The implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 resulted in a structural change in the country’s resolution architecture. However, despite its promise, the IBC has fallen short of expectations in its operation. The Ministry of Corporate Affairs solicited feedback last week on a new set of changes to the Code that it is considering. This is a positive step.
What exactly is insolvency?
- Simply put, insolvency is a financial state that occurs when you are unable to pay off your debts on time.
- Insolvency is essentially the state of being that leads to the filing of a bankruptcy petition. When a person, family, or company is unable to repay its lenders on time, the entity becomes insolvent.
What exactly is bankruptcy?
- Bankruptcy, on the other hand, is a legal procedure used to resolve the issue of insolvency.
- Bankruptcy is a legal declaration of an individual’s inability to repay debts. When filing for bankruptcy, one is obligated to repay what is owed with the assistance of the government.
What is the Insolvency and Bankruptcy Code (IBC) of 2016?
- The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to simplify insolvency and bankruptcy proceedings, protect the interests of all stakeholders (the firm, employees, debtors, and especially creditors), and resolve non-performing assets.
- It was a transition from a ‘debtor in possession’ to a ‘creditor in control’ regime.
- The IBC establishes a time-bound process for resolving insolvencies.
- The Insolvency and Bankruptcy Board of India (IBBI) is the regulator in charge of enforcing the code and monitoring stakeholders’ performance.
Why was the IBC established?
- Non-performing assets should be increased: The IBC was introduced in 2016 to overhaul India’s corporate distress resolution regime, at a time when Non-Performing Assets and debt defaults were piling up and older loan recovery mechanisms were underperforming.
- To consolidate previously available laws in order to create a time bound mechanism with a creditor in control model as opposed to the debtor-in-possession system.
- There are two positive outcomes: When the IBC declares insolvency, there are only two options: resolution or liquidation. The process of winding up a corporation or incorporated entity is referred to as liquidation.
What are the flaws in the code’s operation?
- Timelines are not adhered to: Creditors’ realisations have been lower than expected, and the Code’s strict timelines for resolving cases have not been followed.
- Less attainable value: According to the most recent data, the total realisable value in cases resolved until September 2022 was only 30.8% of the admitted claims.
- The average time is increasing: According to the data, 64% of the ongoing cases have lasted more than 270 days. According to reports, the average time it takes to resolve cases has increased, owing in part to more time spent on associated litigation.
Proposals to address the flaws
- Getting rid of ambiguity and increasing predictability: The changes aim to shorten the time it takes to admit cases and streamline the process by increasing reliance on data with Information Utilities. Given the delays in admitting cases and the implications of recent judicial interventions, this proposal aims to eliminate ambiguity and bring predictability to the process.
- Extending the pre-packaged solution to other businesses: It has also been suggested that the pre-packaged insolvency resolution process that was introduced for micro, small, and medium-sized businesses be expanded to include other businesses. While such a proposal should be appealing, very few cases have been admitted as a result of it.
- A clear distinction between real estate projects: A distinction between a specific real estate project and the larger corporate entity is now being made. The government’s reasoning is that doing so will allow the corporate entity to continue working on other projects while the stressed project is handled separately.
- Changes in the distribution of proceeds: Creditors will receive proceeds up to the liquidation value in accordance with the priority prescribed in Section 53 of the Code, and any surplus over such liquidation value will be rateably distributed among all creditors in the ratio of their unsatisfied claims.
@the end
Attempts to improve the operation of the IBC are encouraged. However, some of the proposals require further investigation. After all, changes to the Code should be motivated by the desire to improve its functionality and outcomes. This should be done while keeping all stakeholders’ incentive structures in mind.
Source: https://www.indiacode.nic.in/handle/123456789/2154?sam_handle=123456789/1362