Insolvency and Bankruptcy Code (IBC)

08 Oct 2022 Insolvency and Bankruptcy Code (IBC)

Source: The Hindu

News: India’s Insolvency and Bankruptcy Code is losing its relevance as haircuts of 100 out of 500 companies were above 90%.

Insolvency and Bankruptcy Code:

• It aims to overhaul the corporate distress resolution regime in India. 
• Focus of IBC is the creditor-in-control model as opposed to the debtor-in-possession system.
• IBC aims to create a time bound mechanism for resolutions through consolidation of previously available laws such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals etc.
• Resolution or liquidation are two options when insolvency is triggered under the IBC.
• In case all attempts to resolve the insolvency under IBC fails, the company’s assets are liquidated.
• IBC also provides for pre-pack resolutions for defaults not exceeding Rs. 1 crore  where creditors and owners of a business agreed out-of-court settlement for selling business to an interested buyer. 

Objectives of IBC  as defined by the Insolvency and Bankruptcy Board of India (IBBI):

• Resolution for saving critical business through restructuring, change in ownership, mergers and other methods. 
• Maximizing the value of assets of the corporate debtor.
• Promoting entrepreneurship, availability of credit, and balancing the interests.

Importance of Insolvency and Bankruptcy Code(IBC):

• Insolvency helps a growing economy like India, a healthy credit flow and generation of new capital.
• Helps credit to not get stuck in the system or turn into bad loans: Insolvent or “sick” companies begin to default on their loans. So through IBC banks or creditors quickly recover as much as possible from the defaulter.
• Insolvency pumps fresh credits into the system and minimizes value degeneration of assets: As businesses get a chance  to start afresh with new owners, or its assets can be liquidated in a timely manner.

Process followed under the IBC:

• Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 6 of the IBC by creditor or debtor  in case of defaults by a corporate debtor (CD).
• Initially the creditor or debtor could apply for insolvency at the minimum default of  ₹1 lakh , but due to stress on companies due to the pandemic the government increased the minimum amount to ₹1 crore.
• Adjudicating authority (AA) under the IBC: Various National Company Law Tribunal (NCLT) benches across India.
• The Tribunal  can admit or reject the application within 14 days  and in case of delay of admission of application, the Tribunal has to provide reason. 
• After an application is admitted by the AA CIRP or resolution process begins. Resolution process must be completed within 330 days.
• Role of interim resolution professional(IRP) appointed by AA: IRPs can be anyone from experienced and registered chartered accountants, company secretaries, lawyers and so on. After appointment IRP:

                 (a)Takes control of the defaulter’s assets and operations.

                  (b)Collects information about the state of the company from Information Utilities (repositories keeping track of the debtor’s credit history

                  (c)Coordinates the constitution of a Committee of Creditors or CoC  with financial creditors of a defaulting company. 

• Role of  CoC: CoC in every CIRP decides the viability of the defaulting company for restructuring or liquidation. It is the responsibility of Coc to appoint an insolvency professional (IP) to look after the operations of the company during the CIRP. Proposal for resolution of a company such as restructuring of debt, merger or demerger of the company examined by IP after that it submits eligible plans to the CoC and plan is approved by CoC if it receives 66% of the voting share of committee members. Company goes for liquidation if CoC fails to approve any resolution plan.
• CoC needs to submit an approved plan to the Tribunal before 330-day (deadline), If tribunal approves the plan then the debtor is bound to implement. The plan can also be rejected by AA 
• Now, pre-packs or pre-pack insolvency resolution processes (PIRP) are also available for Micro, Small, and Medium Enterprises (MSMEs).

Challenges for the IBC:

• Failure of IBC: In the last six years approximately 3,400 cases(IBBI) were admitted under the IBC but only 14% could find a proper resolution and more than 50% of the cases ended in liquidation.

• IBC failed to adhere to its time-bound mechanism even after so much amendment of the deadline: Current timeline for the resolution process is 330 days.According to experts the average number of days to resolve insolvency cases increased rapidly over the past five years. For Example: The resolution of cases involving businesses that owed more than 1,000 crore, however, took 772 days in FY22.

• Issue of haircuts: According to the Parliamentary Standing Committee on Finance, average haircuts borne by creditors in the last five years of IBC is  80% in more than 70% of the cases. Example: Haircut borne by creditors during resolution of Videocon Group case was 95.3.

Way Forward:

• Implementation of suggestion by the Parliamentary Standing Committee that after filing resolution the time taken to admit the insolvency application and transfer control of the company to a resolution process, should not be more than 30 days.

• Introduce new yardstick to measure haircuts: IBBI suggested that haircuts should be looked as the difference between what the company brings along when it enters IBC and the value realized.

Article:  Explained | The Insolvency and Bankruptcy Code (IBC)- where does it stand today?

Article Link: https://www.thehindu.com/news/national/explained-what-is-the-insolvency-and-bankruptcy-code-ibc-and-where-does-it-stand-after-more-than-five-years-of-being-in-place/article65969421.ece

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