Insolvency and Bankruptcy Code

IBC as an enabler

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC 2016

Mains level : Paper 3- Analysing the working of IBC

The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.

Criticism of IBC

  • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
  • However, the corporate insolvency resolution process (CIRP)  has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.

Is IBC delivering on its mandate

Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.

1) It enables the market to attempt to resolve

  • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
  • When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
  • The market usually rescues a viable company and liquidates an unviable one.
  • There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
  • Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
  • In such cases, the code enables liquidation to release available resources to alternate uses.
  • It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.

2) Look at the total asset value not the number of companies

  • In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
  • In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
  • Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.

3) Look at the overall impact, not just final numbers

  • Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
  • Normally, recovery is better if diagnosis and treatment start early.
  • Likewise, the health of the company deteriorates if the resolution process is delayed.
  • The percentage of rescue at this later stage may not be significant.
  • The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
  • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
  • Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
  • The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.

Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”

Conclusion

Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments