Insolvency and Bankruptcy Code and the resolution of NPA crises-A Journey so Far

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What is Insolvency and Bankruptcy Code?

The Insolvency and Bankruptcy code (IBC) 2016 is the bankruptcy law in India passed to address the issues of insolvency and bankruptcy by creating a single law and consolidating all the laws preceding it.  The law was introduced in the Lok Sabha in December 2015 and passed on May 2016 with the President giving his assent on 28 May 2016. The two terms in the law Insolvency and Bankruptcy are quite closely linked but are separate entities. Insolvency is defined as a condition when the debtors, individuals and corporates are unable to pay off their debts or in accounting terms, it means a person or a firm’s total liabilities exceeds its total assets. Bankruptcy, on the other hand, is an actual court order showing how an insolvent person or business pays off his creditors. So a person can be insolvent without being bankrupt but the insolvency can lead to bankruptcy. At the core of its formation, the IBC recommends setting up of a regulator in the form of an Insolvency and Bankruptcy Board (IBBI) which would basically regulate the system of insolvency professionals (IPs), IP agencies, information utilities (IUs) and resolution procedures.

Why the need for an Insolvency Law?

The Insolvency and Bankruptcy Code (IBC) basically seeks to consolidate the numerous bankruptcy laws and their conflicting situations which had made it difficult for the banks to recover their dues. The various laws used to complicate the matter by causing obvious inefficiencies and delays. As regards to the statistics, India was ranked 130 in the World Bank’s Ease of Doing Business before the enactment of this law in 2017. After its passage, India has been ranked 100th which has been primarily due to the reforms ushered in resolving insolvency which is an important parameter when calculating the Ease of doing Business index. However, the most important reason for the enactment of IBC is the huge problem of NPA’s or non performing assets which as of December 2017 stood at Rs 840958. The NPAs are on account of the stressed firms which have been under extreme financial stress and have become a drag on the economy. According to the CMIE database there are about there are about 1039 firms where there is not enough cash (PBIT) to pay interest and the data may be much more than being actually reported. The exit of all these stressed firms will free up capital and also labour for the utilization by healthy firms. The RBI and the government have already put up a list of 12 big defaulters into the IBC and made the list public. These NPA’s have already sucked out the liquidity in the market and made credit dearer. This has resulted in a ripple effect on the economy and effected the overall growth of the economy.

Some Prominent Features

Some of the key features of the code are as follows:-

1) It requires setting up of an insolvency and bankruptcy board (IBBI) which would act as a regulator.

2) The bill proposes to set up a system of insolvency professionals and agencies which would develop professional standards, code of ethics and exercise a disciplinary role to the insolvency process.

3) The code provides for the setting up of information utilities which would collect, collate and authenticate as well as disseminate financial information from listed companies as well as financial and operational creditors of companies.

4) In case of the adjudicating authority over Insolvency The National Company Law Tribunal (NCLT) shall be the Adjudicating Authority with jurisdiction over companies and the limited liability entities (including LLPs.) whereas the Debt Recovery Tribunal (DRT) shall be the adjudicating authority with jurisdiction over individuals and partnership firms other than Limited Liability Partnerships (LLPs).

5) There will be a moratorium period during which all the creditor action will be stayed.

Criticisms

  • One of the most important criticisms of the law pertains to the real estate sector and its treatment of homebuyers. In the initially drafted bill homebuyers were to be treated at the lowest priority of creditors and hence did not have much say in the proceedings.
  • As this law was passed the first 6 months saw 75% of the insolvency proceedings being filled by the unsecured operational creditors and not by financial creditors.
  • There is the uncertainty of regulatory norms for banks and fear of scrutiny by anti-corruption investigation agencies and other bodies among bank management.
  • The law doesn’t have any provisions regarding synergy among Indian and foreign courts over the issue of overseas insolvency proceedings.
  • The law favours excessive government checks as has been seen with regard to appointment, termination, and scrutiny of Insolvency professionals.

In summary, I would like to conclude that the enactment of the IBC is a major step towards economic reforms by its processes of cleaning up the stressed balance sheets and resolving the NPA crises. It is still a work in progress and many areas of concern still remain. However, for the system to function properly, the following areas need to be properly evaluated and scrutinized before it can be a roaring success:-

  • A proper regulator
  • An proper and efficient National Company Law Tribunal
  • An proper and efficient Debt Recovery Tribunal
  • A system of proper Information Utilities
  • A proper system of Insolvency Professionals
  • A proper drafting of the transition process for existing cases
  • A proper adjustment within the existing bankruptcy laws
  • A proper system for modifying financial sector regulations