Insolvency & Bankruptcy Code

1.      IBC Code 2016: Insolvency & Bankruptcy Code was passed on 11th May 2016

Objective: To consolidate existing laws related to insolvency in India, and to simplify the process of insolvency resolution.

What is Insolvency?

                It is the inability of individuals to repay their debts (i.e. their being illiquid)

What is Bankruptcy?

                It is the legal declaration of insolvency

                2ND Meaning: Lack of assets to pay back

Need for IBC?

As there is no single law dealing with I+B in India. The Liquidity of companies and individuals was handled under various acts (around 12 of them). Some were.

                i) Presidency Towns insolvency Act, 1909

                ii) The Provincial insolvency Act, 1920

                iii) Sick Industrial Companies Act, 1920

iv) SARFAESI Act: The Securest and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

v) Companies Act, 2013

vi) Recovery of debts due to banks and financial institutions, Act

Problems to be tackled: (From earlier system)

1) Overlapping jurisdiction of different authorities

2) High Court, Company Law, BIFR (Board for Industrial & Financial Reconstruction), Debt Recovery Tribunal

3) This overlapping jurisdiction of different authorities and multiplicity of laws made the process of insolvency resolution very cumbersome in India

Present Scenario:

                1. Nearly 60,000 cases are pending in India’s Court

2. According to World Bank data, it takes an average of 4.3 years to wind up a company in India. It is easier to start a business than winding it up

Reform: (New): Proposed:

                1. The Insolvency & Bankruptcy Code seeks to cut wind-up time to 1 year

                2. Also, the recovery of a debt under is just 25.7% in India

3. The new code seeks to help banks and other creditors from recovering their loans from the bankrupt company in a timely and efficient way.

Salient Features of IBC:

1. The IBC code 2016 is a comprehensive law and covers all individuals, companies, Limited Liability Partnerships (LLPs), and Partnership firms

2. The adjudicating authority is NCLT (National Company Law Tribunal) for Companies & LLPS; and Debt Recovery Tribunal (DRT) for individuals and partnership firms

3. The insolvency resolution process can be initiated by any of the shareholders of the firm

Firm/debtors/creditors/employees

4. The power of the management and the board of the firm is transferred to the committee of creditors (COC). They act through the IP.

5. If the adjudicating authority accepts, an insolvency resolution or IP appointed.

6. The IP has to decide whether to revive the company (Insolvency resolution) or liquidate it(Liquidation)

7. If they decide to revive it, they have to be willing to buy the firm

8. The creditors also have to accept a significant reduction in debt

9. This reduction is known as a haircut

10. They invite open bids from the interested parties to buy the firm

11. They choose the party with the best resolution plan that is acceptable to the majority of the creditors (75% in CoC) to take over the management of the firm.

Summary:

To summarise the above, the IP has to decide whether to carry out insolvency resolution process or liquidation. They decide to do insolvency resolution when the firm can be made economically variable. They find a new buyer for the form to allow it to continue its operations. The creditors have to accept a haircut.

What is Haircut?

  • The loss is undertaken by the bank, to recover the loan given

      •The law prescribes that this insolvency resolution process has to be completed within 180 days.

                   •It can be extended to 90 days if the case is complex. If the decision is not reached within the time frame, the firm will be liquidated.

Latest Update:

The government passed an ordinance in Nov 2017 to annex the IBC. It barred wilful defaulters and the people associated with defaulting firms (promoters, etc.) from participating in the insolvency process.

Who is a Wilful Defaulter?

It means the promoter of the defaulting firm is not allowed to buy back its own firm.

It creates a moral hazard. The promoter may wilfully default on his loans and run the company into bankruptcy in order to buy back his company later

Things to Remember:

•             Insolvency Professionals (IP)will be members of the IPA (Insolvency Professional Agency) created under the bankruptcy code;

o             The IPA will certify the IPs

•             The code will also address the cross border insolvency through bilateral agreements with other countries. Information utilities have also been created to collect, collate, and give all information about debtors to make a database about serial defaulters.

•             Insolvency & Bankruptcy Board will be set up to regulate the insolvency professionals agencies & information utilities

Benefits of IBC: “Exit is just asimportant as ease of Entry”

  • Easy exit ensures the survival of the fittest in the market and leads to optimum allocate of capital.

Some Ancillary benefits

•             IBC code will improve the EODB Ranking (77th / 190[2018])

•             Will improve investment and entrepreneurship in the economy

•             It will help resolve India’s bad debt problems, and banks will be able to recover their loans from the bankrupt companies in a timely manner.

•             The code could reduce the chances of another case like Kingfisher in India

•             The timely resolution will free up the bank’s resources and increase credit availability in the economy. In other words, it has the ability to resolve India’s balance sheet problem.

RBI: In June 2017, the RBI directed the Banks to file insolvency Applica’s for 12 large accounts that have defaulted on their loans

•             Beneficial to the bank

•             Will clear their books

•             But, it will also mean acceptance of a significant reduction in debt and suffer huge losses (Hair cut)

•             Hair cut Will lead to capital depletion

•             This is one reason courts decided to recapitalise the banks by 2.11 lakh crores. However, things did not move fast.

The stand of SC:

SC gave a green signal in Jan ‘19, hearing many petitions on the sincerity of IBC and said it was much needed.

Conclusion: It is now expected that the IBC will move faster & financial creditor gets their loans in time.