Insolvency and Bankruptcy Code

Why does India need a Bankruptcy law? 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.

Insolvency and Bankruptcy Code

Asset Reconstruction Companies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Asset Reconstruction Company

Mains level : https://indianexpress.com/article/opinion/columns/insolvency-law-ibc-corporate-debt-resolution-bankruptcy-code-nirmala-sitharaman-6704399/

The article argues for the greater role to Asset Reconstruction Companies by allowing them to invest in the equity [shares] of the distressed companies.

Context

  • In a recently released paper “Indian Banks: A time to reform” Viral Acharya and Raghuram Rajan argued for a greater role for Asset Reconstruction Companies.
  • They argue that when there are fewer bids in a bankruptcy auction, the value on loans is better realised if read an asset reconstruction company takes over the borrower and places the firm under new management.

Current limits on the role of ARC

  • The RBI limited the role of  ARC to participation in resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) only by partnering with an equity investor, which is the resolution applicant.
  • If the application succeeds, the equity investor would acquire the shares, while the ARC trust would acquire the debt.

Background of the ARCs

  •  Some stakeholders are asking for extending the role of ARCs by allowing direct invest in the equity of distressed companies through IBC resolution just like private equity funds.
  • The RBI doesn’t appear to favour such an extended role for ARCs.
  • This is due to the uninspiring performance of the Asset Reconstruction Companies in the past.
  • At the time of the Asian Financial Crisis,  India’s non-performing assets stood at a whopping 14.4 per cent.
  •  It was in this context that the Narasimham Committee (1998) recommended setting up an ARC specifically for purchasing NPAs from banks and financial institutions.
  • Subsequently, the SARFAESI Act, 2002 created the legal framework for establishing multiple private ARCs.
  • This policy achieved only modest success.
  • The maximum average recovery by ARCs as a percentage of total bank claims stood at 21.5 per cent in 2010.
  • Since then, it has steadily declined and reached 2.3 per cent in 2018.
  • This low recovery could be the result of collateral disposal rather than genuine business turnarounds [i.e. operating the business and turning it profitable].

Need for extending the role of ARCs

  • In 2002, India lacked an effective bankruptcy system.
  • There was no market for corporate control of distressed firms.
  • ARCs were originally designed for this peculiar institutional ecosystem.
  • They were required to hand over the distressed business back to the original promoter once they had generated enough value to repay the debt.
  • Consequently, ARCs had little incentive to turn around distressed businesses.
  • This situation completely changed in 2016 as the IBC seeks to maximise the value of distressed businesses through a market for corporate control.
  • ARCs should be able to fully participate in this market and attempt successful turnarounds by acquiring strategic control over distressed businesses.
  • In a solvent company, shareholders have stronger incentives than creditors to maximise enterprise value.
  • This is because an increase in enterprise value automatically increases the value of its equity.
  • In contrast, creditors do not benefit from increases in enterprise value beyond their individual claims.
  • If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turnaround.

Way forward

  • The law should enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity.
  • Effectively, an ARC should act more like a private equity fund, as Acharya and Rajan suggested.
  • This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.

Consider the question “What are Asset Reconstruction Companies? How allowing the ARCs to invest in equity of distressed companies under IBC help successful turnaround of the distressed business?”

Conclusion

  •  If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.

Back2Basics: Difference between debt and equity

  • Debt market and equity market are two broad categories of investment available in the general investment milieu.
  • Equity markets trade in shares or stocks of the company listed on the stock exchanges.
  • A stock in a company indicates a unit in the ownership of the company.
  • As shareholders, you become part owners of the company.
  • The largest shareholder, with 50% or more shares, becomes the owner of the company.
  • Equity markets are riskier than debt markets.
  • Debt is a form of borrowed capital.
  • The central or state governments raise money from the market by issuing government securities or bonds.
  • In effect, the government is borrowing money from you and will pay interest to you at regular intervals.
  • The principal amount is returned on maturity.
  • In the same way, a company raises money from the market by selling debt market securities such as corporate bonds.
  • The debt market is made up of bonds issued by government authorities and companies.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Need for streamlining the Insolvency and Bankruptcy Code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC

Mains level : Paper 3- Impact of IBC

The article analyses the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution and on Indian economy.

Measures that will improve investment

1)  IBC: transforming insolvency resolution

  • IBC replaced inefficient bankruptcy law regime and has transformed insolvency resolution in India.
  • The IBC has focused on time-bound resolution, rather than liquidation.
  • IBC acts as an empowering tool to support companies falling within its ambit.
  • It has successfully instilled confidence in the corporate resolution methodology.
  • It has allowed credit to flow more freely to and within India while promoting investor and investee confidence.
  • The IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
  • Through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.

Impact of IBC

  •  According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018.
  • Further, the recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019
  • The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.

2) Decriminalisation of minor offences

  • Criminal penalties including imprisonment for minor offences act as major deterrents for investors.
  • The Government of India is also working toward decriminalisation of minor offences.
  • This will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.

3) Other legislative measures

  • Together with the IBC, following 3 reforms suggests major and multi-dimensional effort by the government.
  • 1) The rolling out of the commercial courts.
  • 2) Commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts.
  • 3) Removal of over 1,500 obsolete and archaic laws.

Way forward

  • There could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process.
  • This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.

Consider the question “Examine the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution procedure and suggest the further improvements in the IBC.”

Conclusion

The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs. Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.

B2BASICS

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

What are Pre-packs under the present insolvency regime?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Pre-Pack

Mains level : Asset reconstructions process under IBC

The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what is called “pre-packs” under the current insolvency regime to offer faster insolvency resolution.

Practice question for mains:

Q.What are the key features of the Insolvency and Bankruptcy Code? Discuss how operationalization of IBC is hindered by the slower resolutions of insolvency cases. Suggest measures for faster resolution.

What is Pre-pack?

  • A pre-pack is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.

Why need Pre-packs?

  • Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.
  • Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

A case for India

  • In India’s case, such a system would likely require that financial creditors agree on terms with potential investors and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
  • This process would likely be completed much faster than the traditional CIRP which requires that the creditors of the distressed company allow for an open auction for qualified investors to bid for the distressed company.
  • The process needs to be completed within 90 days so that all stakeholders retain faith in the system and cases that take more than this time should be taken through the normal CIRP.

What are the other key benefits of a pre-pack?

  • Pre-packs would mostly be used for businesses that are running; the investors would likely need to maintain good relations with operational creditors.
  • In the case of pre-packs, the incumbent management retains control of the company until a final agreement is reached.
  • The transfer of control from the incumbent management to an insolvency professional as is the case in the CIRP leads to disruptions in the business and loss of some high-quality human resources and asset value.

Some limitations

  • The key drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP.
  • Financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.
  • This could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Faults in section inserted for the suspension of IBC amid pandemic

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC

Mains level : Paper 3- Problems with IBC

Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

What changes were made?

  • In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
  • Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
  • The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
  • Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

What are the issues with section 10A?

  • Section 10A provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from this period, as may be notified in this behalf”.
  • This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
  • However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
  • While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
  • The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
  • However, the proviso here expands the substantive provision in the main section.
  • Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
  • In this case the main provision appears clear, only to be obfuscated by the proviso.
  • The proviso therefore does not appear to be legally tenable.
  • As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
  • But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
  • This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

Painting all defaults with the same brush

  • The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
  • There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
  • The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
  • Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25 due to similar reasons.
  • This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

Issue with increasing the default amount limit

  • Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
  • This was purportedly done to protect MSMEs from insolvency petitions.
  • However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
  • The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

Conclusion

The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

B2BASICS:

 Insolvency and Bankruptcy Code, 2015

The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

Timeline

  • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

Insolvency Resolution Plan

  • The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

  • The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Information Utilities

  • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

Bankruptcy and Insolvency Adjudicator

  • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
  • The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

Insolvency regulators

  • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

New approach to economic revival: SNAP

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC 2016 provisions.

Mains level : Paper 3- IBC provisions and need for novel approach to deal with the economic fallout of the pandemic.

In this article the author suggests a new approach to deal with multiple bankruptcies and stressed assets that would come up post COVID. So, what is the new approach and how it is different from the existing IBC? Read further.

Why is speed of resolution important?

  • First, because it is the only way to revive the economy.
  • As revenues have dried up cash flow problems have cascaded down the supply chain.
  • Firms will consequently be unable to restart production unless they first get credit to pay their suppliers and workers.
  • But impaired firms cannot get credit and impaired banks cannot provide it.
  • So, the entire economy will be stuck unless the balance sheet problem is sorted out.
  • Second, speed will also minimise the losses from the COVID crisis.
  • The value of bankrupt firms decays rapidly over time, and the bill for this loss will have to be borne ultimately by the government.
  • So, speed is necessary to contain the damage to the government’s financial position, which has been badly eroded by the COVID crisis.
  • But moving quickly will be difficult.
  • The only real mechanism that currently exists to handle stress and bankruptcy is the Insolvency and Bankruptcy Code (IBC) system, which has been suspended for six months.

Why the IBC cannot help much?

  • Many have therefore argued for bringing the IBC back into operation as soon as possible.
  • Why such a strategy would not be very effective? The system is slow, with many cases taking two years or more; it could easily become overwhelmed completely if it is forced to absorb a large new set of bankrupt firms.
  • In addition, the IBC envisages that banks maximise their recoveries by auctioning off the bankrupt firms to the highest bidder.
  • But in a nation and indeed a world, where all balance sheets are damaged, it is not obvious who would be able to buy these firms, or at what prices.
  • So recovery rates from sales could be low, undermining the objective of the exercise.
  • Even if strong bidders could be found, there is a fundamental political, even philosophical, question of whether it is really right to take these firms away from their promoters.
  • After all, many of these firms did nothing wrong; they got into financial difficulties because of the corona crisis.

So, what is the solution?

  • What is needed is a new set of procedures that can utilise much of the existing IBC framework, but are simple, straightforward, and prompt, with a built-in expiry clause.
  • Let’s Call them Special Non-Adversarial Procedures (SNAP).
  • As soon as the lockdown is largely over, the IBC creditor committees (CoCs) could meet to assess the new wave of NPAs.
  • The largest, most complex cases — say, those with debts exceeding Rs 10,000 crore — would be sent to the IBC for regular treatment.
  • But all other cases would be eligible under SNAP
  • After all, the wider the set of companies that are put back on their feet quickly, the stronger the recovery will be.

How would the SNAP work?

  • Under SNAP, CoCs would, over the next three months, examine delinquent firms’ financial records, checking to see whether they are actually viable.
  • If so, these firms would be designated as Lockdown Affected Enterprises (LAEs), eligible under SNAP.
  • Since the basis of the designation would be that the firm is fundamentally sound but because of COVID impact, an Insolvency Professional (IP) appointed by the CoC would work with existing management (who would continue to run the firm) to arrange for interim finance.
  • Then, the IP would assess how much of a debt reduction the firm needs, and within three months would present a specific proposal to the CoC.
  • If the CoC can reach a two-third majority in favour of the proposal, the promoter would keep the firm, while the firm would be granted immediately released from bankruptcy.
  • Since the National Company Law Tribunal (NCLT) is already overloaded, it would not be involved at all in SNAP.
  • If the CoC cannot reach agreement within the three-month deadline, or if at any subsequent point the firm defaults on its newly reduced debt, it would be sent to the IBC for resolution.
  • SNAP would be disbanded by end-December 2020.

Checks and balances under SNAP

  • Such a system would have a series of checks and balances, to prevent firms from securing undeserved debt reductions.
  • Banks would need to certify that defaulters are truly LAEs.
  • IPs would need to certify the size of the debt reduction.
  • A large majority of creditor banks would need to agree to the IP’s proposal.

What should be the role of the government in SNAP?

  • With these checks and balances in place, the government should then commit to two things.
  • First, it should provide some legal cover, ensuring that bankers would not be subject to investigations by the anti-corruption agencies, as long as they followed the LAE rules.
  • Second, the public sector banks would be compensated for the costs of the reduction in the value of the asset, automatically and fully.

Major advantage of SNAP

  • Besides speed, SNAP would have one further major advantage.
  • It would reduce the adversarial nature of the IBC process, arising because promoters are forced to cede their firms.
  • Under the proposed system, promoters would not only have incentives to cooperate; they would actually want to take the initiative, applying for LAE designation themselves, in the hopes that they could get back to business as soon as possible.
  • Such a system might seem difficult to envisage, but it is certainly feasible: It is a design feature under Chapter 11 of the American bankruptcy act.
  • If SNAP succeeds, some of the special procedures could be introduced permanently into the IBC framework, adding a new dimension: Not just liquidation and rehabilitation under new promoters but rehabilitation under existing management.

Way forward

  • After SNAP, repair of the financial system would have to go back to addressing the long-standing problems, which will have been aggravated by the crisis.
  • Firms that were unviable even before the COVID crisis would be sent directly to the IBC, but with the IBC reformed.
  • The government should issue guidelines focusing on the following three-
  • 1. Focusing the COCs on the goal of maximising value, disregarding non-commercial objectives.
  • 2. Directing the NCLT courts to focus on the CoCs’ adherence to the procedure rather than on the merits of their decisions.
  • 3. Increasing competition in the auction by allowing promoters to bid for their assets, as long as they have not been declared wilful defaulters.
  • For the power and real estate sectors, a sui generis approach via the creation of a bad bank is still the best way forward.
  • Real estate resolutions need to take into account the interests of home-owners, something that is almost impossible to do under the IBC.

Consider the question, “Economic revival after the pandemic would require some tweaks in the IBC as it was not designed to handle such situations. Suggest the ways to handle the bankruptcies more effectively and changes that are desired in the IBC.”

Conclusion

Introducing three-pronged strategy quickly would set the stage for the economic recovery of India:  1) Special, expedited, non-adversarial and time-bound bankruptcy procedures (SNAP) for COVID-affected firms 2) A reformed IBC focused squarely on loss-minimisation 3)Bad banks for stressed assets in the power and real estate sectors.


Back2Baciscs: What is Insolvency and Bankruptcy Code-2016?

  1. The Code creates time-bound processes for insolvency resolution of companies and individuals.  These processes will be completed within 180 days.  If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
  2. The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.
  3. Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
  4. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
  5. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Insolvency code should be suspended for six months to help companies recover

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC, difference between operational and financial creditor, threshold limit to file insolvency case etc.

Mains level : Paper 3- Purpose and issues with IBC, its various provisions and changes that needs to be made in the wake of Covid-19.

This article argues the suspension of IBC for six months. The issues arising out of suspension like damage to the creditors are also dealt with here. Reading of this article will help us understand the finer details of IBC that are relevant from the UPSC point of view. We have also covered one article from livemint dealing with the same issue, but that article covered the issue in a broader sense.

Who are operational and financial creditors?

  • After the lockdown is over, several companies are likely to default on their dues to both operational and financial creditors.
  • Who is a financial creditor? The financial creditors include banks and others who have given financial assistance to a company in the form of loans and debentures.
  • According to a 2018 amendment to the Insolvency and Bankruptcy Code (IBC) 2017, flat purchasers are also deemed as financial creditors.
  • An operational creditor is just about anyone who has to receive money from a company.
  • The IBC provides a fast-track mechanism to deal with companies which are unable to repay their creditors and have become financially unviable.
  • Section 22 of the Code mandates the appointment of a Resolution Professional (RP) who is expected to miraculously turn around the company in 330 days.
  • If this attempt fails, the company goes into liquidation.

The two types of creditors were in the news, so pay attention to these terms.

Increase in threshold limit to file an insolvency petition

  • The IBC’s provisions have been extensively used by various creditors whose dues were not paid.
  • What was the threshold limit? Initially, the threshold limit was just Rs 1 lakh and the IBC became an effective recovery mechanism for all operational creditors.
  • What is the limit now? Just before the lockdown, the finance minister raised the threshold for invoking the insolvency provisions to Rs 1 crore.
  • This limit was raised to prevent proceedings being initiated against small and medium enterprises.

Possibility of the domino effect after the lockdown is over

  • After the lockdown, several enterprises, large, medium and small, might not be able to pay their dues, at least in the short-term.
  • The easiest way for a creditor to recover money is to initiate insolvency proceedings against the debtor company and threaten it with liquidation.
  • The shutdown of business after the lockdown could have a domino effect.
  • How would the domino effect come into play? If an auto-manufacturer has shut down its operations, the ancillary units will not get their dues.
  • This would then lead to non-payment to downstream vendors and service providers as well.
  • It might take at least three to four months for the situation to stabilise.

Steps that should be taken to avoid the domino effect

  • Moratorium on the IBC: The most important, and immediate, step that needs to be taken is to have a six-month moratorium on the IBC.
  • It may be necessary to promulgate an ordinance suspending the prospective operation of Sections 7 and 9 of the IBC so that no fresh petition is filed against a company.
  • Impact on creditors: While this could hurt some of the creditors, the damage that could be done to the corporate sector by invoking the IBC is likely to be far greater.
  • A distressed creditor is not without a remedy as he can always approach the civil courts for relief, which will not be so severe on a defaulting company.
  • If an insolvency petition is filed and the RP appointed, it is difficult to stop the insolvency process.
  • The IBC requires a financially-stressed company to be taken over by a financially-sound
  • For example, Essar Steel was taken over by ArcelorMittal and Bhushan Steel was taken over by Tata Steel.
  • In the current scenario, it will be difficult, if not impossible, for an RP to find a suitable buyer and the only option would be to liquidate the company.
  • Using the insolvency process to recover dues is contrary to the IBC’s objectives.

The objective of the IBC is not just insolvency but the reorganisation of companies, maximisation of value of assets and the need to balance the interests of all stakeholders. Pay attention to this point.

How the suspension of the IBC will be beneficial?

  • Suspending the IBC for a short period would enable several companies to return to normalcy.
  • It will help them function without the constant threat of an insolvency application and its Board of Directors and management being taken over by the RP.
  • Moreover, the National Company Law Tribunal benches will simply be unable to take any additional workload.

Conclusion

Suspending the IBC for six months would be a much-needed step to prevent further damage to the economy. It would be in the larger public interest. Indeed, at this critical stage, permitting the legal remedy of insolvency could be the last nail in the coffin of many companies.


Back2Basics: What is the Insolvency and Bankruptcy Code?

  • IBC provides for a time-bound process to resolve insolvency.
  • When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency.
  • Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.
  • Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament.
  • It got Presidential assent in May 2016.
  • The law was necessitated due to huge pile-up of non-performing loans of banks and delay in debt resolution.
  • Insolvency resolution in India took 4.3 years on an average against other countries such as United Kingdom (1 year) and United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Can the insolvency code handle the aftermath of the corona crisis?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Committee of creditor, difference between financial and operational creditors etc.

Mains level : Paper 3- Issues in the IBC and suggestion to improve it.

The article is about the aftermath of Covid-19 for the Indian business. Though the government has announced the slew of relief packages, one expects a significant spike in the number of bankruptcies. Will India’s Insolvency and Bankruptcy Code be able to deal with this new normal? Some pressing issues that could arise and solutions are discussed here.

Rise in the pending cases with NCLT

  • Since the commencement of the IBC and setting up of the National Company Law Tribunal (NCLT), 12,000 cases have been filed.
  • Around 4,500 cases have been settled before resolution, with a settlement amount of almost ₹2 trillion.
  • 1,500 cases have been admitted and 6,000 cases are waiting in the queue.
  • The covid-19 epidemic will only increase this traffic jam.
  • Increasing the capacity of NCLT: The pile-up of cases needs to be addressed by increasing capacity of the NCLT, and by ensuring that as many cases as possible are settled without going to the IBC.

Every issue mentioned here is important from Mains point of view. IBC has been a significant step by the government to streamline the process of insolvency and bankruptcy.

Need for a relook at section 29A(c) of IBC

  • What is section 29A(c) of IBC? This provision makes ineligible the defaulting person (promoter) from bidding for the asset (buying back) if it has been NPA for a year or more.
  • What was the purpose of section 29A(c): The intent of section 29A is to prevent persons who, by their misconduct or fraudulent motives contributed to the default of the corporate debtor, from “buying back” the corporate debtor from the creditors, potentially at steep discounts.
  • What’s the issue? While this is clearly a justifiable objective, the short window of one year has prevented even genuine promoters who faced major setbacks on account of unforeseen circumstances from being given a second chance.
  • Even though such promoters are often in good the best position to revive their businesses.
  • In view of the current force majeure, we recommend that the grace period of one year under section 29A(c) be extended to two years.
  • And further extensions should be made possible on the approval of a supermajority (i.e. 75%) of the Committee of Creditors.
  • Further, the newly introduced Section 12A allows the bank, which was the insolvency applicant, to exit the insolvency process.
  • Which brings the promoter back in control—provided 90% of the Committee of Creditors agrees and the public bidding process has not commenced.
  • The requirement for exit should be reduced to 75% of the committee.

Extension of timelines

  • Recently, the Supreme Court did well by passing a suo-moto order on the extension of limitation generally.
  • Based on these SC orders, the National Company Law Appellate Tribunal has ordered that such extension also apply to the outer limit of 330 days for the resolution of corporate insolvency cases.
  • This could be further extended once the gravity of the situation becomes clear over the next few months.
  • The moratorium period on debt financing recently announced by RBI should also be extended to cover money market instruments.

Need for providing more financing options to corporate debtors

  • While the IBC does provide for interim finance with a preferential position for a corporate debtor, there are known limitations and residual risks on the provision of such finance.
  • The government would do well to look at expanding the market by making changes.
  • The changes could include permitting interim funding by asset reconstruction companies even without being creditors.
  • And making provisions for a minimum return even in case of liquidation, and extending the enhanced priority standing given to interim financiers in the IBC phase to the pre-IBC phase.
  • Post the lockdown, incremental working capital support upto, say, 25% of existing working capital exposure could be allowed in deserving cases even if the account is in default or NPA.
  • This can be deemed to be priority lending to also protect bankers’ interests.
  • The provision could also be made for the extension of concessional finance within limits based on demonstrated export potential.
  • For example- order, short lead-time business, margin adjustments) in order to contribute to the recovery of exporting industries.

Equitable treatment of operational creditor

  • In the Swiss Ribbons judgment, the Supreme Court urged equitable, though not equal, treatment of operational creditors.
  • The need to protect the interests of operational creditors in bankruptcy proceedings is all the more critical in difficult market conditions where credit would be hard to obtain.
  • Some broad guidelines appear to be desirable.
  • For instance, one could stipulate that in the absence of quality issues, two operational creditors belonging to the same sub-class in terms of the type of product or service sold, should be treated equally.
  • This should be irrespective of group relationships or continuity in the business of the resolved entity.

Facilitating resolution outside the corporate insolvency resolution process

  • On the issue of closing a case before the onset of insolvency proceedings, there was a case for doing this even before the corona outbreak, and even without the paucity of processing capacity.
  • The labelling of a company as insolvent or bankrupt has a chilling effect on its already dim prospects.
  • Vendors, customers and employees start having second thoughts about associating with this company.
  • Certain rules get triggered—for instance, the rule barring an infrastructure company from accepting new orders.
  • The current outbreak amplifies the case for facilitating resolution outside the corporate insolvency resolution process.
  • At the same time, there is a need to streamline the process to ensure enhanced proceeds.

Conclusion

All institutions of the economy will need to fire together in order to maximize the prospects of recovery. A suitably modified bankruptcy framework has a crucial role to play.


Back2Basics: Difference between financial and operational creditors

  • Financial and operational creditors are different in the sense that their liabilities arise from different origins.
  • Where a financial creditor is liable because of a contract such as a loan or debt and operational creditor is liable because of operational transactions.
  • The difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security.
  • Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

The real reform

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3-How IBC has fared so far?

Context

The IBC has started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.

Demystifying the myths surrounding IBC

Myths about recovery:

Most of the myths surround recovery. Consider the following example for quick appreciation.

  • M/s. Synergies Dooray was the first company to be resolved under the IBC. It was with the Board of Industrial and Financial Reconstruction (BIFR) for over a decade.
  • The realisable value of its assets was Rs 9 crore when it entered the IBC process. It, however, owed Rs 900 crore to the creditors.
  • How much did IBC recover? The resolution plan yielded Rs 54 crore for them.
  • Some condemned IBC because the resolution plan yielded a meagre 6 per cent of the claims of the creditors, disregarding the fact that they recovered 600 per cent of the realisable value of the company, which had been in the sick bed for over a decade.
  • If the company was liquidated, assuming no transaction costs, the creditors would have got at best Rs 9 crore — 1 per cent of their claims.

The myth that recovery under IBC is dismal

  • Let’s examine the myth that the recovery through resolution plans is dismal.
    • Two hundred companies had been rescued till December 2019 through resolution plans.
    • They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
    • The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies.
    • Why creditors had to take a haircut? Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
    • What is the conclusion? As compared to other options, banks are recovering much better through IBC, as per RBI data.

The myth that IBC is sending companies for liquidation:

    • What is the primary objective of IBC: Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
    • More number of companies sent for liquidation: There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued.
    • The context for the numbers: Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
    • Looking from the value term angle: In value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.

The myth that IBC is resulting in huge job losses

  • The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
  • Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
    • Take the examples of Minerals Limited and Orchid Healthcare Private Limited, which have been completely liquidated. They owed Rs 8,163 crore, while they had absolutely no assets and employment.
    • What matters in this context is the assets a company has or the employment it provides — not how much it owes to creditors.
  • The IBC process would release the idle or under-utilised assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
  • One also needs to consider the jobs saved through the rescue of 80 per cent of the distressed assets, and the job being created by these companies, post-rescue.

What changes IBC has brought?

  • Changed the behaviour of debtors: A distressed asset has a life cycle. Its value declines with time if the distress is not addressed.
    • The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
  • Debtors are settling debt at an early stage: Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
    • They are settling when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application.
    • These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness. Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
  • Value erosion at the liquidation stage: The value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
    • The recovery may be low at this stage, but in the early stages of distress, it is much higher — primarily because of the IBC.
    • The percentage of companies or distressed assets getting into liquidation is insignificant.
    • Stakeholders should increasingly address the distress in the early stages and the best use of the IBC would be not using it all.

Conclusion

Stakeholders who understand business and have the backing of sophisticated professionals are using IBC with open eyes after evaluating all options. There is no reason to doubt their commercial wisdom. The 25,000 applications filed so far under IBC indicate the value and trust that stakeholders place on the law — the ultimate test of its efficacy.

 

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Right to carry on business

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Right to carry on business

Mains level : Issues over IBC

The Supreme Court has increased the time limit for the corporate resolution to extend beyond the mandated 330 days. The judgment is significant for India’s fledgling corporate resolution process under the Insolvency and Bankruptcy Code.

Time limits

  • As of now, the time limit for resolution process is mandatorily 330 days in all cases.
  • If debts are not resolved and the bankrupt firm cannot be brought back to its feet within this time-frame, the only option left is liquidation of its assets to pay creditors.
  • The court said that the provision saying the 330-day mark should be followed in the ‘ordinary course’.
  • Extension of time should be granted by the NCLT if parties are able to prove there is very little time left in the resolution process and the delay has been caused by ‘tardy’ legal proceedings.

Why extension?

  • A Bench led by Justice Nariman in a judgment, observed that many litigants suffer the prospect of liquidation for no fault of theirs.
  • Delay in legal proceedings leads to the resolution process being dragged beyond the 330-day mark.

How is Article 19 involved?

  • Justice Nariman said it would be arbitrary to let litigants suffer liquidation unnecessarily.
  • The court held the mandatory nature of the 330-day mark as a violation of Article 14 (right to equal treatment) of the Constitution and an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution.

Back2Basics

Article 19

According to Article 19, all citizens shall have the right—

  • to freedom of speech and expression;
  • to assemble peaceably and without arms;
  • to form associations or unions or co-operatives;
  • to move freely throughout the territory of India;
  • to reside and settle in any part of the territory of India; and
  • the right to acquire, hold and dispose of property (deleted after 44th CAA, 1978)
  • to practise any profession, or to carry on any occupation, trade or business.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] The efficiency promise of the bankruptcy code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : IBC - analysis

Context

It has been 3 years since the Insolvency and Bankruptcy Code (IBC) is passed, and it remains a work in progress. 

Background to IBC

  • It had envisaged a mechanism by which creditors could wholly or partially recover their dues from a company unable to pay back.
  • The insolvent business taken over is to be revived or sold off so that its assets could swiftly get back to generating value under new ownership
  • In theory, it’s about capital moving to the best hands. 

Updates – Online Bidding

  • Recent reports suggest the government may bring in a short, time-bound online bidding process to resolve corporate bankruptcy cases. 
  • This is likely to improve transparency and reduce litigation over business failures.
  • This would be an efficient way to deal, which is crucial for an economy to optimize its allocation of resources

Amendments

  • Last year, it was amended to protect homebuyers, placing them at par with financial creditors. 
  • 8 changes were made to ease the resolution process, the most important one being an extension of the maximum time that can be taken to a more realistic 330 days.

Outcomes – Drawbacks

  • At the heart of the IBC legislation was its time-bound approach to resolving insolvency cases. But the initial 270-day deadline proved inadequate
  • Several lenders unsure of their stance; some promoters trying every legal device to retain their firms, and the very process frequently getting caught in a judicial quagmire
  • Some high-profile cases have been plodding along for years now.
  • Bankruptcy courts have been stormed with realty cases because even a lone homebuyer can file one.
  • So far, creditors of a company undergoing insolvency proceedings have been at liberty to negotiate with bidders on a case-to-case basis. This leads to a drama of bids and counter-bids and bank officials are chased leading to litigation. 

What lies ahead – with new proposals

  • In case the assets or shares of a bust company are being auctioned, a clear time window would be specified for eligible bidders to place financial bids. 
  • Moving to bid online should speed up resolutions. 

What needs to be done

  • The tribunals that deal with IBC cases could do with stricter guidelines to distinguish between financial and operational creditors
  • Secured lenders need to be marked apart from unsecured lenders with greater clarity. 
  • Resolution orders should not end up casting the basis on which banks lend money in doubt.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Green Channel Combination

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Green Channel concept

Mains level : Mergers and Acquisition

  • Putting in place a speedier approval mechanism, Competition Commission has introduced a green channel route for clearing certain categories of mergers and acquisitions.

The Green Channel Concept

  • Mergers and Acquisitions (M&As) or combinations beyond a certain threshold are required to have mandatory approval from the fair trade regulator.
  • The green channel is aimed to sustain and promote a speedy, transparent and accountable review of combination cases, strike a balance between facilitation and enforcement functions, create a culture of compliance and support economic growth.
  • This concept recommended by the high level panel that reviewed competition law — would allow for an automatic system for speedy approval of combinations subject to certain conditions.
  • Under this process, the combination is deemed to have been approved upon filing the notice in the prescribed format.
  • Parties to a combination can avail the green channel route subject to various conditions, including that there is no horizontal overlap or vertical relationship.

Benefits of the move

  • The amended regulation provide for a single summary of the proposed combination.
  • Earlier, entities had to provide both a short as well as a long summary.
  • This system would significantly reduce time and cost of transactions.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] Diluting the code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : impact of NCLAT's latest Judgement

CONTEXT

Last week, the National Company Law Appellate Tribunal (NCLAT) approved the resolution plan filed by ArcelorMittal for Essar Steel. But the two-member bench of the appellate tribunal modified the manner in which the proceeds from the sale would be distributed. Earlier, the resolution plan had proposed to pay financial creditors 92.5 per cent of their dues. But as per the order, both financial and operational creditors will recover 60.7 per cent each of their admitted claims.

Consequences of judgement

  • The judgement, which, in effect, places operational creditors at par with secured financial creditors at the time of settling claims, is likely to have far reaching consequences.
  • Under the Insolvency and Bankruptcy Code (IBC), Section 53 deals with the distribution of proceeds from the liquidation of assets.
  • It lists the hierarchy in which various claims against the firm would be settled. Under this waterfall mechanism, after the costs associated with the insolvency resolution process and liquidation are settled, dues owed to secured creditors and workmen have to be settled first.
  • This is followed by discharging dues of employees, unsecured creditors and governments, in this particular order.
  • After these claims have been settled, the balance is to be distributed among preference and equity shareholders, in that order.
  • Thus the structure draws a clear distinction between the claims of secured creditors and operational creditors in the liquidation process, with the former having the first right.

The distinction drawn by case

  • However, the judgement draws a distinction between claim settlement in the resolution and liquidation process.
  • It notes that as the case is not about “distribution of assets from the proceeds of sale of liquidation… the resolution applicant cannot take advantage of Section 53 for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders”

Conclusion

  • The consequences of this order stretch beyond this particular case.
  • To argue that claims of financial creditors can be treated at par with operational creditors would muddy the waters as it loses sight of the basic distinction between secured and unsecured creditors.
  • In fact, in its judgement on the constitutionality of the IBC earlier this year, the Supreme Court had justified the difference between financial and operational creditors, making a critical distinction between financial debts which are secured and operational debts which are unsecured.

 

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

RBI circular to banks on loan defaulters quashed

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC

Mains level : Effectiveness of regulatory mechanism for stressed assets resolution

  • The Hon’ble Supreme Court has struck down a Feb-2018 RBI circular giving lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over Rs. 2000 crore.

About the RBI circular

  • Through a notification issued on Feb 12, 2018 the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject.
  • Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days.
  • In case of non-implementation, lenders were required to file an insolvency application.
  • RBI termed it necessary to substitute the existing guidelines with a harmonized and simplified generic framework for resolution of stressed assets.

What did the revised framework replace?

  • The circular went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect.
  • The circular was ostensibly intended to stop the “evergreening” of bad loans the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
  • The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

Issues with the circular

  • The companies argued that the circular was arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.
  • Several companies from the power and shipping sectors had challenged the circular, arguing that the time given by the RBI was not enough to tackle bad debt.
  • The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.
  • Power producers, for instance, had argued that the RBI’s ‘one-size-fits-all’ approach was impractical since the sector had to confront external factors that were beyond its control.
  • These factors included the unavailability of coal and gas, and problems arising out of the failure of state governments to honour power purchase agreements.

Impact of SC’s relaxation

  • The order provides immediate relief to companies that have defaulted in repayments, especially those in the power, shipping and sugar sectors.
  • However, many financial sector experts argued that the verdict could delay the process of stressed assets resolution, which had of late picked up pace.
  • Since banks will have the choice of devising resolution plans or going to the National Company Law Tribunal under the IBC, the urgency that the RBI’s rules had introduced in the system could be impacted.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] Deals to rules

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Positive handling of bad loans through IBC and other initiative.


NEWS

CONTEXT

India’s bad loan policy is finally moving in the right direction.

Reasons for high default

  • Not creating the fear of immediate, automatic and borrower-blind consequences for default is one reason why India’s credit to GDP ratio is a low 50 per cent (Arunachal is 1 per cent, Bihar is 17 per cent, 100 per cent is the average for rich countries).

Reforms in the right direction

  • But over the last three years, the new Insolvency and Bankruptcy Code (IBC) and the RBI’s Revised Framework for Resolution of Stressed Assets (RFRSA, issued on February 12 last year) have begun to show impressive results in recognition (we know the truth), deterrence (defaults are reducing), resolution (defaults are being cured) and speed (defaults are being cured faster).
  • This is great news for financial inclusion of the small, honest, and non-politically connected.

No difference with willful defaulter Tag

  • The “willful defaulter” tag is a distinction without a difference; banks face pain irrespective of whether a default is caused by Fraud , Competition , or Unsustainable Ambition.
  • Current court petitions by defaulting sugar, shipping and power companies against the IBC and RFRSA should be dismissed because they want pre-IBC bank behaviour (discretionary bad loan recognition via restructuring or evergreening) that created our pre-IBC regime (Eagle’s Hotel California, where you check in but never check out).

The effectiveness of new reforms

  • India’s new policy regime for defaults — IBC plus RFRSA — ensures a time-bound exploration of all business, capital and ownership restructuring options before liquidation.
  • It is working; bad loans went from 2.4 per cent in 2007 to 11.6 per cent in 2018 but may now be down to 10.2 per cent.
  • And the direct impact of RFRSA lies in annualised reduction in bad loans for recent quarters being the highest in recent years with a huge acceleration in two-way mobility between standard and non-standard loan classifications.
  • Of the 82 accounts resolved by the IBC, the average realisation by financial creditors was 48 per cent and average time taken for resolution was 310 days (versus World Bank estimates of 27 per cent and 1,580 days).
  • RFRSA fixed birth defects of past RBI interventions like SDR, S4A, JLF, CAP, etc by requiring weekly reporting by banks on all accounts in default anytime during the week with exposure greater than Rs 50 million, requiring all lenders to initiate steps to cure a default with any lender, requiring an independent credit opinion for resolution plans, and setting a 180-day implementation deadline for resolution plans in loans greater than Rs 2,000 crore.

Challenges

  • Litigation has choked the pipeline with resolution for only three of the RBI’s first IBC list of 12, only 63 of the total 1,484 cases admitted under the IBC have the highly desirable outcome of being withdrawn under Section 12A (withdrawal from insolvency prior to expression of interest stage with consent of 90 per cent of lenders).
  • recovery rates are still lower than global averages, and 31 per cent of the 898 ongoing insolvency cases at the end of 2018 have breached the 270-day deadline.

Learning from the mistakes of  China

  • China can teach us a lot about labour markets but not about banking.
  • Their share of bank lending to the private sector has shrunk by 80 per cent since 2013, total bad loans may exceed $3 trillion, and total debt now exceeds 300 per cent of GDP (most loans went to construction because China produced three times as much cement between 2012 and 2016 as the US did in the entire 20th century).
  • While China’s treatment of defaulters is tempting — they recently expanded restrictions on travel, buying homes, holding high-level jobs, kids school eligibility, etc for defaulters — these practices are inconsistent with a democracy.

Way Forward

  • Over the last three years, India’s bad loan policy moving from deals to rules means the long arc of economic history is finally bending towards justice.
  • This remarkable reform will not only recover Rs 3 lakh crore plus for banks but has hugely positive consequences for India’s productivity, wages and prosperity.

 

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap]Resolution, at last: on Essar Steel case

 

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level: The issues discussed in the newscard regarding the IBC’s various aspects through Essar ruling.


NEWS

CONTEXT

Essar Steel case has clarified many aspects of the Insolvency and Bankruptcy Code process.

Significance of Case

  • The National Company Law Tribunal’s approval of ArcelorMittal’s bid for the insolvent Essar Steel Ltd. is significant for several reasons.
  • First, the ₹42,000-crore bid will be the largest single recovery of debt under the fledgling Insolvency and Bankruptcy Code (IBC) enacted in 2016.
  •  Second, the case, which took 583 days to resolve, compared to the 270 days provided under the Code, has tested several aspects of the law and set important precedents for the future.
  •  Among the aspects that have been clarified are the eligibility of those who have defaulted in repaying their borrowings elsewhere to bid, the time-limits for bidding and the place of unsecured, operational creditors under the resolution mechanism.
  •  In the event, the successful culmination of the Essar Steel case will be a big leg-up for the insolvency resolution process that is less than three years old.

Challenges 

  • The Code provides for an appeal to the National Company Law Appellate Tribunal and then to the Supreme Court, and it is unlikely that the promoters, who bid a much higher ₹54,389 crore, will let go without a fight.
  • The banks, though, will be hoping that the process ends in the next couple of weeks as they would want to account for the receipts from the resolution process within this financial year.
  • After all, only four cases (excluding Essar Steel) out of the initial list of 12 big defaulters referred by the Reserve Bank of India for resolution back in June 2017 have been successfully resolved till now.
  • Insolvency and Bankruptcy Board of India data also point to a pile-up of cases in the various benches of the NCLT.
  • As many as 275 companies, representing 30% of the total of 898 undergoing resolution, have exceeded the 270-day limit set for resolution under the Code.

Way Forward

  • The fact is that there is a need for more benches of the NCLT to clear the pile-up. The government would do well to look into this issue.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Government submits resolution plan for IL&FS

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: IL&FS crisis

Mains level: Too big to fail institutions and their risk of failing


News

  • The government has submitted the debt resolution plan for crisis-hit IL&FS to the NCLAT and also suggested the name of retired Supreme Court judge Justice D K Jain to supervise the entire process.

What is IL&FS Crisis?

  1. The IL&FS Ltd is an infrastructure finance company registered with the Reserve Bank of India as a ‘Systemically Important Non-Deposit Accepting Core Investment Company’, with over Rs.1,15,000 crore of assets and Rs. 91,000 crore of debt.
  2. IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on the due date—which means the company has run out of cash or it is facing a liquidity crunch.
  3. The company piled up too much debt to be paid back in the short-term while revenues from its assets is skewed towards the longer term.

The Resolution Plan

  1. The entire resolution process would be based on the principles enunciated in the Insolvency and Bankruptcy Code.
  2. Under the plan, the government has categorised IL&FS group companies into green, amber and red based on their respective financial positions.
  3. The corporate affairs ministry has fixed September 30, 2018 as the cut-off date for entertaining the claims submitted by the lenders.
  4. During the conduct of the resolution process, payments will be permitted only to maintain and preserve the going concern status of the companies of the IL&FS group.

Declaring a bidder

  1. Upon receipt of the recommendations, a successful bidder would be declared, who will deposit the earnest money.
  2. Upon declaration of the bidder, documentation of the sale will be completed and the forwarded to National Company Law Tribunal for the final approval.
  3. According to the affidavit filed before the NCLAT, the classification of the IL&FS group companies is “based on a 12-month cash flow based solvency test”.

3 Categories

  1. Companies falling in the green categories are the entities, which will continue to meet their payment obligation.
  2. While companies falling in the amber category are those who are not able to meet their obligations but can meet only operational payment obligations to senior secured financial creditors.
  3. Amber category entities “are permitted to make only payments necessary to maintain and preserve the going concern”.
  4. Companies falling in the red category are the entities which can not meet their payment obligations towards even senior secured financial creditors.
  5. These companies would be permitted to make payment necessary to maintain and preserve the going concern status.

Asset Monetization Plan

  1. The distribution of the sale proceeds would be in accordance with the waterfall mechanism specified under section 53 of the IBC.
  2. Under Section 53 of IBC, senior secured creditors loans are cleared first and any surplus that remains thereafter is given to unsecured or subordinated creditors and thereafter to the equity owners.

For detailed reading on IL&FS crisis , navigate to the page:

[Burning Issue] IL&FS Crisis

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Panel for adopting UN model on cross-border insolvency

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: UNCITRAL Model Law

Mains level: Policy measures to curb cross border insolvency.


News

Context

  • The Insolvency Law Committee (ILC), tasked with suggesting amendments to the Insolvency and Bankruptcy Code of India (IBC), has recommended for adopting the UN model to handle cross-border insolvency cases.

Recommendations of the ILC

  1. The ILC has recommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law of Cross Border Insolvency, 1997.
  2. The Model Law has been adopted in 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
  3. It provides for a comprehensive framework to deal with cross-border insolvency issues.
  4. The ILC has also recommended a few changes to ensure that there is no inconsistency between the domestic insolvency framework and the proposed cross border insolvency framework.

Why adopt UNCITRAL Model Law

  1. The proposed IBC will enable us to deal with Indian companies having foreign assets and vice versa.
  2. However it still does not provide for a framework for dealing with enterprise groups, which is still work in progress with UNCITRAL and other international bodies.
  3. Many Indian companies have a global footprint and many foreign companies have a presence in multiple countries, including India.
  4. The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.

Back2Basics

UNCITRAL Model Law of Cross Border Insolvency

  1. It is a model law issued by the secretariat of UNCITRAL in 1997 to assist states for the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.
  2. It defines a cross-border insolvency as one where the insolvent debtor has assets in more than one state, or where some of the creditors of the debtor are not from the state where the insolvency proceeding is taking place.
  3. The model law deals with four major principles of cross-border insolvency namely:
  • direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor;
  • recognition of foreign proceedings & provision of remedies;
  • cooperation between domestic and foreign courts & domestic and foreign insolvency practioners;
  • coordination between two or more concurrent insolvency proceedings in different countries.
  1. The main proceeding is determined by the concept of centre of main interest (“COMI”).

UNCITRAL

Please navigate to:

[pib] United Nations Commission on International Trade Law (UNCITRAL) completes 50 years

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

More banks report tightening of credit standards, shows survey

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The newscard discusses measures adopted by banks to reduce NPAs.


News

Cautioned over NPAs

  1. A survey conducted by FICCI and Indian Banks’ Association (IBA) showed more respondents claiming they had tightened credit standards during January-June 2018, the period in which survey was conducted.
  2. 67% respondents among participating banks have reported tightening of standards, steeply increasing from 28% in the last round of the survey.
  3. A total of 22 public sector, private sector and foreign banks participated in the survey, which is conducted twice a year. These banks together represent 64% of the banking industry, as classified by asset size.
  4. This round has been conducted at a time when NPAs have shot past the Rs. 10-lakh crore marks and continue to rise.

IBC effect

  1. The survey noted that with stressed assets rising, banks have generally adopted a cautious approach in lending, to prevent fresh slippages.
  2. As was the case in the previous round of the survey, 59% of the respondent banks reported a rise in NPAs in the current round of the survey.
  3. Infrastructure, metals and engineering goods were the key sectors reported with the highest NPAs. More than two-thirds of the respondents have cited these as sectors with high NPAs.
  4. At the same time, most participating banks agreed that the Insolvency and Bankruptcy Code (IBC) had made the recovery process faster and improved the recovery position of banks.
  5. To improve the resolution rate, bankers suggested strengthening of the judiciary, enhancing capacity, empowerment of local level government officials, among other suggestions.
  6. They also said that extension of the moratorium beyond 270 days for any reason should not be permitted.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Govt. panel suggests amending Passport Act to prevent borrowers from fleeing country

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Preventing bank fraudsters and other offenders fleeing the country


News

Amending Passport Act

  1. A government panel has recommended amending the Passport Act to prevent borrowers from fleeing the country.
  2. If the recommendations are accepted, it will be a step towards ensuring that large borrowers are held accountable for non-payment of loans to banks and cannot flee the country without paying their dues.
  3. The recommendations include that over a reasonably prescribed limit, wherever there is a financial risk in a particular (loan) account, the borrower will be asked to participate in the resolution of the account, and stop them from fleeing the country.
  4. The government will prescribe a threshold for the loan default, beyond which the lenders will be empowered to alert enforcement agencies as per the provisions in law.

Other recent measures

  1. The government has already enacted the Fugitive Economic Offenders Law to ensure that the fugitives return to the country to face prosecution.
  2. The law empowers confiscation of all assets both within and outside the country for all offences where the monetary value of the offence exceeds ₹100 crore.

What data says about offenders?

  1. According to data collated by the external affairs ministry, 28 Indians involved in financial irregularities had fled the country in the period between 2015 and 30 June 2018.
  2. The list was compiled by the Central Bureau of Investigation and Enforcement Directorate (ED), and includes names like Mallya, Nirav Modi and his brother Neeshal Modi, Choksi and Lalit Modi.

About the Panel

  1. The government panel is headed by Rajiv Kumar, secretary, Department of Financial Services in the ministry of finance.
  2. Other members of the panel include representatives from Enforcement Directorate, Central Bureau of Investigation, Reserve Bank of India, Home ministry and ministry of external affairs.
  3. The panel was set up after increasing instances of bank frauds were unearthed, with enforcement agencies unable to prevent the defaulters and fraudsters from fleeing the country.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] Explaining the Fugitive Economic Offenders Ordinance

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: Laws to prevent economic frauds


News

Who is a fugitive economic offender?

  1. Under the Fugitive Economic Offenders Ordinance, promulgated by the President in April, a fugitive economic offender is any individual against whom a warrant for arrest in relation to a scheduled offence has been issued by any court in India and who has either left India to avoid criminal prosecution, or who, being abroad, refuses to return to India to face criminal prosecution.
  2. The list of offences that can qualify an individual to be designated an economic offender, enumerated in the schedule to the Ordinance, includes offences under several Acts such as:
  • Negotiable Instruments Act, 1881;
  • Reserve Bank of India Act, 1934;
  • Central Excise Act, 1944;
  • Customs Act, 1962;
  • Prohibition of Benami Property Transactions Act, 1988;
  • Prevention of Money Laundering Act, 2002; and
  • Indian Penal Code.

What happens if a person is designated a fugitive economic offender?

  1. If the special court is satisfied that an individual is a fugitive economic offender, it can direct the Central government to confiscate the proceeds of the crime in India or abroad, whether or not such property is owned by the fugitive economic offender, and any other property or benami property in India or abroad that is owned by the fugitive economic offender.
  2. While the confiscation of property within India should not be a problem for the Centre, confiscating properties abroad will require the cooperation of the respective country.
  3. The fugitive economic offender will also be disqualified from accessing the Indian judicial system for any civil cases.

On whom does the burden of proof lie?

In keeping with the principle of ‘innocent until proven guilty’, the burden of proof for establishing that an individual is a fugitive economic offender or that certain property is part of the proceeds of a crime is on the Director appointed to file an application seeking fugitive economic offender status.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Cross-border insolvency: Rules to help lenders access foreign assets

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: UNCITRAL

Mains level: The newscard highlights the priority of government to counter  cross-border insolvency


News

Amendments for Cross-Border Insolvency in IBC

  1. The government put out a draft amendment on cross-border insolvency to further strengthen the Insolvency and Bankruptcy Code (IBC), seeking to help lenders access overseas assets of a stressed company.
  2. The draft aims to enable India to seek cooperation from foreign countries to bring defaulters’ assets there under consideration for insolvency proceedings.
  3. In this respect, the draft favours adoption of an existing UN model law (United Nations Commission on International Trade Law, or UNCITRAL) on cross-border insolvency that has already been ratified by 44 countries.

How will it work?

  1. A cross-border insolvency law recognises that one country has to proceed with the main insolvency case while others with supplementary cases, depending on the location of defaulter’s assets.
  2. Similarly, if a foreign country has already initiated insolvency proceedings against a particular defaulter to recover stressed assets some of which are located here, India, too, will have to cooperate with that nation.

What are its benefits?

  1. Once enacted, this will offer a level playing field to Indian companies with investment and creditors overseas and multinational companies with interest in India.
  2. It will offer greater certainty and predictability to insolvencies involving multiple jurisdictions.

Back2Basics

United Nations Commission on International Trade Law

  1. UNCITRAL was established in 1966 with the recognition that international trade cooperation among States is an important factor.
  2. When world trade began to expand dramatically in the 1960s, national governments began to realize the need for a global set of standards and rules to harmonize national and regional regulations, which until then governed international trade.
  3. UNCITRAL Model Law on Cross-Border Insolvency was a model law issued by the Secretariat of UNCITRAL in 1997 to assist states in relation to the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.
  4. The Model Law is designed to provide a model framework to encourage cooperation and coordination between jurisdictions.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] Miles to go: The bankruptcy code

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level: The issues discussed in the newscard regarding the IBC.


News

The new bankruptcy code yields its first success

  1. Tata Steel acquired 73% stake in the bankrupt firm Bhushan Steel for about Rs. 35,000 crore last week, making it the first major resolution of a bankruptcy case under the new Insolvency and Bankruptcy Code (IBC)
  2. Bhushan Steel was one among the 12 major accounts referred to the National Company Law Tribunal at the behest of the Reserve Bank of India last year to ease the burden of bad loans on banks

Expectations of the Finance Ministry from Banks

  1. The Finance Ministry now expects banks to recover more than Rs. 1 lakh crore from the resolution of the other cases referred by the RBI to the NCLT
    Possible benefits
  2. If the banks do indeed recover funds of this scale, it would considerably reduce the burden on taxpayers
  3. Even more important, speedy resolution would free valuable assets to be used for wealth-creation

Many challenges are still there

  1. The resolution of one high-profile case, however, should not deflect attention from the many challenges still plaguing the bankruptcy resolution process
  2. The IBC, as the government itself has admitted, remains a work in progress

Some issues with the present IBC

  1. The issues such as the proposed eligibility criteria for bidders have left it bogged down and suppressed its capacity to help out creditors efficiently
  2. Also, the strict time limit for the resolution process as mandated by the IBC is an area that has drawn much attention,
  3. and it merits further review in order to balance the twin objectives of speedy resolution and maximising recovery for the lenders

The way forward

  1. Going forward, amendments to the bankruptcy code should primarily be driven by the goal of maximising the sale price of stressed assets
  2. This requires a robust market for stressed assets that is free from all kinds of entry barriers

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

180 days too long for resolving insolvency, says IBBI member

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspectives, the following things are important

Prelims Level: IBBI

Mains Level: Important for business sector.


News

Statement by a member of the IBBI(Insolvency and Bankruptcy Board of India)

  1. A member of the Insolvency and Bankruptcy Board of India (IBBI) said the current time limit to resolve insolvency cases was more than adequate
    A significant statement
  2. This assumes significance in light of demands for more time to resolve cases filed for bankruptcy
  3. In the present era, we have professionals with technology and offices that are increasing in efficiency
  4. With the availability of these, why should any time be lost?
  5. The sooner we remove such cases, the sooner will we clear the way for the business sector to move ahead

Current status

  1. Currently, after a case is admitted in the National Company Law Tribunal, it has to be resolved within 180 days, failing which the company goes into liquidation
  2. In exceptional cases, the NCLT may allow another 90 days for resolution

Default is not always related to criminal conduct

  1. When a loan is not repaid, the default is automatically construed as criminal conduct under the Code
  2. But there could be situations where the default is purely a result of market forces
  3. Therefore, it can’t be called criminal conduct in all cases

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Insolvency and Bankruptcy Code set for major overhaul

Note4students

Mains Paper 2: Governance | Government policies & interventions for development in various sectors & issues arising out of their design & implementation

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code, Alternative investment funds

Mains level: Insolvency procedure in India and various issues related to it


IBC amendments

  1. The ministry of corporate affairs is finalizing a series of IBC amendments based on a panel’s recommendations
  2. This is to remove difficulties in turning around businesses and to strike a balance between the interests of lenders, customers of failed businesses and their promoters

Proposed amendments

  1. They make a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and decide their future along with lenders
  2. Amendment will make it easier for the panel of creditors to make key decisions for resolution or liquidation with 66% of the vote, less than the 75% required now
  3. It will make sure that the provisions enacted in January to disqualify wilful defaulters and those ‘acting jointly’ with them from bidding for the bankrupt firm do not unfairly bar entities like asset reconstruction companies (ARCs), banks and alternative investment funds
  4. The code will also define financial entities which are not covered by the disqualification in a move aimed at widening the pool of potential bidders
  5. The proposed amendments will also make sure that companies filing for bankruptcy have to notify their banks and suppliers of their decision

Applicability of provisions

  1. The IBC amendments will apply prospectively once enacted
  2. It will also clarify that lenders’ action against any guarantor to a bankrupt firm do not enjoy the same protection from recovery proceedings that the insolvent company enjoys while a rescue plan is prepared

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Govt to set up more NCLT benches to handle wave of bankruptcy cases

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: IBC code(read the attached story)

Mains level: The NCLT courts are important tools against ongoing NPA crisis in the country.


Increase in the number of the National Company Law Tribunal(NCLT) benches

  1. The government is set to increase the number of bankruptcy courts to ease the load on existing benches overburdened by creditors suing defaulting businesses and expedite resolution of insolvency cases
  2. The government will also hire more judicial and technical officers to take into account the requirement of the new NCLT benches at Cuttack, Jaipur and Kochi
  3. NCLT has 11 benches at present, including a principal bench in the capital

Need of more NCLT courts

  1. According to experts, bankruptcy courts are over-burdened as they also address other company law matters
  2. relating to mismanagement and oppression, mergers and acquisitions and cases of de-registration of companies on account of defaulting on statutory annual return filing requirements
  3. Cases relating to mergers and acquisition were earlier handled by high courts

Possible changes to the insolvency and bankruptcy code 

  1. Simultaneously, the legislative framework is being streamlined
  2. Possible changes to the insolvency and bankruptcy code include (1) introduction of a simpler code for micro, small and medium enterprises, (2) granting creditor status to home buyers who have given advances to real estate firms and modifying procedures about clearing turnaround plans
  3. An expert panel is expected to give its recommendations on modifications to the bankruptcy code to the government shortly
  4. The need to amend the code arose from the gaps that emerged as the resolution process gathered momentum

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Govt moves amendments to plug loopholes in insolvency law

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy code, asset reconstruction companies, alternative investment funds, sustainable structuring of stressed assets

Mains level: Rising NPA problem and ways to tackle it


Insolvency and Bankruptcy Code (Amendment) Bill 2017

  1. It seeks to streamline the law and plug loopholes
  2. Bill allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month
  3. This will aid promoters who had submitted resolution plans before the enactment of an ordinance that barred them from taking part in the resolution process of the companies

Other provisions

  1. Bill has paved the way for asset reconstruction companies, alternative investment funds (AIFs) such as private equity funds and banks to participate in the bidding process
  2. Many of these entities acquire distressed assets and the classification of these assets as non-performing assets (NPAs) would have disqualified them from the bidding process
  3. Similarly, banks opting to convert their debt into equity under the Reserve Bank of India’s scheme for sustainable structuring of stressed assets would have inadvertently become promoters of these insolvent companies and thereby been barred from the resolution process
  4. The bill has also sought to bring any individual who was in control of the NPA under the ambit of the insolvency code
  5. It lays out that the individual insolvency law will be implemented in phases
  6. The amendment bill has addressed concerns about some of the stringent provisions in the ordinance that was brought in last month

Insolvency and Bankruptcy code

  1. The IBC was enacted in 2016 to find a time-bound resolution for ailing and sick firms, either through closure or revival, while protecting the interests of creditors
  2. A successful completion of the resolution process was expected to aid in reducing rising bad loans in the banking system

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[pib] IBBI grants recognition to two registered valuers organistaions

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Board of India

Mains level: Functions of IBBI


News: 

  • In pursuance to the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India (IBBI) has recognised two registered valuers organisations.
  • The Institution of Estate Managers and Appraisers will handle one asset class of “land and building” while the IOV Registered Valuers Foundation will handle three asset classes of “land and building”, “plant and machinery” and “securities or financial assets”.
  • These registered valuers organisations will conduct educational courses in valuation, grant membership and certificate of practice to individuals, conduct training for its members and lay down and enforce the Code of Conduct for the registered valuers, who are its members.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] Changed priorities

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Non-performing assets, bankruptcy, Insolvency and Bankruptcy Code (IBC) 2016, CRILC, Insolvency and Bankruptcy Board of India

Mains level: Measures related to tackling NPAs


Context

  1. The 2017 Forbes India List says that the combined net worth of India’s 100 wealthiest stood at a whopping $479 billion
  2. Even then, top corporate borrower groups in India are unable to repay loans and make timely interest payments

Tackling NPAs

  1. The government has taken the high moral ground to deal with the menace of non-performing assets (NPAs)
  2. NPAs have brought many public sector banks on the verge of bankruptcy
  3. Government brought an ordinance on November 23 amending the Insolvency and Bankruptcy Code (IBC) 2016
  4. It disqualified errant promoter from participating in the bidding process

Intent of ordinance

  1. It signals the government’s intent to shift attention away from recovery of bad loans to selling the assets of defaulting corporates
  2. The May 2017 ordinance directed banks to accept deep haircuts on their non-performing loans

Corporates-bank nexus

  1. These corporates have not been downgraded on their creditworthiness parameter although the Reserve Bank of India (RBI) has been monitoring all large loans through the Central Repository of Information on Large Credits (CRILC) since 2014

Loopholes in IBC

  1. The Insolvency and Bankruptcy Board of India (IBBI) is the regulator set up on October 1, 2016, under the Insolvency and Bankruptcy Code
  2. The IBBI is assisted by the disciplinary, advisory and technical committees
  3. The resolution professionals entrusted with the responsibility of sorting out the insolvent companies or individuals can be registered with any one of the three insolvency professional agencies
  4. The advisory committees on corporate insolvency and liquidation are chaired by several top corporates
  5. The appointment of corporates as heads of important corporate insolvency advisory committees under IBBI does not inspire confidence in the credibility of the resolution process

Way forward

  1. The recent ordinance may end up being used selectively to defeat the very objective of penalizing the errant promoter
  2. The banks will only lose if resolution is sidetracked by the ensuing power struggle among corporate India to purchase distressed assets at rock-bottom prices

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

Image source

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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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.

 

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

‘Wilful defaulters must not buy IBC assets’

Image Source

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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

https://www.civilsdaily.com/story/insolvency-and-bankruptcy-code-2016/

 

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

[op-ed snap] No level playing field

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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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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)

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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
  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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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
  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

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

  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.

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.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Centre tables bankruptcy Bill in Lok Sabha

  1. The Centre tabled the Insolvency and Bankruptcy Bill, 2015 in the Lok Sabha, which enhance the ease of doing business in the country.
  2. The proposed Bill aims for a complete renovation of the current insolvency and bankruptcy system in India.
  3. It will help streamline the procedure of revival of companies facing financial distress.
  4. The Bill proposes adherence to strict deadlines to decide whether to liquidate a sick firm or not.
  5. A recent survey found that the average duration for insolvency resolution in India is 4.3 years.

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.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

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

  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. The survey found that the ‘top three challenges in the current setup with respect to revival of stressed assets’.
  3. SARFAESI Act gives secured lenders the legal right to replace ineffectual management.
  4. The report recommends that the proposed National Company Law Tribunal should have a separate bench for handling bankruptcy cases.

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.

By Root

Caretaker @civilsdaily

Insolvency and Bankruptcy Code

Bankruptcy panel calls for insolvency regulator

  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.

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.

By Root

Caretaker @civilsdaily

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

By Root

Caretaker @civilsdaily

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