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IBC (Insolvency and Bankruptcy Code)

Peeps…Have you heard about the thread game (“What is the one word” kind)?

Well…! It goes like this!

What is the one word that pops up in your mind, when I say.…. Vijay Mallya

Yeah…LOAN DEFAULT (Isn’t it? And beers don’t suit the context)

All we have heard about him is, he borrowed plenty and became an expat after failing to repay them.

Ever wondered what happens to a company or an individual who couldn’t pay back the lenders genuinely (unlike Mallya) and facing immense financial distress?

There comes IBC (Insolvency and Bankruptcy Code) into picture!!

Before delineating the details, let us understand the basic language of the agenda now.

How does bankruptcy differ from insolvency? Are they different in first case?

Insolvency is a state in which a debtor(borrower) is no longer having the ability to pay his/her debt within the due date. On the other hand, Bankruptcy is the legal procedure which is followed to resolve the problem of insolvency.

Okay! Why did we need IBC?

Before IBC became effective in December 2016, there were multiple laws governing the insolvency resolution process for corporates and individuals. Now every such case is brought under the same umbrella. Moreover, there was an increase in Non-Performing Assets (NPAs) despite RBI taking various measures. Yet another reason cited was, the time required for resolution was comparatively poor in India. Now, let us see if IBC had sorted out these issues.

How is IBC different from the laws which existed previously?

  • It brought in the concept of two adjudicating authorities:
  • NCLT (National Company Law Tribunal) – to take up insolvency resolution cases of corporates
  • DRT (Debt Recovery Tribunal) – which deals with the case of individuals / partnerships
  • Earlier, the company going bankrupt was mostly liquidated. But IBC gave the debtors (borrowers) a chance to revive the business. So, it introduced Insolvency Resolution Process (IRP) wherein a restructuring plan is proposed. On approval of the plan by creditors (usually banks), the business is brought back to life and operations are run. 
  • IBC didn’t fail to serve the interest of creditors too. After the code was enacted, the creditors were able to file for the proceedings once they lose confidence in the repaying capacity of the debtor.
  • The code also established Insolvency and Bankruptcy Board of India (IBBI) – It ensures that all the stakeholders abide by the laws of IBC

Moving on, let us acquaint ourselves with the process of insolvency resolution:

  1. A creditor/debtor approaches NCLT for initiating bankruptcy proceedings
  2. If the case is accepted, the NCLT appoints Insolvency Professionals (the experts who conduct the IRP) as in-charge of the company
  3. These Insolvency Professionals form the Committee of Creditors and provide them with a Resolution plan and information from Information Utilities (Central repository of financial and credit related information of borrowers)
  4. This Committee of Creditors is constituted by the lenders to whom the company owes money
  5. The Committee of Creditors is given a mortarium period of 180 days (which could be extended by 90 more days) to decide on the resolution (whether to revive/sell/liquidate the business)
  6. This decision is then conveyed to NCLT by the IR Professional
  7. The order is then issued by NCLT

All set and done, if the company is liquidated, the credit repayment is done in the following order-

  1. Secured creditors (as they hold collateral), who gave financial credit to the debtor
  2. Unsecured creditors – usually the company’s suppliers and employees
  3. Last in the queue are Stockholders

Phew! Quite knotty to comprehend, right?

Fine! Was IBC effective in our country?

To be precise, “Yes!”. We were ranked 130th in World Bank’s Ease of Doing Business (EODB) Index in 2016. Right now, we have jumped up to 63rd position (Huh! How is it related to IBC?). EODB ranking is based on 10 parameters, one of which is “resolving insolvency” category. In this parameter, we have leaped to 52nd rank from 108th last year. This index helps us attracting foreign investment and in due course contributes to our GDP.

The introduction of IBC has resulted in a recovery rate of 43% against the rate of 22% in the pre-IBC era. Earlier, the process of resolution took an average of 4.3 years. Post the effectuation of the code, it has seen a major drop to 317 days (Which is great!!)

Be that as it may, there are a few challenges faced by IBC as well. “Early resolution” was the selling proportion of IBC. But there are some infrastructure bottlenecks decelerating the process. There were delays in the resolution of big-ticket cases like what happened with Essar Steels. The number of NCLTs ought to be hiked.

Across the board, the IBC has made a substantial impact in the insolvency & bankruptcy proceedings in the last 3 years, since its advent. The government deserves the credit (meaning glory here) for carrying on with such a move to enact IBC. As it happens with any typical ordinance, we can expect welcome amendments to better the processes.

Written by — Nagarajan P(Editor, TJEF)

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