Insolvency & Bankruptcy Code (IBC) in India (GS Paper 3, Economy)
Context
- The Finance Minister has proposed to set up an integrated technology platform to improve the outcomes under the Insolvency & Bankruptcy Code (IBC).
- This initiative aims to streamline and enhance the efficiency of the insolvency resolution process in India.
About
- Additional Tribunals: The Union Minister proposed the establishment of additional tribunals, some of which will decide cases exclusively under the Companies Act.
- Debt Recovery Reforms: Steps to reform and strengthen debt recovery tribunals are also proposed to speed up the recovery process.
Insolvency
- Economic Significance: In a growing economy like India, maintaining a healthy credit flow and generating new capital is essential. Insolvent companies or businesses begin to default on their loans, making it crucial for banks or creditors to recover as much as possible quickly.
- Recovery Mechanisms: The business can either restart with new owners if viable or have its assets liquidated in a timely manner to minimize value degeneration and inject fresh credit into the system.
Need for the IBC
- Historical Context: Before the IBC, India faced mounting Non-Performing Assets (NPAs) and debt defaults. Older loan recovery mechanisms, such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals, were underperforming.
- Introduction of IBC: The IBC was introduced in 2016 to overhaul the corporate distress resolution regime and consolidate previously available laws into a time-bound mechanism. Under the IBC, insolvency can result in either resolution or liquidation, with efforts made to resolve the insolvency through restructuring or new ownership plans.
Insolvency and Bankruptcy Code (IBC)
- Objective: The primary objective is to promote entrepreneurship, ensure the availability of credit, and balance the interests of all stakeholders by providing a time-bound insolvency resolution process.
- Applicability: The IBC applies to companies, limited liability partnerships (LLPs), partnership firms, and individuals, providing a framework for both corporate and personal insolvency.
Modus Operandi
- Initiation of CIRP: When a corporate debtor (CD) defaults on loan repayment, either the creditor or the debtor can apply for the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 6 of the IBC, with a minimum default amount of ₹1 crore.
- Adjudicating Authority: Applications are made to the National Company Law Tribunal (NCLT), the designated adjudicating authority for corporate insolvency resolution processes.
Insolvency Resolution Process (IRP)
- Licensed Professionals: The IBC mandates a structured insolvency resolution process overseen by licensed insolvency professionals (IPs) who manage the affairs of the debtor during the process.
- Time-bound Process: Strict timelines are mandated to ensure timely resolution and prevent undue delays.
Liquidation
- If a resolution plan is not approved or implemented within the specified time frame, the corporate debtor may be liquidated to distribute the proceeds to creditors.
Cross-border Insolvency
- The IBC includes provisions for dealing with cross-border insolvency through cooperation and reciprocal arrangements with other countries.
Challenges
- Operational Delays: Strict timelines are often difficult to adhere to due to legal complexities, coordination issues among stakeholders, and judicial backlog.
- Lack of Infrastructure: Inadequate infrastructure, including a shortage of insolvency professionals (IPs) and trained personnel, hampers effective handling of cases.
- Creditor Recovery: Creditors often face significant losses (haircuts) during the resolution process, contrary to the IBC's aim of maximizing asset value.
Way Ahead
- Parliamentary Recommendations: The Parliamentary Standing Committee suggested that the NCLT should not take more than 30 days after filing to admit insolvency applications and transfer control to a resolution process. It also recommended recruiting in advance based on the projected number of cases due to more than 50% vacancy in the Tribunal compared to the sanctioned strength.
- Continuous Reforms: Since its enactment, the IBC has undergone amendments to address practical challenges. Continuous policy reforms and amendments are essential to adapt to evolving economic and legal landscapes.
Conclusion
- The Insolvency and Bankruptcy Code (IBC) has significantly reformed India's approach to resolving corporate distress.
- While it has made substantial progress in improving the efficiency of insolvency resolution, continuous efforts to address challenges and enhance the system's robustness are crucial for maintaining a healthy economic environment.
