Wednesday, Oct 11, 2017

Insolvency and Bankruptcy Code - IBC-BOON OR BANE

Introduction

The Insolvency and Bankruptcy Code (IBC), 2016 has been enacted to merge the existing laws related to insolvency and bankruptcy. The IBC involves standard steps which is viable and understandable. So, everyone, be it creditors, debtors, companies, or shareholders etc. shall have a standard perform  for any matters relating to insolvency.

“The IBC has been a real game changer in the Indian economy’s business reform initiatives in the last twenty five years. Ease of doing business is ironically the base premise for enacting the comprehensive Code to exit from the business.”

The IBC has made a spectacular progress in short span. The recent orders issued by the Adjudicating Authorities are beginning to have profound impact on defaulting business owners as the message is loud and clear “settle dues or cede control”.


Why was IBC enacted?

Initially there was Presidency Towns Insolvency Acts, 1909 which was applicable in Kolkata, Chennai and Mumbai and the Provincial Insolvency Act 1920 for the rest of India, for regulating the insolvency laws. The Act applied to individuals and partnerships but exempted corporations from within its ambit. Post Independence, the bankruptcy and insolvency were specified in Constitution and with the passage of time there were numerous acts which governed Insolvency and bankruptcy issues such as the Sick Industrial Companies (special provision) Act, 1985 (“SICA”), SARFAESI Act, 2002, the Recovery of Debts due to Banks and financial institutions Act, 1993 (“RDDBFI Act”), Companies Act, 1956 as well as Companies act, 2013.

But these regulations have not yielded satisfactory results. These regimes were high fragmented, borne out of multiple judicial forums resulting in lack of clarity and certainty of jurisdiction. Further, we had various adjudicatory bodies/Tribunals to deal with such issues and matters under different Acts stated above.

So, this led to the unclear knowledge about the authority as to whom the parties should approach in the related matters. Hence, this resulted in overlapping of decisions. There was no common regulatory authority to regulate the rights of the secured or unsecured creditors, employees etc. or to determine the priority of their claims. Large number of stressed assets such as NPAs with low recovery rates due to a lack of enabling environment for the enforcement of creditor’s rights. Moreover there was no adequate or credible data regarding the assets, indebtedness etc. of companies which further heighten the problems. Hence large number of legislations and non-statutory guidelines have made the recovery of debt a complex and time consuming process.

The IBC is a welcome overhaul which has directly addressed in resolving the insolvency and bankruptcy issues of corporates and simultaneously serving creditors and public financial institutions by helping them in recovery of bad and distress loans and ultimately tackling Non Performing Assets. The Main objective of Code is distribution of the effects of a debtor in the most expeditious, equal and economical mode. The Code lays down the complete procedure of Insolvency Resolution process which involves collating claims and reviewing the requisite financial and other relevant records of the company. The introduction of this Code has brought in ample opportunities for professionals ranging from being appointed as official liquidator to managing the financial health of corporates in case of distressed assets.

Present Scenario

Today we have IBC, 2016, which provides a specialized forum to oversee all liquidation and insolvency proceedings for individuals, SMEs and Corporates. The Code triggers a uniform law or process for a valid claim. The Code has replaced all the existing laws and come up with a uniform procedure to resolve insolvency and bankruptcy disputes. Now, in case of any dispute, an insolvency professional will be appointed to take control of the corporate debtor. The whole process or proceedings get resolved within a standard time limit. In the case of a default, the time- limit is 180 days, within which the resolution has to be completed. This can be extended by another 90 days by the adjudicator, depending on the process. The Code provides a balanced approach between rehabilitation and recovery and provides for compulsory liquidation it also provides a clearly –defined waterfall mechanism for payment of debt in the event of liquidation.

The IBC enacted to radically change the process of insolvency resolution in India, is keenly watched by economists and jurists as well as businessmen and investors, for the reason that each aspect of the implementation of law has the potential to critically impact the ease of doing business in India. For this reason the code is especially sensitive to interpretation and it is vital that the issues thrown up in its inaugural year of implementation be recognized and the judicial remark on the same be understood.

To meet the objectives of timeliness and value maximization, the IBC has a new institutional set-up comprising four critical pillars:

  1. A robust and efficient adjudicating authority to hear the cases.
  2. A regulated profession of insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.
  3. A regulated competitive industry of information utilities (IUs) to reduce information asymmetries in the insolvency resolution process.
  4. A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform legislative, executive and quasi-judicial functions with respect to the IPs, and IUs and draft regulations for the resolution procedures under IBC.
Five Main Pillars /Constituents of Code


Conclusion

Overall this legislation is a huge step for a country like India towards joining top 50 in the World Bank’s Ease of doing Business and has a potential to bring business practices in India closer to more developed and advanced markets over a long period of time. Moreover, the code aims to provide for speedy disposals of cases as it has divided the authority and the jurisdiction of the NCLT and DRT between individuals and companies. It also provides with a list of priorities which shall be given preference for settlement of such debts at the time of liquidation of the assets of the company (first on the list is settlement of liquidation cost).

IBC has now brought in a complete change in the scenario of resolution of financial distress in the country. IBC also sets methods for working with defaulting borrowers in order to better enable the borrower to better meet financial obligations. Thus in all together it proves to be a boon for the Country.

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Acquisory News Chronicle - September 2017