The Insolvency and Bankruptcy Code (IBC), notified in 2016, has been the key mechanism for addressing corporate distress and the accumulation of bad loans in the financial sector since its implementation. Recent National Company Law Tribunal (NCLT) rulings have also put the spotlight on the IBC.
GS-III: Indian Economy (Banking Sector & NBFCs, Growth & Development of Indian Economy)
What is bankruptcy code? Assess its role to address the bad loans in Banking Sector. 15 Marks
Dimensions of the Article:
- Basics: What is Insolvency and Bankruptcy?
- Process of resolution of Insolvency
- Insolvency and Bankruptcy Code (IBC), 2016
- Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019
- Summary of Insolvency resolution mechanism
- Differences between NCLT and NCLAT
- Issues with Implementation of IBC
- Way Forward
Basics: What is Insolvency and Bankruptcy?
- Insolvency is a financial status: your debts are greater than the fair market value of your assets & you’re unable to pay your debts as they generally become due.
- Bankruptcy is a legal status: it’s a legal procedure whereupon an insolvent person files for protection from her creditors so that they cannot commence or continue legal proceedings (like a wage garnishment) against her to recover their debts.
Process of resolution of Insolvency
- If the adjudicating authority accepts the Insolvency resolution process initiated by any of the stakeholders of the firm: firm/debtors/creditors/employees., then – an Insolvency resolution professional (IP) is appointed.
- The power of the management and the board of the firm is transferred to the Committee of Creditors (CoC) and 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.
Insolvency and Bankruptcy Code (IBC), 2016
- Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
- The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been pulling the Indian economy down for years.
Objectives of IBC
- To consolidate and amend all existing insolvency laws in India.
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote 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 individuals.
- To set up an Insolvency and Bankruptcy Board of India.
- Maximization of the value of assets of corporate persons.
Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019
- The amendment also intends to provide protection to a corporation from criminal proceedings against offences committed by previous management or promoters.
- Additionally, it also provides a faster revival process for stressed companies.
- The amendment brings the much-awaited changes needed in the insolvency sector. It clears the air on various aspects and provides relief to both corporate debtor as well as the creditors.
- The thresholds introduce will prevent admission of unnecessary cases to the insolvency court.
- However, even after anticipation, cross border insolvency framework has not been included in the amendment.
Summary of Insolvency resolution mechanism
- The proceedings of the resolution process would be adjudicated by the:
- National Companies Law Tribunal (NCLT), for companies; and
- Debt Recovery Tribunal (DRT), for individuals.
Committee of Creditors (CoC):
- During the insolvency resolution process, a committee consisting of lenders would be constituted for taking decisions (by voting) on the resolution process.
- The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets.
- However, such a decision has to be approved by at least 66% of the votes in the committee of creditors. (Earlier, the voting threshold for the approval was 75%, but it was reduced to 66% through the IBC amendment act, 2019).
Insolvency and Bankruptcy Board:
- The Board would regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
- The Board would consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.
Procedure to resolve Insolvency and Bankruptcy:
- The Code proposes two independent stages: Insolvency Resolution Process, during which lenders assess whether the debtor’s business is viable to continue and the options for its rescue and revival; and Liquidation (Sale of Assets), if the insolvency resolution process fails.
Insolvency Resolution Process (IRP):
- When a default occurs, the resolution process may be initiated either by the debtor or creditor before the adjudicating authority.
- The NCLT appoints an insolvency professional to administer the IRP.
- The Resolution Professional identifies the financial creditors and constitutes a Committee of Creditors (CoC).
- The CoC would prepare the resolution plan for the restructuring the loans of the defaulted borrower which may be in the form of extending the maturity period of the loan, reducing the rate of interest on loans etc.
- However, such a resolution plan has to be approved by at least 66% of the votes in the committee of creditors.
Liquidation (Sale of Assets):
- If the Committee of Creditors fail to come up with a resolution plan within the time limit of 330 days, then the proceeds from the sale of the debtor’s assets are distributed in the following order of precedence:
- insolvency resolution costs, including the remuneration to the insolvency professional,
- secured creditors, whose loans are backed by collateral, dues to workers, other employees,
- unsecured creditors,
- dues to government,
- priority shareholders and
- equity shareholders.
- The National Company Law Tribunal is a quasi-judicial body in India that adjudicates issues relating to Indian companies.
- The tribunal was established under the Companies Act 2013 and was constituted on 1 June 2016 by the government of India. Hence, NCLT is a Statutory Body.
- All proceedings under the Companies Act, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies shall be disposed of by the National Company Law Tribunal.
- The National Company Law Tribunal is the adjudicating authority for insolvency resolution process of companies and limited liability partnerships under the Insolvency and Bankruptcy Code, 2016.
- No criminal court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal.
- The National Company Law Appellate Tribunal (NCLAT) is a tribunal which was formed by the Central Government of India under Section 410 of the Companies Act, 2013.
- Hence, NCLAT is also a Statutory Body.
- The tribunal is responsible for hearing appeals from the orders of National Company Law Tribunal(s) (NCLT), starting on 1 June, 2016.
- The tribunal also hears appeals from orders issued by the Insolvency and Bankruptcy Board of India under Section 202 and Section 211 of IBC.
- It also hears appeals from any direction issued, decision made, or order passed by the Competition Commission of India.
Differences between NCLT and NCLAT
- NCLT makes the judgement on the insolvency resolution proceedings. NCLAT makes judgement on the decisions made by the NCLT.
- NCLT is the primary Tribunal and NCLAT is the appellate tribunal.
- NCLT analyzes the evidences that are presented by the insolvent debtor or their creditors. NCLAT analyzes the decisions that are made by the NCLT.
Issues with Implementation of IBC
- In India there are not many strategic investors and an asset will have interest or value only if there are more people who are ready to buy. Therefore, better asset value realization will lead to faster resolution of stressed companies (happy creditors).
- There are delays in implementation of IBC whether it’s in terms of approvals, having an application admitted itself.
- A lot of IBC cases are very old cases related to the stock of NPAs [Non-Performing Assets]. So, once this round is over, in future, perhaps, there will be fewer cases and IBC will be able to perform better than before.
- There is shortage of NCLT member, lot of vacancies & delays in appointments all of which has a bearing on IBC working efficiency.
- Increasing the predictability of IBC process so as to attract more & diverse range of strategic buyers who are willing to bid for assets, and submit resolution plans under the code
- MSMEs have flexibility in terms of promoters being able to submit resolution plans for such companies. Similar type of relaxation can be extended to large companies with necessary safeguards built into it.
- Establishing National ARC (“Bad Bank”) will give the time to the banks to resolve these cases over a period of time. Government should make sure that it is adequately staffed & well-functioning.
- IBC cases are not the only mandate of the NCLT. They also consider various cases under the Companies Act (Ex: mergers or oppression). To improve IBC efficiency, NCLT strength has to be enhanced.
- IBC is not the only solution for resolving stress. Other mechanisms pre-IBC mechanisms, one-time settlements, restructuring packages needs to be promoted as well.
-Source: The Hindu