INSOLVENCY AND BANKRUPTCY CODE (IBC)
1. WHY IN NEWS
Insolvency and bankruptcy board of India (IBBI) sixth anniversary was conducted on 1st October 2022, on this anniversary our finance minister Nirmala sitaraman said that the country could not afford to lose the sheen of its insolvency law, the insolvency and bankruptcy code (IBC).
2. About Insolvency and Bankruptcy Code (IBC)
2.1.Insolvency: Insolvency is a situation where individuals or companies cannot repay their debt.
2.2.Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
IBC was introduced in 2016 to 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, with the former being the preferred solution.
Companies have to complete the entire insolvency exercise within 180 days under IBC and the deadline may be extended if the creditors do not raise objections to the extension.
3. CHALLENGES FOR THE IBC:
- Insolvency Bankruptcy Board of India is the regulator of the Insolvency and Bankruptcy Code in India. According to its regulator, IBBI the first objective of the IBC is a resolution-finding way to save a business through restructuring, change in ownership, mergers, etc.
- The second objective is to maximize the value of assets of the corporate debtor; the third objective is to promote entrepreneurship, availability of credit, and balancing of interests.
- According to Insolvency Bankruptcy Board of India data for the 3400 cases admitted under the IBC in the last six years, more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution.
- 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 the financial year 2022, it took 772 days to resolve cases involving companies that owed more than 1000 crores. The average number of days it took to resolve such cases increased rapidly over the past five years.
4. IBC 2016 Advantages
Strict timelines:
- Normal cases: 180 days
- Complex cases: 180 days +90 days
- Legal proceedings: 330 days
- In the case of tardy legal proceedings, it can go beyond 330 days.
- It promotes entrepreneurship, the release of capital that can be invested in other productive assets.
- It focuses more on resolution rather than liquidation.
- In only 15% of cases, the resolution is done, and the rest is liquidation.
5. Expert’s opinion on IBC:
- In order to address the delays, the parliamentary standing committee suggested that the time taken to admit the insolvency application and transfer control of the company to a resolution process, should not be more than 30 days after filing.
- The IBBI has also called for a new yardstick to measure haircuts. It suggested that haircuts cannot be looked at as the difference between the creditors’ claims and the actual almost realized but as the difference between what the companies bring along when it enters IBC and the value realized.
6. INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) BILL, 2021
- The insolvency and bankruptcy code (Amendment) Bill, 2021 was introduced in the Lok-Sabha to amend the insolvency law and provide for a pre-packaged resolution process for stressed Micro, Small, and Medium Enterprises.
- Under this mechanism, main stakeholders such as creditors and shareholders come together to identify a prospective buyer and negotiate instead of a public bidding process.
- The insolvency and bankruptcy are applicable to defaults which is more than Rs.1crore. There has been a recent change in IBC, which is called the Pre-Pack mechanism for MSMEs.
6.1 Pre-Pack Mechanism:
- If an MSME takes a loan and the default is less than 1 crore, then this Pre-Pack mechanism will be applicable.
- Under this mechanism, the owner of the MSMEs will propose or submit a resolution plan to NCLT (National Company Law Tribunal). Outside bidders and open bidding will not be done.
- During this resolution, the management of MSMEs will remain with the previous owners. Under this mechanism, the process will be completed within 120 days.
7. CONCLUSION:
The Insolvency and Bankruptcy Code has reformed the Indian Insolvency Law to a great extent. The government needs to provide appropriate budgetary allocations to up skilling insolvency professionals and digitization of insolvency resolution process.
There has been a marked improvement in the recovery process which is already leading to billions of dollars being invested in the country due to the protection of creditor rights.
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Prelims question: 1. According to the IBC, which of the following is not a financial service
A.Underwriting issuance of financial support
B.Accepting of deposits
C.Operating an investment scheme
D.Payment of wages to the Employees
Mains questions:
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