Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

Analysing Insolvency and bankruptcy Code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : what is IBC

Mains level : IBC reforms

InsolvencyContext

  • Speaking at the Sixth anniversary of the insolvency and bankruptcy Board of India (IBBI) on October 1, Union Finance Minister Nirmala Sitharaman said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy code(IBC)

What is Insolvency?

  • Simply speaking, insolvency is a financial state of being one that is reached when you are unable to pay off your debts on time.
  • Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity a person, family, or company becomes insolvent when it cannot pay its lenders back on time.
  • Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.

What is Bankruptcy?

  • Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
  • Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government.

InsolvencyWhat is Insolvency and Bankruptcy Code (IBC)?

  • In a growing economy, a healthy credit flow and generation of new capital are essential.
  • 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.

Why the IBC introduced?

  • Increasing Non ­Performing Assets: 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.
  • Time bound mechanism: 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.
  • Two positive outcomes: When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation. liquidation means the process of winding up a corporation or incorporated entity

InsolvencyImportance of the Insolvency and bankruptcy code

  • Resolution: First objective is finding a way to save a business through restructuring, change in ownership, mergers etc.
  • Maximising the value: The second objective is to maximise the value of assets of the corporate debtor  maximise the value .
  • Credit facility: To promote entrepreneurship, availability of credit, and balancing the interests of all stakeholders.
  • Easy exit: The Insolvency and Bankruptcy Code would provide such an environment to ensure easy exit for sick companies and help the country to improve its position in ease of doing business.
  • Speedy winding up: The bankruptcy code will make it easier for companies to wind up failed businesses and bring India on a par with developed nations in terms of resolving bankruptcy issues.
  • Time bound disposal: Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further. It minimizes the problem of delay as there are strict timelines within which the case has to be disposed off. Quick disposal of cases will maximize the recovery amount.
  • Information database: It prepares a database to provide information on the insolvency status of individuals. In addition to this, specialized insolvency professionals helps in guiding through the process.
  • Easy process of claim: Easy process of claim by the creditors also encourages financial institutions to extend credit facilities thus strengthening the financial markets with increased availability of credit for business.

What are the challenges before IBC?

  • Weak Resolution: IBBI data for the 3,400 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.
  • Increasing deadlines: 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 is almost a year.
  • 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.
  • On Haircuts (Debts that banks forgo):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.
  • As per The Hindu Data Team, in close to 33 of 85 companies so far that owed more than 1,000 crore, lenders had to take above 90% haircuts. In case of the resolution of the Videocon Group for instance, creditors bore a haircut of 95.3%.

InsolvencyWhat  are experts saying?

  • Addressing the delays: 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 case.
  • New mechanism: The IBBI has also called for a new yardstick to measure haircuts. It suggested that haircuts not be looked at as the difference between the creditor’s claims and the actual amount realized but as the difference between what the company brings along when it enters IBC and the value realized.

Conclusion

  • Insolvency and Bankruptcy Code is a comprehensive and systemic process, which gives a quantum leap to the functioning of the credit market. However, it is the need of the hour to find new and innovative alternatives to make this system comprehensible and address the challenge of delay and resolution.

Mains Question

Q. Insolvency and Bankruptcy Code (IBC) is a comprehensive and systemic process, which gives a quantum leap to the functioning of the credit market. Discuss the challenges and way ahead in the resolution mechanism of IBC.

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