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GOVT. AMENDS INSOLVENCY LAW THROUGH ORDINANCE

Context:

The government has amended the insolvency law to provide for a pre-packaged resolution process for micro, small and medium enterprises.

Relevance:

GS-III: Indian Economy (Development and Growth of Indian Economy, Banking Sector and NBFCs, NPAs)

Dimensions of the Article:

  1. About the Ordinance passed by the Government
  2. Insolvency and Bankruptcy Code (Amendment) Bill, 2020
  3. Objectives of IBC
  4. What is Insolvency and Bankruptcy?
  5. Process of resolution of Insolvency

About the Ordinance passed by the Government

  • An ordinance was promulgated to amend the Insolvency and Bankruptcy Code (IBC) on April 4, according to a notification.
  • The latest 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.

Provisions of the Ordinance

  • 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 efficient alternative insolvency resolution process MSMEs to ensure a quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.

Insolvency and Bankruptcy Code (Amendment) Bill, 2020

  • The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. The latest changes pertain to various sections of the IBC as well as introduction of a new section.
  • The IBC, which came into force in 2016, has already been amended thrice.
  • Stressing that the government is “very responsive” and has been talking to the industry, she assured the House that amendments to the IBC are not being “unthinkingly done”.
  • The Bill replaces an ordinance.
  • The amendments were earlier introduced as ordinances. Now after the Parliament session begun the ordinance was introduced as bill. And the bill has now been passed as an act in the parliament. The amendment aims to protect the successful bidders of insolvent companies from risk of criminal proceedings. The criminal proceedings may be expected from previous promoters of the company.
  • The Ordinances are laws promulgated the President of India. The President issues ordinance on recommendation of Council of Ministers. An ordinance shall be issued only when the Parliament is not in session.

Objectives of IBC

  1. To consolidate and amend all existing insolvency laws in India.
  2. To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
  3. To protect the interest of creditors including stakeholders in a company.
  4. To revive the company in a time-bound manner.
  5. To promote entrepreneurship.
  6. To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
  7. To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
  8. To set up an Insolvency and Bankruptcy Board of India.
  9. Maximization of the value of assets of corporate persons.

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

  1. 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.
  2. 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.
  3. The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
  4. If they decide to revive, they have to find someone willing to buy the firm.
  5. The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
  6. They invite open bids from the interested parties to buy the firm.
  7. 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.

-Source: The Hindu

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October 2022
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