Insolvency and Bankruptcy code

What is IBC?

Insolvency and Bankruptcy Code, 2016 is considered as one of the biggest insolvency reforms in the economic history of India. This was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of the value of assets of such persons.

Background

• The era before IBC had various scattered laws relating to insolvency and bankruptcy which caused inadequate and ineffective results with undue delays. For example, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act SARFAESI –for security enforcement.
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) for debt recovery by banks and financial institutions, Companies Act for liquidation and winding up of the company, Ineffective implementation, conflict in one of these laws and the time-consuming procedure in the aforementioned laws, made the Bankruptcy Law Reform Committee draft and introduce Insolvency and Bankruptcy Law bill.

Objectives of IBC

• Consolidate and amend all existing insolvency laws in India.
• To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
• To protect the interest of creditors including stakeholders in a company.
• To revive the company in a time-bound manner.
• To promote entrepreneurship.
• To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
• To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
• To set up an Insolvency and Bankruptcy Board of India.
• Maximization of the value of assets of corporate persons.

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Highlights of the Code

• 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.

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

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

• The National Company Law Tribunal (NCLT) adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) adjudicate insolvency resolution for individuals.

• The Insolvency and Bankruptcy Board of India regulate functioning of IPs, IPAs and IUs.

Key Issues and Analysis

• Time-bound insolvency resolution requires the establishment of several new entities.  Also, given the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role.

• IPAs, regulated by the Board, will be created for regulating the functioning of IPs.  This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals.  Further, requiring a high value of performance bond may deter the formation of IPAs. 

• The Code provides an order of priority to distribute assets during liquidation.  It is unclear why: (I) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.

• The Code provides for the creation of multiple IUs. However, it does not specify that full information about a company will be accessible through a single query from any IU.  This may lead to financial information being scattered across these IUs.

• The Code creates an Insolvency and Bankruptcy Fund.  However, it does not specify the manner in which the Fund will be used.

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IBC Amendment Bill, 2019

• The Bill amends the Insolvency and Bankruptcy Code, 2016.
• The Code provides a time-bound process for resolving insolvency in companies and among individuals. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
• Under the Code, a financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. The NCLT must find the existence of default within 14 days. Thereafter, a Committee of Creditors (CoC) consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution. The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets.
• The CoC will appoint a resolution professional who will present a resolution plan to the CoC. The CoC must approve a resolution plan, and the resolution process must be completed within 180 days. This may be extended by a period of up to 90 days if the extension is approved by NCLT.
• If the resolution plan is rejected by the CoC, the debtor will go into liquidation. The Code provides an order of priority for the distribution of assets in case of liquidation of the debtor. This order places financial creditors ahead of operational creditors (e.g., suppliers). In a 2018 Amendment, home-buyers who paid advances to a developer were to be considered as financial creditors. They would be represented by an insolvency professional appointed by NCLT.
• The Bill addresses three issues. First, it strengthens provisions related to time-limits. Second, it specifies the minimum pay-outs to operational creditors in any resolution plan. Third, it specifies the manner in which the representative of a group of financial creditors (such as home-buyers) should vote.
• Resolution plan: The Code provides that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation. The Bill amends this to provide that the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation). For example, if the default were for Rs 1,000 crore and the resolution professional recovered Rs 800 crore, the operational creditor must at least get an amount which they would have received if Rs 800 crore have been obtained through liquidation proceeds.
• Further, the Bill states that this provision would also apply to insolvency processes: (i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and (iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
• Initiation of resolution process: As per the Code, the NCLT must determine the existence of default within 14 days of receiving a resolution application. Based on its finding, NCLT may accept or reject the application. The Bill states that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
• Time-limit for resolution process: The Code states that the insolvency resolution process must be completed within 180 days, extendable by a period of up to 90 days. The Bill adds that the resolution process must be completed within 330 days. This includes time for any extension granted and the time taken in legal proceedings in relation to the process. On the enactment of the Bill, if any case is pending for over 330 days, the Bill states it must be resolved within 90 days.
• A representative of financial creditors: The Code specifies that, in certain cases, such as when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the committee of creditors by an authorised representative. These representatives will vote on behalf of the financial creditors as per instructions received from them. The Bill states that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.

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The success of IBC so far

• Due to the institution of IBC, we have seen that many business entities are paying up front before being declared insolvent. The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
• 4452 cases were dismissed at the pre-admission stage. Hence, it shows the effectiveness of IBC.
• Presently, there are 1332 cases before NCLT.
• Realization by creditors around Rs 80,000cr in resolution cases.
• Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
• The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
• 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr

Way forward

• There is a need for setting up more tribunals in different parts of the country to handle the greater-than-expected volume of cases.
• IBC must consider that there are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise.
• India is more concerned with the recovery of NPA, not with the running of units, thus the first priority is to save the banking system.
• Thus the banks also must push policymakers towards this move because they’re unlikely to get more if the case comes before the NCLT.
• Proactive training/onboarding of judges, lawyers, and other intermediaries will be necessary for effective implementation of the code.
• Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality. There is a requirement of enhanced IU infrastructure.

Conclusion:

IBC as a structural reform has a demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders, it is the IBC or the insolvency law which has trumped even the GST.