Insolvency and bankruptcy code – present challenges: Explained, pointwise

Source: The Hindu 

Syllabus: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Relevance: The Insolvency and Bankruptcy Code (IBC) is the key instrument aimed to address corporate distress.


Recent National Company Law Tribunal (NCLT) rulings have put the spotlight on the IBC. The Insolvency and Bankruptcy Code (IBC) 2016, has been the key mechanism for addressing corporate distress and the accumulation of bad loans in the financial sector.

It has been five years since the IBC came into force. It has performed well on some parameters but needs amendments to resolve key challenges. The President recently promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021. The ordinance allowed the use of Pre-Pack insolvency resolution.

About the 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:
    1. 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.
    2. 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.
    3. Information utilities: They will keep a record of debts given by creditors along with details of repayments/ dishonour of debt.
    4. Adjudicating authorities: They will give the approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
      1. National Company Law Tribunal(NCLT): It is the adjudicating authority for companies and limited liability entities
      2. Debt Recovery Tribunal: It is the adjudicating authority for individuals and partnership firms.
    5. 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.
Basic Terminologies
  • 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.
Key challenges faced by IBC
  • Firstly, delays in appointment and infrastructural issues such as one judicial member sit for two benches.
  • Secondly, IBC cases are not the only mandate of the NCLT.
    • They also consider various cases under the Companies Act such as mergers or oppression and mismanagement cases.
  • Thirdly, one basic difference between India and other countries is that Indian companies are mainly promoter-owned and owners run the companies.
    • Since it is owned and controlled as well as managed by mostly the same people in India, it creates a problem in taking over the asset.
  • Fourthly, a lot of cases are old that is stock of NPAs [Non-Performing Assets].
    • Once the backlog is cleared there will be fewer cases because the fear of losing the company under Section 49A will push the promoters to find a resolution.
  • Fifth, delay in implementation in terms of approvals, having an application admitted itself.
    • For instance, the resolution plan that was approved for Jet Airways recently was actually approved by the Creditors’ Committee in October 2020.
    • though the NCLT has a very limited role but it was only approved in June 2021.
  • Sixth, there are concerns about the extent of haircuts that banks and financial creditors are having to take in order to achieve resolution.
    • Size of the haircut is really not a measure of the success of IBC. It depends on the company and its asset, if the asset is good, value will be good.
    • But Some businesses would have failed, like many of the EPC companies, where haircuts are very high.
    • Basically, in an EPC company there are hardly any assets, except some equipment.
  • Lastly, Section 29A prevents all promoters from submitting resolution plans.
    • But some restrictions are not helpful and prevent almost all companies in presenting resolution plan.
    • Such as, section 29A bars promoter who has had NPAs for over a year, or who’s had a personal guarantee that has been invoked from submitting resolution plans.
    • There is relaxation for MSMEs to have greater flexibility and it can be considered to lay the floor open to a larger number of resolution plans.
    • Allowing certain relaxations to Section 29A could be helpful.
Suggestions to improve the IBC
  • IBC is not the only solution for resolving stress.
    • Pre-IBC mechanisms such as one-time settlements, restructuring packages can also help in improving the resolution process in cases where there is some consensus between the debtor and the debtor and the creditors.
  • Attract more buyers or a more diverse range of strategic buyers to be willing to bid for assets, and submit resolution plans under the code.
  • National ARC to improve assets resolution.
    • The national ARC (Asset Reconstruction Company), ‘bad bank’ is a good thing because it’s a one-time clean-up exercise.
    • A lot of cases don’t have a great resolution plan or they don’t have great value left and the other point is that there are not many strategic investors.
    • In such cases, a national ARC would be of great help.

Above all on average IBC has promoted faster recoveries and resolutions as compared to the earlier timeline of five years, six years or more. However, there are some challenges that need to be addressed to resolve corporate distress.


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