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The Parliament passed the Insolvency and Bankruptcy Code (IBC) in 2016. It is a comprehensive insolvency code encompassing all companies, partnerships and individuals (other than financial firms).
Based on the last five-year experience, the government wanted to introduce few changes to make the IBC more effective. Subsequently, The President recently promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021. This aims to fulfil the intended objectives of IBC.
Insolvency and Bankruptcy Code, 2016
- The code replaced all the existing laws and created a uniform procedure to resolve insolvency and bankruptcy disputes.
- It allows creditors to assess the viability of a debtor as a business decision. Further, the creditors can agree with the plan for its revival or suggest for a speedy liquidation.
- The Code creates a new institutional framework. This framework facilitated a formal and time-bound insolvency resolution process and liquidation. The framework includes:
- Insolvency Professionals: They will administer the resolution process. They also manage the assets of the debtor and provide information for creditors to assist them in decision-making.
- Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies would conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
- Information utilities: They will keep a record of debts given by creditors along with details of repayments/ dishonour of debt.
- Adjudicating authorities: They will give the approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
- National Company Law Tribunal(NCLT): It is the adjudicating authority for companies and limited liability entities
- Debt Recovery Tribunal: It is the adjudicating authority for individuals and partnership firms.
- Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
- The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
- Moratorium period of 180 days (extendable up to 270 days) for the Company. For startups and small companies, the resolution time period is 90 days which can be extended by 45 days.
- Insolvency: It is a situation in which a debtor is unable to pay his/her debts.
- Bankruptcy: It is a legal proceeding involving an insolvent person or business that is unable to repay its outstanding debts.
- Liquidation: It is a process of bringing a business/company to an end. It involves the distribution of the company’s assets among creditors and other claimants.
About Insolvency and Bankruptcy Code (Amendment) Ordinance 2021
- The Amendment allows the use of Pre-Packaged insolvency resolution as an alternative resolution mechanism for MSMEs. The threshold limit to trigger the Pre-Packaged insolvency resolution is between Rs 10 lakh to 1 Crore.
- Section 54A: It allows the use of Pre-Packaged insolvency resolution(PPIR).
- PPIR is a form of restructuring that allows creditors and debtors to work on an informal plan and then submit it for approval.
- Under this system, financial creditors will agree to the terms of a potential investor. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
- However, the submission of the resolution plan cannot happen directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.
- The threshold limit to trigger the PPIR is between Rs 10 lakh to 1 Crore.
- The NCLTs must consider a pre-pack insolvency proceeding before allowing a Corporate Insolvency Resolution Process(CIRP).
- CIRP is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.
Benefits of Insolvency and Bankruptcy Code ordinance
- Quicker Resolution: Over 86% of the ongoing insolvency resolution proceedings crossed the 270-day threshold as of December 2020.
- However, the process under PPIR is limited to a maximum of 120 days. Further, only 90 days are available to the stakeholders to bring the resolution plan to the NCLT.
- Greater Autonomy to Debtor: As the existing management retains control in the case of pre-packs. On the other hand, A resolution professional takes control of the debtor as a representative of financial creditors. This results in a cost-effective and value maximising outcome for the debtor.
- Prevents misuse by errant promoters: The PPIR gives significant consent rights to the financial creditors. For instance, it requires approval of a minimum of 66% of financial creditors before submission of a resolution plan. This prevents any misuse from financial creditors.
- Amicable settlement: The amendment has made sure that both debtors and creditors have a say in the resolution process. This is a deviation from the earlier approach. As the IBC 2016 gives excessive focus on creditors in resolution.
- Prevents job losses: Under PPIR, there is less probability of liquidation. Thereby ensuring continuity of business and resulting in fewer layoffs for workers.
Challenges in Insolvency and Bankruptcy Code
- Poor Approval rate: As per the IBBI’s data, (Insolvency and Bankruptcy Board of India) a mere 15% approval rate has been shown by NCLT in corporate insolvency cases from 2016-19.
- Greater Focus on liquidation: The objective of IBC was to promote entrepreneurship and promote resolution. But ironically IBC put more focus on liquidation. This hinders the economic potential of the country.
- In 2019, almost 1/3rd of all corporate cases filed for resolution ended up towards liquidation.
- Supreme Court Judgement: The Government had placed a compulsory deadline of 330 days if 270 days mark got breached. However, the SC in the Essar Steel insolvency case relaxed the criteria of “mandatorily” resolving the CIRP within 330 days. This judgement can be used to breach the deadline of the PPIR process also.
- Resource Deficit: The government had proposed to set up 25 additional single and division benches of NCLT in July 2019. They were established at various places including Delhi, Jaipur, Kochi, etc. However, most of these remain non-operational or partly operational on account of lack of proper infrastructure or adequate support staff.
Suggestions to reform IBC process
- There is a need to increase the number of NCLT benches and appoint more competent professionals. This will ensure that the IBC platform is not used as a recovery but more as a resolution tool.
- Further masses should be aware of alternate dispute resolution mechanisms like Lok Adalat, Arbitration etc. This can reduce the workload on insolvency tribunals.
- The government can place companies such as construction, electricity (that do not have hard assets) outside the NCLT. This would save resources and time in pursuing IBC for these companies.
The ordinance will be beneficial for the small players and would encourage time-bound resolution of stressed assets under the IBC model. Nonetheless, further augmentation is necessary for the success of IBC.