Speaking at the sixth anniversary of the Insolvency and Bankruptcy Board of India (IBBI) Union Finance Minister said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy Code (IBC).
GS III: Indian Economy
Dimensions of the Article:
- What is the IBC?
- Objectives of IBC
- What are the challenges for the IBC?
- Insolvency and Bankruptcy Board of India (IBBI)
- Process of resolution of Insolvency
What is the IBC?
- In a growing economy, a healthy credit flow and generation of new capital are essential, and when a company or business turns insolvent or “sick”, it begins to default on its loans.
- In order for credit to not get stuck in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible from the defaulter, as quickly as they can.
- In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery mechanisms were performing badly, the IBC was introduced to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as opposed to the debtor-in-possession system.
- When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation.
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.
What are the challenges for the IBC?
- In the last six years, more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution.
- Furthermore, the IBC was touted as a time-bound mechanism. Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further.
- The IBC was thus initially given a 180-day deadline to complete the resolution process, with a permitted 90-day extension.
- It was later amended to make the total timeline for completion 330 days — which is almost a year.
- However, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore.
- The average number of days it took to resolve such cases increased rapidly over the past five years.
- When we come to haircuts — the debt foregone by the lender as a share of the outstanding claim — the Parliamentary Standing Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on an average had to bear an 80% haircut in more than 70% of the cases.
Insolvency and Bankruptcy Board of India (IBBI)
- The Insolvency and Bankruptcy Board of India (IBBI) is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India.
The IBBI is a Statutory Body under the Insolvency and Bankruptcy Code, 2016 (IBC).
- It covers Individuals, Companies, Limited Liability Partnerships and Partnership firms.
- It attempts to simplify the process of insolvency and bankruptcy proceedings.
- It handles the cases using two tribunals like NCLT (National Company Law Tribunal) and Debt Recovery Tribunal.
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.
-Source: The Hindu