Analysing Effectiveness of Insolvency and Bankruptcy Code (IBC)

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By admin May 15, 2019 20:12

As per the reports of CRISIL (A global rating agency), Insolvency and Bankruptcy code (IBC) has proved to be a key reform in identification and resolution of insolvencies in India in an expedited manner, however, some of the challenges still remain to be resolved.

About IBC

Introduction

  • It applies to both Individual and companies.
  • It provides for a 180- days period to resolve insolvency.
  • It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
  • It provides for a common platform of debtors and creditors of all classes to resolve insolvency.

Institution created under code

Insolvency and Bankruptcy Board: Board will comprise of members from RBI and the Ministries of Finance, Corporate Affairs and Law. It will regulate the activities of insolvency professionals, insolvency professional agencies and information utilities.

Insolvency professionals: It will be a cadre of licensed professionals. They will be tasked with the administration of the resolution process, management of debtor’s assets, as a source of information to creditors, to help them in decision making.

Information Utilities: The utility would specialise in procuring, maintaining and providing/supplying financial information to businesses, financial institutions, adjudicating authority, insolvency professionals and other relevant stakeholders. In 2017, National e-Governance Services Ltd (NeSL) became India’s first information utility (IU).

Insolvency Professional Agencies:  It registers insolvency professionals. The agencies conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance.

Adjudicating authorities: Act created National Company Law Tribunal (NCLT) for corporates and Debt Recovery Tribunal (DRT), for individuals as well as partnership firms for the adjudication of the resolution process. The responsibilities of the authority include:

  • approval to initiate the resolution process
  • appoint the insolvency professional,
  • approve the final decision of creditors

Process for resolution of insolvency

  1. Initiation:
    1. A financial creditor or corporate debtor can give an insolvency plea to adjudicating authority (NCLT or DRT) to admit in corporate insolvency resolution process (CIRP). Authority will either accept or reject the plea within 14 days.
    2. If accepted by the authority, it will appoint the insolvency professionals for drafting a plan of resolution within a period of 180 days (can be extended unto 270).
    3. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets.
  2. Decision to resolve insolvency:
    1. Insolvency professional will create a committee consisting of financial creditors. This committee will take a decision either to revive the debt owed to them by changing the repayment schedule or sell (liquidate) the assets of the debtor to repay the debts owed to them. If the Committee fails to reach a decision in 180 days, the assets of debtor will go into liquidation.
  3. Liquidation
    1. If the debtor goes into liquidation, an insolvency professional administers the liquidation process.
    2. Following the order of precedence, in which Proceeds from the sale of the debtor’s assets are distributed:
      1. Insolvency resolution costs, including the remuneration to the insolvency professional,
      2. Secured creditors, whose loans are backed by collateral, dues to workers, other employees,
      3. Unsecured creditors,
      4. Dues to government,
      5. Priority shareholders and
      6. Equity shareholders.

Read Also: Resolution, at last: on Essar Steel case: Insolvency Code Explained

Insolvency and Bankruptcy Code (second amendment) bill, 2017

The bill was passed to prevent certain parties from bidding for companies as resolution applicant and up hold the credibility of resolution process.

Salient features

  • It defines a resolution applicant as the one, who submits a resolution plan after receiving an invite by the insolvency professional to do so.
  • An applicant to submit a resolution plan, needs to fulfill certain criteria laid down.
  • The Bill inserts a provision prohibiting certain persons from submitting a resolution plan.
  • The bill has made the provision that committee will approve a resolution plan by a 75% majority, subject to any conditions specified by the Insolvency and Bankruptcy Board.
  • The bill prohibits the insolvency professional to sell the movable or immovable property of the debtor in case of liquidation.
  • Bill inserts a provision of penalties for contravening the provisions of the code.

Insolvency and Bankruptcy Code (second amendment) bill, 2018

  • It amends to IBC, 2016.
  • It identifies allottees under a real estate project as Financial creditors.
  • The voting threshold for routine decisions taken by the committee of creditors has been reduced from 75% to 51%.
  • It provides for the withdrawal of a resolution application submitted to the NCLT under the Code.  This decision can be taken with the approval of 90% of the committee of creditors.

What were the needs for IBC?

  • India’s rank in ease of doing business report was 130 in 2017, that has improved to 77 in 2019.
  • As per the World Bank report of 2015, in India insolvency resolution (IR) took 4.3 years on an average.
  • While IR takes 1 year for the United Kingdom and 1.5 years in America.
  • Reasons behind delays in India were: delay in courts and lack of clarity about the current resolution framework.

Some of the achievements of IBC

  • As of March 31, 2019, under the Corporate Insolvency Resolution Process (CIRP), a resolution plan for 94 stressed assets was approved by the NCLT. These accounts valued at Rs 1,75,000 crore, of this amount 43% has been recovered.
  • As per the estimates, the banking sector’s gross NPA (aggregate) dropped to ~10% in March 2019 from 11.5% at the end of fiscal 2018.
  • Although there has been a time lag in the resolution of cases, still it was way faster than the recovery time of 3.5-4 years taken by asset reconstruction companies.
  • IBC has resulted in improvement in rights of creditors and also in the identification of bankruptcies and initiation of resolution proceedings. It has empowered creditor to initiate a resolution proceeding against a defaulting corporate borrower.
  • Its implementation has resulted in the better financial discipline among borrowers.

Challenges facing IBC process

  • In comparison to the maximum stipulated timeline of 270 days, as mentioned in IBC code, resolution of cases took 324 days.
  • While many big tickets cases could not be finalized even after 400 days.
  • The current strength of National Company Law Tribunals (NCLT) benches is insufficient to deal with the larger number of pending cases.
  • There have been loopholes in the functioning of Committee of Creditors. Nominated members of Financial creditors does not have any authority to take decisions upfront. It leads to a conflict of interest in reaching a revival plan.
  • There is no proper infrastructure of the Information Utilities (IU) that provide access to credible and transparent evidence of default.
  • There is a multiplicity of regulators to Insolvency Professionals i.e. presence of numbers of insolvency professional agencies (IPAs) to regulate professionals.

What should be done?

  • An immediate improvement of NCLT and NCLAT infrastructure is required.
  • Digitization of the NCLT/NCLAT platform would improve their performance.
  • Proactive training/onboarding of judges, lawyers, and other intermediaries will be necessary for effective implementation of the code.
  • Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality. There is a requirement of enhanced IU infrastructure.

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By admin May 15, 2019 20:12