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How is ease of doing business linked with the Insolvency and Bankruptcy Code?

In India, lack of resolution of insolvency is one of the significant factors for the failure of credit market in the country. The present legislations governing insolvency are fragmented, multi-layered and the adjudication of insolvency matters take place in multiple forum, resulting in an unpredictable regime.

The Insolvency and Bankruptcy Code has been hailed as an excellent reform for India that will pay a critical role in improving the ease of doing business.

Why does India need a Bankruptcy law?

Currently it takes, on an average, more than 4 years to resolve insolvency in India. The proposed Bankruptcy Code will replace over a century-old archaic insolvency act – The Presidency Towns Insolvency Act, 1909.

  • Delays in making decisions on the viability of business.
  • Sometimes, company promoters try to delay reorganisation or attempts to sell-off assets or change of management.
  • Delays in disposing off cases by Debt Recovery Tribunal.
  • Continued litigation at various levels and delays in appellate level.
  • Currently, there are 4 different agencies viz. the HC, the Company Law Board, the BIFR and the DRTs that handle insolvency-related cases.

How can a modern law help?

  • Speedy closure will help firms on the verge of brink in two ways, i.e. either restructure the firm or sell-off the assets to recover the money.
  • It will promote efficient allocation and greater availability of credits for businesses, as it frees up capital.
  • Development of financial markets such as bond market, due to clarity on repayment for debtors.

What is the international experience in this regard?

  • US Bankruptcy Code provides for fairly quick liquidation or reorganisation of the company.
  • In UK, once the cases are filed, then after 12 months, either the part of assets are discharged to pay-off debt or court-appointed administrators handle the case, if company can be turned around.

Was any committee formed to suggest Insolvency reforms?

  • The Bankruptcy Law Reform Committee (BLRC) was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan.
  • It was the first committee with the mandate of suggesting comprehensive and not incremental reforms.
  • The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions.

What was the recommendation of the Committee?

  • The committee proposed an all-encompassing law for corporate and individual insolvency, reflecting the best practices from across the globe.
  • The corporates should assess the viability of an enterprise in the early stages of insolvency, such that the creditor and the debtors can negotiate a financial arrangement while preserving the economic value of the enterprise.
  • However, if the negotiations fail, then the enterprise is liquidated. The insolvency resolution is required to be done within a period of 180 days.
  • It also suggested fast track insolvency resolution for certain entities which is required to be completed within 90 days.

What are the provisions of draft Insolvency and Bankruptcy Code?

The code aims to bring modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.

  • It will restore some power to creditors, both financial and operational.
  • It will fast-track mechanism of insolvency resolution process may be applicable to certain categories of entities.
  • The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
  • It also provides for fast-track resolution of corporate insolvency within 90 days.
  • Debt Recovery Tribunals will be adjudicating authority over both individual & unlimited liability partnership firms.
  • National Company Law Tribunal will be adjudicating authority with jurisdiction over companies with limited liability.
  • It has a clause to provide for insolvency professionals who will specialize in helping sick companies. <These professionals will help revive control the management of distressed firm to revive it>
  • It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system
  • To setup Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
  • The bill also seeks to establish Insolvency and Bankruptcy Fund of India.

What about Financial Sector Insolvencies?

  • FSLRC recommended creation of a resolution corporation to monitor financial firms and intervene before they go bust.
  • The aim is to close-down the firms which can’t be revived or change their management to protect investors or depositors.

The reform is dubbed as 2nd most important reform after GST, as it will also improve the ease of doing business in India.


 

Published with inputs from Pushpendra

Any doubts?


  1. vinod rawat

    nice coverage

[op-ed snap] Messy fix: the amended insolvency code

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Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code

Mains level: Measures being taken to resolve NPA issue


Context

Ordinance for amending the Insolvency and Bankruptcy Code 

  1. The Central government has passed an ordinance that significantly amends the Insolvency and Bankruptcy Code
  2. The aim of the changes is stated ‘to strengthen further the insolvency resolution process’

How will this be undertaken?

  1. There will be prohibition of certain persons from submitting a resolution plan, who, on account of their antecedents, may adversely impact the credibility of the processes
  2. The categories of persons who are deemed ineligible to participate in resolving a corporate entity’s debt once it has been put under the process of insolvency resolution by creditors have also been mentioned

How this changes will affect corporates?

  1. The category of people barred is too broad and risks the very objectives of the original code
  2. Not all bad loans are a result of mala fide intent on the borrower’s part
  3. Barring the promoters of such firms whose companies have ended up struggling to service debt as a result of unpredictable external factors from a chance to restructure and turnaround the business, merely because the loans have turned sour, is unfair to both the entrepreneur and the enterprise itself
  4. The amendment risks becoming an instrument of blunt force that hurts more than it helps

Objective of IBC

  1. IBC is not intended to serve as a mere instrument of liquidation
  2. It is to provide an enabling legal framework for the “reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons
  3. And to promote entrepreneurship

Insolvency and Bankruptcy code being changed, wilful defaulters can’t bid for stressed assets

Note4Students:

Mains Paper3 | Indian economy – planning and development

The following things are important from UPSC perspective:

Prelims: IBC- Insolvency Bankruptcy Code

Mains level: This news card talks about the recent amendments introduced in the IBC by the government.


News

Context

  1. The Union Cabinet approved the promulgation of an ordinance to amend the Insolvency and Bankruptcy Code (IBC) to streamline the stressed-assets resolution process and effectively bar willful defaulters from bidding for companies being put up for sale under the IBC.
  2. The ordinance was being sent to the President and his approval was expected very soon.
  3. The amendments have been introduced after concerns were raised on existing promoters wresting back control of companies under resolution at cheap valuation.

The Amendments in the IBC

  1. The amendments to the IBC explicitly prohibit persons declared as willful defaulters or those having a history of siphoning funds from a company, or convicted of fraud, from submitting a resolution plan for companies that are going through the corporate insolvency resolution process.
  2. The changes also empower the Insolvency and Bankruptcy Board of India (IBBI) to outline further eligibility requirements for applicants bidding for companies under resolution.
  3. There is no plan to prevent existing promoters from submitting a resolution plan for their own companies.
  4. The ordinance also proposes to disallow sale of property to a person who is disqualified to be a resolution applicant.
  5. The amendments explicitly provide that the Committee of Creditors consider viability of the resolution plan at the time of approval.

Two new Sections inserted in IBC

  1. Apart from the amendments, the government has also inserted two new Sections to the IBC.
  2. While Section 23 5A has been added to provide for punishment for contravention where no specific penalty or punishment has been provided.
  3. Section 29 A has been inserted to prevent an “un-discharged insolvent” from participating in the resolution plans.
  4. Section 29A also provides for disallowing an account declared as non performing asset (NPA) for one year or more for being a resolution applicant.

Concerns

  1. The proposed changes to the IBC, do not address the concerns of homebuyers stuck with undelivered flats by companies that are now undergoing resolution.
  2. The IBC currently overlooks the interests of the buyers who have booked the property but are yet to get it registered in their names.
  3. In such a case, the IBC does not provide any remedy to the homebuyers even though they have paid most of the apartment cost.

 

‘Wilful defaulters must not buy IBC assets’

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Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Read B2B

Mains level: Shows the seriousness of government to tackle the issue of the NPA


News

Direction from the Finance Ministry

  1. The Finance Ministry has asked banks to be vigilant to ensure that wilful defaulters are prevented from buying stressed assets again
  2. Why: To ensure the success of the bankruptcy process under the Insolvency and Bankruptcy Code (IBC)

Why this step?

  1. It has been brought to the notice of the Finance Ministry that some wilful defaulters were making a bid to buy the assets of those cases which have been referred under IBC
  2. The resolution is crucial to the entire banking sector and therefore banks have been advised to be vigilant so that wilful defaulters do not get benefits of the process
  3. Banks have to be very conscious of the fact that such defaulters do not get into the system again

Back2basics

The Insolvency and Bankruptcy Code (IBC)

To know more about the code, Click here

Insolvency resolution norms made stringent

Note4students

Mains Paper 3: Indian economy – planning and development.

The following things are important from UPSC perspective:

Prelims: IBBI.

Mains level: This newscard talks about the amendments made by the IBBI in corporate resolution process and  its impact.


News

Context

The amendment

  1. The Insolvency and Bankruptcy Board of India (IBBI) has amended the corporate insolvency resolution process regulations to ensure that applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility.
  2. The amendment also imposes greater responsibility on the resolution professional and the Committee of Creditors in discharging their duties.
  3. The amendments will ensure that as part of due diligence prior to approval of a resolution plan, the antecedents, credit worthiness and credibility of a resolution applicant, including promoters, are taken into account by the Committee of Creditors.
  4. To ensure that the corporate insolvency resolution process results in a credible and viable resolution plan, the IBBI has carried out amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Resolution Process, 2016 (CIRP Regulations).


Back2basics

IBBI

  1. It is a modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.
  2. Insolvency and Bankruptcy Board of India has been setup to act as a regulator for these utilities and professionals.
  3. It has restored some power to creditors, both financial and operational.
  4. It has fast-tracked the mechanism of insolvency resolution process.
  5. The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
  6. It also provides for fast-track resolution of corporate insolvency within 90 days.
  7. Debt Recovery Tribunals have been set up as adjudicating authority over both individual & unlimited liability partnership firms.
  8. National Company Law Tribunalis adjudicating authority with jurisdiction over companies with limited liability.
  9. It has a clause to provide for insolvency professionalswho will specialize in helping sick companies and in their revival.
  10. It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system.
  11. It has also established  Insolvency and Bankruptcy Fund of India, deposits of the fund will include grants made by the central government, the amount deposited by the persons, interest earned on investments made from the fund etc. any person, who has contributed to the fund, may apply for withdrawal, in a case of proceedings against him.

Insolvency proceedings: New form allows homebuyers to seek claims from firms

Image result for insolvency and Bankruptcy Code (IBC).

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Note4students

Mains Paper 2: Polity | Separation of powers between various organs dispute redressal mechanisms and institutions.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Insolvency and Bankruptcy Code (IBC) features


News

  1. The government has introduced a new form under the insolvency law to enable a person who has to receive a payment from an insolvent company to seek the claim.
  2. This will enable persons such as homebuyers to make claims for undelivered flats on a company undergoing resolution under the Insolvency and Bankruptcy Code (IBC).

What are the new changes?

  • Till now, only financial and operational creditors were permitted to seek claims under the IBC.
  • But Insolvency and Bankruptcy Board of India (IBBI) has amended the regulations whereby claims can be made by creditors other than financial and operational creditors.
  • Such entities should submit proof of their claims to the resolution professional, as per a notification issued by the IBBI.
  • There could be claims from a creditor who is not a financial creditor or an operational creditor and it needs a specific form for submitting its claim.
  • The revised regulations come at a time when a large number of flat buyers have been left in the lurch, due to long delays in delivery with developers citing fund crunch

Back2basics

Insolvency and Bankruptcy Code, 2016

 

[op-ed snap] No level playing field

Image result for Insolvency and Bankruptcy Code, 2016.

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Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

Op-ed discusses about the flaws in the Insolvency and Bankruptcy Code, 2016.

Once you are done reading this op-ed, you will be able to attempt the below.

“The Insolvency and Bankruptcy Code has loopholes to close down businesses instead of assisting entrepreneurs” Critically examine.

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code, National Company Law Tribunal, Article 19(1)(g)

 Mains level: Insolvency and Bankruptcy Code, 2016- features, flaws, challenges.


News

Context

  • The Insolvency and Bankruptcy Code has loopholes to close down businesses.

Why Insolvency and Bankruptcy Code?

  1. It was enacted to improve the ease of doing business in India
  2. It aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals
  3. Attempts to ease the process of recovery of money by operational and financial creditors in a timely manner.
  4. Places the onus on professionals to put forth resolution plans within 180 days

A quick procedure

  1. Code looks to wrap up the process in 180 days.
  2. It warrants a notice of dispute to be issued followed by a response period of 10 days for the corporate debtor, failing which the creditor is entitled to file an insolvency application before the National Company Law Tribunal.
  3. Upon admission of the application, the moratorium period commences.
  4. At this stage, the existing management of the company loses complete control and all powers vest with an interim resolution professional, who has merely 30 days to put together all the relevant information and call for a meeting of the financial creditors.
  5. Once the financial creditors meet, they must appoint a resolution professional who will propose a resolution plan for the company.
  6. All such resolution plans are placed before the financial creditors. When at least 75% of the financial creditors approve, the plan is implemented by way of an order by the NCLT. If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.

The flaws

  1. The Code has enough loopholes to close down businesses instead of assisting entrepreneurs.
  2. It fails to provide adequate safeguards to protect the rights of the company before handing over the management in its entirety to the resolution professional.
  3. Neither does the corporate debtor have an opportunity to put forth his/her case nor is there any scope of discretion provided to the adjudicating authority itself.
  4. At various stages, the Code fails to provide any opportunity to the corporate debtor to make a representation
  5. The Code is also deficient in providing a yardstick for the qualification of insolvency resolution professionals
  6. It allows for any person to access the information memorandum put together by the insolvency professional. There is no law protecting confidentiality and vitiates the fundamental right to business under Article 19(1)(g).
  7. Code prohibits withdrawal of the application once the same has been admitted. This means that there is no scope whatsoever for settlement

Centre constitutes Insolvency and Bankruptcy Board

  1. Centre has constituted a four-member Insolvency and Bankruptcy Board of India (IBBI)
  2. Under the Chairmanship of MS Sahoo, who was till recently Competition Commission of India (CCI) Member
  3. Main activity: To regulate the functioning of insolvency professionals, insolvency professional agencies and information utilities under the Insolvency and Bankruptcy Code 2016
  4. Kudos! Centre had notified the Insolvency Code in May & the fact that IBBI has been constituted in a span of four months is a commendable effort
  5. Expansion: While the Centre has for now set up the IBBI with four members, going forward this will be expanded to 10 (including the Chairman)

Insolvency bill moots ‘creative destruction’- II

  1. The draft Bill also sets in place the creation of a Resolution Corporation
  2. It will comprise three ex-officio members representing the Ministry of Finance, the Reserve Bank of India, and the Securities and Exchange Board of India, respectively
  3. Additionally, there will be one member each nominated by the insurance and pension regulators
  4. Background: It was noted in Budget 2016 that there is a need for a comprehensive code for the resolution of financial sector companies
  5. This code, together with the Insolvency and Bankruptcy Code 2015, would provide a comprehensive resolution mechanism for our economy

Insolvency bill moots ‘creative destruction’- I

  1. A draft Financial Resolution and Deposit Insurance Bill 2016 has mooted the creative destruction of inefficient firms
  2. The legislation seeks to address insolvency issues in financial services companies
  3. In financial firms, zero failure of financial firms is not always possible
  4. However, it is important to ensure that the failure of a financial firm is orderly
  5. Why? So that consumers are protected and systemic stability and resilience are preserved, without relying on taxpayer-funded bail-out

Cross-border pacts mooted to seize defaulters’ assets

  1. Context: Govt would enter into cross-border treaties
  2. Aim: To confiscate overseas assets of wilful defaulters and recover dues of banks even as the
  3. Background: In the wake of the Mallya episode
  4. Also after Congress indicated support, in principle, for the report of the Joint Parliamentary Committee on the Insolvency and Bankruptcy Code
  5. The Bill is considered a key to Govt’s agenda of improving the ease of doing business

RBI submits defaulters’ list to SC

  1. Context: RBI submitted a list of big loan defaulters to the Supreme Court
  2. Undisclosed: The names were submitted in a sealed envelope because disclosing names may have an adverse impact on businesses
  3. Background: The court on 16 February made RBI a party ‘in public interest’ to a 2003 case related to bad loans

Report on insolvency and bankruptcy code expected by March end

  1. The joint committee of Parliament studying the insolvency and bankruptcy code will submit its report by the first week of March
  2. Whenever there was global economic turmoil in the past, India has always shown resilience, including the global financial crisis in 2008-09
  3. Jaitley invited the foreign investors in roads, highways, oil and gas, urban infrastructure and railways, during India Investment Summit 2016
  4. The National Infrastructure and Investment Fund (NIIF) would be the major driving force for investments in to India’s infrastructure 2016-17 onwards

The big fish: don’t let the big defaulters escape

Raghuram Rajan rightly cautions India against being seen as a weak state that lets off the well-connected loan defaulters.

  1. We are accused of not having the administrative capacity of ferreting out wrongdoing.
  2. Dominant banking culture in India works like a net that lets the big defaulters escape without any penalties by restructuring their debts.
  3. Amount recovered from cases decided in 2013-14 under the Debt Recovery Tribunals was just 13 per cent of the total amount at stake.
  4. Worse still, these cases were estimated to take 4 years, instead of the mandated 6 months under the law, to resolve.
  5. RBI initiated the Strategic Debt Restructuring (SDR), which allows creditor banks to convert their unpaid loan into equity and take a majority ownership of the troubled firms.
  6. Government can help by passing the long-pending bankruptcy code.
  7. Key reasons why large defaulters tend to get away is that they can seek legal recourse, which is a very long-drawn-out process in India.

Centre tables bankruptcy Bill in Lok Sabha

The Centre tabled the Insolvency and Bankruptcy Bill, 2015 in the Lok Sabha, which enhance the ease of doing business in the country.

  1. The proposed Bill aims for a complete renovation of the current insolvency and bankruptcy system in India.
  2. It will help streamline the procedure of revival of companies facing financial distress.
  3. The Bill proposes adherence to strict deadlines to decide whether to liquidate a sick firm or not.
  4. The Bill proposes the setting up of an Insolvency and Bankruptcy Board of India to regulate insolvency professionals and agencies.
  5. It also proposes the setting up of a fund dubbed the Insolvency and Bankruptcy Fund of India.
  6. A recent survey found that the average duration for insolvency resolution in India is 4.3 years.

Insolvency resolution in India plagued by wide range of problems: report

The average duration for insolvency resolution in India is 4.3 years, significantly higher than that of South Asia region (2.6 years) and that of OECD high-income countries (1.7 years).

  1. A survey of Indian companies by the consultancy also found that there are systemic problems in the way stressed assets are relieved currently.
  2. SARFAESI [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act] gives secured lenders the legal right to replace ineffectual management.
  3. It is impossible to achieve, as promoters tend to litigate and the long time taken for resolution in the current judicial system leads to severe degradation in value of the assets.
  4. The report recommends that the proposed National Company Law Tribunal should have a separate bench for handling bankruptcy cases.

Bankruptcy panel calls for insolvency regulator

Proposed Bankruptcy Code will replace over a century old insolvency act, Presidency Towns Insolvency Act, 1909, ensures time-bound disposal of insolvency application.

  1. Bankruptcy Law Reforms Committee (BLRC), headed by TK Vishwanathan.
  2. It suggested setting up an insolvency regulator to exercise regulatory oversight over insolvency professionals and agencies.
  3. To ensure speedier winding up of insolvent companies and providing easier exit route to investors.
  4. Recommended, bankruptcy & insolvency processes for individuals with annual gross income of less than Rs 60,000 and aggregate assets of not more than Rs 20,000.

India lacks an effective overarching mechanism to ensure quick winding up of businesses and compensation to other stakeholders.



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