What is the Insolvency and Bankruptcy Code 2016 of India?
A new bankruptcy code came into force in May 2016 as Indian capitalism began to take a more modern shape, increasingly breaking the shackles of decades of confusion between practising Capitalism and professing Socialism. The likes of liquor baron Vijay Mallya who had defrauded banks are now being pushed out of their conked-off companies which they had continued to hold on to despite repeated defaults.
-In line with the declared objective of rooting out corruption from the Indian way of life—a potent poll plank that played a key role in catapulting Narendra Modi to the helm of affairs in 2014 as the country reeled under a spate of scams in the 10 years of under Congress-led UPA—the BJP regime passed the Insolvency and Bankruptcy Code (IBC).
-It came as part of a war against corruption, much warranted by the new economic-powerhouse image that Modi regime wants India to be recast into in tune with India’s proposed role in the new global economic order.
-The Code reflected an acknowledgement by the Modi regime that old bankruptcy laws were not fit for the required purpose. The old laws unduly prolonged the insolvency process and in the process also opened the floodgates of corruption as they allowed ‘tactical’ bankruptcy to perpetrate economic fraud. The slow process of the law courts also helped crooked promoters to continue milking the bust firms.
-The old laws needed to be recast to inspire confidence in foreign investors who did not want to invest in financially fragile legal structures.
-The new Code stipulates a shift from the current legal and institutional framework that favours “debtor in possession” to a regime of “creditors in control” to aid lenders in effective and timely recovery or restructuring of defaulted assets and does not cause undue strain on the Indian credit system.
-Considered as a seminal economic reform by the Modi regime, it won accolades from multilateral institutions such as the World Bank and the International Monetary Fund. It is one of the reasons for the 30-notch bump in India’s ranking in the ease of doing business rankings.
- According to World Bank statistics, in India, it took an average of 4.3 years to resolve a bad account. Lenders recovered an average of 26.4 cents to the dollar, among the poorest in emerging economies.
-According to the GoI, “The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholders/promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation”.
-The maximum time for resolution is 270 days. (180 plus 90 days grace period)
-Clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.
- Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”.
- Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) to act as ‘Adjudicating Authority’ and deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liabilities entities, respectively.
- Establishment of a regulator in the form of Insolvency and Bankruptcy Board of India (IBBI) to exercise oversight over insolvency professionals, insolvency professional agencies and information utilities.
- Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to the development of a competitive industry for such professionals.
- Information utilities would collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.
- Enabling provisions to deal with cross-border insolvency.
-In effect, if a firm is found to be insolvent, under the Code the entire board of the company is fired. An independent expert is appointed to run the firm on behalf of its lenders. The new manager is to prepare the bust company for new investment. If the creditors cannot reach a deal the business is to be liquidated, its assets sold for peanuts, something to the detriment of every stakeholder.
- An amendment to the Code in November last barred wilful promoters and errant promoters of defaulting companies, and their related and connected parties, from bidding for stressed assets in the resolution process.
-Before the new code, the defaulting investors were not just able to cling at the helm of the company, but also arm-twisted beleaguered banks for debt settlement or reduction.
- In a reply to the Lok Sabha by MoS finance, Shiv Pratap Shukla said that since the code’s launch, 2,434 fresh cases had been filed before the National Company Law Tribunal (NCLT) till November 30, 2017. At least 2,304 cases seeking the winding-up of companies have been transferred from various high courts to the NCLT. Of these, 2,750 cases have been disposed of and 1,988 cases were pending as of December 2017.
- 2018 will see the resolution of the 12 big cases identified by the Reserve Bank of India (RBI) for early resolution under the new framework which accounts for close to one-quarter of the Indian banking system’s stressed assets of Rs10 trillion.
- In the US the company retains the management control while working to achieve pre-agreed goals within a certain timeframe, but the Indian code provides for management control to pass over to resolution professionals once insolvency resolution is underway.
- The intentions of the lawmakers are made clear in the following words of the government: “In India, the legal and institutional machinery for dealing with debt default has not been in line with global standards. The recovery action by creditors, either through the Contract Act or through special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes.”
-“Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor aid restructuring of firms.”
-“Laws dealing with individual insolvency, the Presidential Towns Insolvency Act, 1909 and the Provincial Insolvency Act. 1920, are almost a century old. This has hampered the confidence of the lender. When lenders are unconfident, debt access for borrowers is diminished. This reflects in the state of the credit markets in India. Secured credit by banks is the largest component of the credit market in India. The corporate bond market is yet to develop.”
-“The objective of the new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.”
-The order of preference order of settling debts is as follows: secured creditors; pay workmen’s dues for 12 months; unpaid dues to employees other than workmen;.financial dues owed to unsecured creditors. Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment.
-Workers’ salaries for up to 24 months will get priority in case of liquidation of assets of a company, ahead of the secured creditors.
-The Code also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.
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Last Updated Jul 24, 2018, 2:52 PM IST