidation value and 86.3% of fair value.
  • Out of 597 liquidations, only 3% of the admitted claims were realized against the claim of Rs 1,32,888 crore.

Discrimination in Interest Collection:

  • Banks treat corporates differently in interest collection, raising concerns about fairness.
  • The amount realized from liquidations is minimal, affecting the overall recovery process.

Regulatory Concerns in Corporate Insolvency Process

The Corporate Insolvency Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) faces significant regulatory concerns, as highlighted by various reports and authorities:

Admitted Claims Discrepancy:

  • The Financial Stability Report (FSR) identifies concerns about CIRP, revealing that admitted claims fall short of dues.
  • Banks or financial creditors recover only a fraction of the liquidation value and fair value.

Parliamentary Standing Committee Report:

  • The 32nd report of the Parliamentary Standing Committee on Finance expresses apprehensions about the CIRP.
  • Raises concerns about low recovery rates with haircuts reaching up to 95%.
  • Highlights delays in the resolution process, with over 71% of cases pending for more than 180 days.
  • Points to a deviation from the original objectives of the code intended by Parliament.
  • Recommends the necessity for a professional code of conduct for the Committee of Creditors (COCs) and advocates fixing a ceiling on haircuts.

Issues with Resolution and Insolvency Professionals:

  • The report identifies concerns related to Resolution Professionals (RPs) and Insolvency Professionals (IPs).
  • Emphasizes the need for addressing issues within these professional roles.

Judicial Shortage Impact:

  • A shortage of judges in the IBC resolution process contributes to a slowdown in case processing.
  • The shortage hampers the expeditious resolution of cases, leading to prolonged resolution times.

Key Highlights of the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive framework designed to address bankruptcy and insolvency concerns across various entities. Here are the key highlights:

Definition of Insolvency and Bankruptcy:
  • IBC deals with resolving bankruptcy and insolvency issues of companies, individuals, and partnerships promptly.
  • Insolvency refers to a state where liabilities exceed assets, hindering payment obligations.
  • Bankruptcy is the legal declaration of an entity’s inability to pay due bills.
Amendment Act, 2021:
  • The Insolvency and Bankruptcy Code (Amendment) Act, 2021 focuses on an alternative resolution framework for micro, small, and medium enterprises (MSMEs).
  • Aims for efficient, cost-effective, and value-maximizing outcomes for stakeholders.
Objectives:
  • Maximizing debtor’s asset value.
  • Promoting entrepreneurship.
  • Ensuring timely resolution.
  • Balancing stakeholder interests.
  • Facilitating a competitive market.
  • Providing a framework for cross-border insolvency.
IBC Proceedings:
  • Insolvency and Bankruptcy Board of India (IBBI):
    • Regulatory authority overseeing insolvency proceedings.
    • IBBI members, including the Chairperson, appointed by the government, possess expertise in finance, law, and insolvency.
Adjudication of Proceedings:
  • National Companies Law Tribunal (NCLT):
    • Adjudicates proceedings for companies.
  • Debt Recovery Tribunal (DRT):
    • Handles proceedings for individuals.
  • Courts play a crucial role in approving resolution initiation, professional appointments, and endorsing final decisions.
Insolvency Resolution Procedure:
  • Initiated by debtor or creditor upon default.
  • Insolvency professionals manage the process, providing financial information and overseeing asset management.
  • A 180-day period prevents legal actions against the debtor during resolution.
Committee of Creditors (CoC):
  • Formed by insolvency professionals, CoC includes financial creditors.
  • Determines outstanding debts’ fate, deciding on revival, repayment schedule changes, or asset liquidation.
  • Failure to decide within 180 days leads to asset liquidation.
Liquidation Process:
  • Proceeds from asset sale distributed in order: insolvency resolution costs, secured creditors, dues to workers, other employees, and unsecured creditors.

-Source: The Hindu


 

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