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Focus: GS-II Governance

Why in news?

  • The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, has introduced a new clause that sets a threshold of a minimum 100 homebuyers or 10% of total homebuyers in a project, whichever is less, as a requirement to jointly take the developer to an insolvency court.
  • This means that an individual homebuyer, who is a financial creditor, cannot file an insolvency application.

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

  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.

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.

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.

February 2024