Insolvency and Bankruptcy Code 2016 and Amendments

Background:

• Before the implementation of the Insolvency and Bankruptcy Code (IBC) in 2016, India lacked effective legal and institutional mechanisms to handle debt defaults.
• Existing laws and institutions, such as the Recovery of Debts due to Banks and Financial Institutions Act, 1993, and the Sick Industrial Companies (Special Provisions) Act, 1985, were deemed ineffective.

Objectives of IBC:

• The IBC aims to consolidate laws related to insolvency, providing a single legislation for resolving insolvency cases in a time-bound manner.
• It seeks to promote entrepreneurship, facilitate credit availability, and balance the interests of all stakeholders, including debtors, creditors, suppliers, and employees.

Key Features and Highlights:

1. Insolvency Professionals:
• A specialized cadre of licensed professionals is established to administer the resolution process, manage debtor assets, and provide information for creditors.
2. Insolvency Professional Agencies:
• Agencies where insolvency professionals are registered.
• Conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance.
3. Information Utilities:
• Professional organizations registered with the Insolvency and Bankruptcy Board of India (IBBI).
• Collect, authenticate, and store financial information accessible to resolution professionals, creditors, and other stakeholders.
• Aid in decision-making by providing a comprehensive financial profile of debtors.
4. Adjudicating Authorities:
• National Companies Law Tribunal (NCLT) for companies and Debt Recovery Tribunal (DRT) for individuals and small firms.
• Approve the initiation of the resolution process, appoint insolvency professionals, and approve final decisions of creditors.
• NCLT appoints a resolution professional to manage the business of the debtor under the guidance of a committee of creditors.
5. Insolvency and Bankruptcy Board:
• Regulates insolvency professionals, information utilities, and insolvency professional agencies.
• Comprises representatives from RBI, Ministries of Finance, Corporate Affairs, and Law.

Resolution Process:

• The Code emphasizes a shift of control from the defaulting debtor's management to its creditors, allowing creditors to drive the business with the resolution professional acting as their agent.

Significance:

• The IBC streamlines the insolvency resolution process, promotes transparency, and ensures a time-bound approach to resolving debt defaults.

Conclusion: The Insolvency and Bankruptcy Code 2016 is a landmark legislation that has transformed the insolvency landscape in India. By providing a comprehensive framework, it addresses the challenges posed by debt defaults and contributes to a more robust and efficient financial ecosystem.

NCLT and DRT in the IBC Process:

1. NCLT (National Company Law Tribunal):
• NCLT is a quasi-judicial authority established under the Companies Act, 2013.
• Decisions made by NCLT can be challenged in NCLAT (National Company Law Appellate Tribunal), the Appellate Tribunal.
2. Debt Recovery Tribunals (DRT):
• DRTs were established to streamline the debt recovery process involving banks and financial institutions after the enactment of the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993.
• Appeals against DRT orders can be filed before the Debts Recovery Appellate Tribunal (DRAT).

Procedure and Process under IBC:

1. Minimum Amount for Insolvency:
• For individual defaulters and unlimited partnerships, the minimum amount required to trigger the insolvency code is ₹1,000.
• For corporate debtors, the minimum default amount required to initiate the insolvency procedure is ₹1,00,000.
2. Initiation of Insolvency:
• Creditors, including financial creditors (banks and bondholders) and operational creditors (suppliers), or the corporate debtor, employees, or shareholders can initiate the corporate insolvency resolution process.
• The insolvency professional administers the process, providing financial information from information utilities to the creditor and managing the debtor's assets.
• Legal action against the debtor is not allowed during the 180-day process.
3. Decision to Resolve Insolvency:
• A committee is formed by insolvency professionals, consisting of financial creditors who lent money to the debtor.
• The committee decides on the outstanding debt's future, either through debt revival or liquidation.
• A decision must be made within 180 days, with a one-time extension of an additional 90 days.
• Revival plans require consent from 75% of financial creditors.
4. Liquidation and Waterfall:
• If the debtor goes into liquidation, an insolvency professional administers the process.
• Proceeds from the sale of assets follow a waterfall distribution: i) Insolvency resolution costs, including insolvency professional remuneration. ii) Secured creditors. iii) Dues to workers and other employees. iv) Unsecured creditors. v) Dues to the government. vi) Priority shareholders. vii) Equity shareholders.
5. Workers' Salaries Priority:
• In case of liquidation, workers' salaries for up to 24 months get priority, ahead of secured creditors.

Significance of the IBC:

• Power to Creditors: The IBC empowers creditors in the insolvency resolution process.
• Easier Exit: Facilitates a more straightforward exit strategy for businesses.
• Speedier Resolution: Ensures a quicker insolvency resolution process, promoting efficiency.
• Ease of Doing Business: Enhances the overall ease of doing business environment.
• Reduction of Bad Loans: Aims to reduce the burden of bad loans on the financial system.
• Capital Productivity: Ensures productive use of capital by facilitating quick bankruptcy resolution.

Key Differentiators of IBC:

1. Single Code: Consolidates multiple laws into a single insolvency code.
2. Time-Bound Process: Provides a time-bound resolution process.
3. Elaborate Institutional Infrastructure: Establishes a comprehensive infrastructure of Insolvency Professionals (IPs) and Information Utilities (IUs).
4. Universal Applicability: Applies to all businesses, not just manufacturers, differentiating it from previous legislation like SICA.

Conclusion: The Insolvency and Bankruptcy Code (IBC) has transformed the insolvency resolution landscape in India by introducing a comprehensive and time-bound process. It empowers creditors, ensures efficient resolution, and contributes to a more conducive business environment. The IBC's universal applicability and elaborate infrastructure set it apart from earlier laws, making it a critical component of India's insolvency framework.

Banking Regulation (Amendment) Act 2017: The Banking Regulation (Amendment) Act 2017 brought about crucial changes to the Banking Regulation Act, 1949. This amendment granted the Reserve Bank of India (RBI) the authority to issue directives to banks, instructing them to initiate recovery proceedings against loan defaulters. The context for this empowerment was the implementation of the newly enacted Insolvency and Bankruptcy Code, 2016 (IBC). Subsequently, the RBI utilized these powers by directing banks to initiate recovery proceedings against numerous defaulters.

Three Years of IBC:

1. Progress and Recovery:
• Over the three years since its enactment, the IBC has shown progress in achieving its objectives, specifically faster recovery of stressed assets and shortened resolution timelines.
• Recovery through the IBC reached ₹70,000 crore in the fiscal year 2019, which was twice the ₹35,500 crore recovered through other resolution mechanisms in fiscal year 2018, such as the Debt Recovery Tribunal, Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat.
2. Shift in Power Dynamics:
• The IBC has significantly shifted the balance of power from borrowers to creditors, enhancing the creditor's position in the resolution process.
3. Credit Discipline:
• The IBC has instilled a stronger sense of credit discipline. Defaulting borrowers now face the real possibility of losing their assets if the resolution process fails, leading to increased urgency and seriousness among them.
4. Debt Disposal and Behavioral Change:
• Approximately ₹2.02 lakh crore of debt related to 4,452 cases was disposed of even before admission into the IBC process, as borrowers repaid the amounts in default to creditors. This indicates a positive behavioral change among borrowers.
• The slower accumulation of new non-performing assets (NPAs) in the Indian banking system reflects this behavioral shift.

Challenges and Areas for Improvement:

1. Resolution Timelines:
• Resolution timelines remain an area of concern. Although the average resolution timeline for cases resolved through IBC has improved to 324 days (compared to 4.3 years earlier), it still exceeds the original code's stipulated timeline of 270 days.
2. Outstanding Cases:
• As of 2019, there were 1,143 cases still outstanding under the IBC, indicating the need for further expeditious resolution.
3. Limited Information Utilities:
• There is a limited number of information utilities, which play a crucial role in the insolvency resolution process. Expanding and strengthening information utilities can enhance the effectiveness of the IBC.

Impact of the COVID-19 Pandemic:

• To provide relief to entities affected by the pandemic, the government has suspended fresh proceedings under the IBC since March 25, 2020. This suspension has been extended until 2021 due to the ongoing challenges posed by the pandemic.