Background:
Government had identified Bankruptcy Law Reform as a key priority for improving the ease of doing business and had announced that a comprehensive Bankruptcy Code, meeting global standards and providing necessary judicial capacity, will be brought in fiscal 2015-16.
Accordingly, the Government had constituted the Bankruptcy Law Reform Committee to look into various Bankruptcy related issues and give its report along with a draft Bill on the subject to the Government.
Facts:
- The World Bank’s doing business report 2016 pointed out that it takes more than 4 years to resolve insolvency cases in India, as against 1.5 years in OECD countries.
- In summary, it is very difficult to solve insolvency and similarly difficult to exit from a business.
- This is one of the reasons that India is placed at 130 out of 189 countries in the ease of doing business.
- Bankruptcy and Insolvency’ falls in List III i.e. concurrent list.
What is the Bill about?
The proposed Bill aims for a complete renovation of the current insolvency and bankruptcy system in India, which will help streamline the procedure of revival of companies facing financial distress.
- It aims to improve the ease of doing business and attract more investment in the country.
- The Code will help Indian firms to exit an ailing business while banks stand to gain as they can recover their dues in time.
- The Bill proposes adherence to strict deadlines to decide whether to liquidate a sick company or not, wherein the decision to liquidate a company will have to be reached within 180 days.
- The Bill proposes the setting up of an Insolvency and Bankruptcy Board of India to regulate insolvency professionals and agencies. It also proposes the setting up of a fund dubbed the ‘Insolvency and Bankruptcy Fund of India’.
Significance:
As of now, there is no single law that deals with insolvency and bankruptcy in India. A number of provisions spread across various statutes have rendered the insolvency and bankruptcy-related process a legal quagmire significantly hindering the ease of doing business in the country. The new Bill seeks to consolidate all of this into a single Code.
Insolvency and Bankruptcy Code, 2015 passed:
The code seeks to ensure time-bound settlement of insolvency, faster turnaround of businesses and create a unified data base of serial defaulters. Highlights of the Code:
- The Code creates time-bound processes for resolution of the insolvency of companies and individuals.
- These processes will be completed within time-bound 180 days. If insolvency is resolved in stipulated time, the assets of the borrowers may be sold to repay creditors.
- The resolution of the insolvency of processes will be conducted by licensed insolvency professionals (IPs). These IPs will be members of insolvency professional agencies (IPAs).
- IPAs under insolvency resolution will also furnish performance bonds equal to the assets of a company.
- The Code facilitates establishment of Information utilities (IUs) to collect, collate and disseminate financial information to facilitate insolvency resolution.
- The insolvency resolution for companies will be adjudicated by the National Company Law Tribunal (NCLT). The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
- The Code also gives statutory backing establishment of the Insolvency and Bankruptcy Board of India to regulate functioning of IPs, IPAs and IUs.
What are the challenges now?
- Time-bound insolvency resolution will require 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.
Crux:
Enacting the IBC will be a great step forward for Indian economic reforms. But the gains for the economy will come only after an exercise in complex project management covering eight areas:
- Creation of the regulator
- Creation of an adequate National Company Law Tribunal
- Creation of an adequate Debt Recovery Tribunal
- Creation of Information Utilities
- Creation of Insolvency Professionals
- Drafting a transition process for existing cases
- Ensuring interoperability with existing laws
- Modifying financial sector regulations
Failure on any of these could mean failure to achieve the objective of the Code—a sound bankruptcy process.
Related notes:
Basics:
What is Insolvency?
The term insolvency is used for both individuals and organizations. For individuals, it is known as bankruptcy and for corporate it is called corporate insolvency. Both refer to a situation when an individual or company are not able to pay the debt in present or near future and the value of assets held by them are less than liability.
What is the difference between insolvency & bankruptcy ?
Insolvency is a situation when the debtor cannot meet its financial obligations i.e when he cannot pay back the money to lender on time. Warning signs could be decrease in sales, high dependence on credit, delay in payments etc. Bankruptcy is a legal declaration of insolvency. In this, the debtor files an application with the court to declare himself insolvent or the creditor files an application against the insolvent. Therefore it is a last stage of insolvency. We note here that while insolvency is a financial situation and bankruptcy is a legal condition. Insolvency may or may not lead to bankruptcy.