The problem of Non-Performing Assets (NPA) has been pulling down the performance of Indian Economy over the years. It was crucial to bring in a robust mechanism to settle entities sliding into bankruptcy without causing much damage to the economy in a time bound manner. Insolvency and Bankruptcy Code (IBC or Code) is considered as one of the significant economic reforms to be taken by the country in addressing the issue of NPAs. The Code has received wide commendation from Indian Industry and has contributed significantly to India’s 30 places jump in ‘Ease of Doing Business Ranking’ in 2018.
What is this IBC or Code? How insolvency proceedings were handled before this law? What is unique about this law? Let’s find answers for these questions.
Before IBC or Code
The issue of Re-organization and winding up was covered under separate laws. There was no surety of debt recovery under various laws like the Contract Act, Recovery of Debts Due to Banks and Financial Institutions Act 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The entire process of insolvency and liquidation was in the hands of equity holders and debt holders. It took companies about four to five years to complete the process of liquidation. By that time, the assets would have eroded heavily with very little left for distribution. Also there were instances, where the promoters participated in the bidding process and reacquired the assets with a steep haircut, leaving the financial lenders helpless and outraged.
Insolvency and Bankruptcy Code
All laws related to insolvency is now consolidated in to one single law. The IBC has resulted in major power shift from equity holders (including Promoters), debt holders of the company to creditors. The concept of creditor in control is enforced through this legislation. Once the resolution process is started under IBC, the board cedes control of the company to insolvency professionals. This fear of losing control over their companies has forced many promoters to settle or resolve their dues. Also the promoters are barred from bidding or participating in the sale process of the assets. This makes the whole process more transparent and reliable, raising the hope of speedy recovery and a strong investment sector in the country. The law has made it clear that the promoters and business holders can no longer act according to their wishes with debts piling up in their arena. The advantage of this Act is the time-bound resolution process which is explained below.
- Company defaults on Payment – Minimum of Rs. 1 lakh.
- Application to the National Company Law Tribunal(NCLT) to be filed by the financial creditor/operational Creditor/corporate debtor
- National Company Law Tribunal to appoint interim resolution professional (IRP)
- The interim resolution professional forms a committee of creditors (COC)
- If 66% (earlier 75%) of the creditors approve resolution plan, the revival plan of the company goes through.
- If the plan is rejected, the company goes in to liquidation.
Time periods as per IBC.
- The admission of a company under Corporate Insolvency Resolution Process (CIPR) to be done within 14 days from receipt of Application.
- The resolution plan must be approved within 180 days with another 90 days as extension as a last step.
- In case of Liquidation, the entire process to be completed within a period of 2 years from date of initiation.
IBC has become a huge boon for Mergers & Acquisitions Industry (MA) in India with debt ridden companies looking at options for debt restructuring or putting up their distressed assets for on sale for potential buyers. It also gives opportunity to major industry players to acquire debt ridden company at costs lower than new Greenfield projects. Even employees of the company can file for insolvency under IBC (Cases – Aruna Hotel Chennai & PopUrban Bengaluru) to recover their dues.
Indian Code has similarities with UK & US Insolvency code in matters like initiation of bankruptcy proceedings, appointment of Insolvency Professionals & Boards losing power to govern company in case of creditor initiated proceedings. However in Indian Code, the promoters are not allowed to bid for assets unless they have settled the dues in full before resolution plan is in place whereas in UK/US code, promoters can participate in the bidding. As per World Bank report of 2018, India ranks 108th among 189 countries in Insolvency resolution (up from 136th in 2016).
IBC can be seen as a Game Changer since it is modeled towards maximization of value of assets, striking a balance between liquidation and reorganization, provision of timely, efficient and impartial resolution and ensuring a transparent and predictable Insolvency Law.
References:-
5. https://www.livelaw.in/top-stories/supreme-court-validity-of-insolvency-bankruptcy-code-142379.cms
Business Management 
Very informative !
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