‘Insolvency’  is a situation where in any person or a corporate entity is unable to fulfil its financial obligations whereas ‘Bankruptcy’ is a situation where in a court of competent jurisdiction declares a person or an entity insolvent, passes appropriate orders to resolve it and protect the rights of the creditors. Indian economy has been facing the ‘Twin Balance sheet’ problem wherein the balance sheets of  both, banks as well as corporate houses, are under stress and is acting as a major obstacle to investment and growth of our economy. In this context, the Insolvency and Bankruptcy Code, 2016 (IBC) has come into existence to address the structural problems hampering the efficient recycling of capital and rebalance the rights of creditors, giving the much needed recourse to take timely and effective action against defaulting borrowers. This move is aimed at consolidating the existing laws related to the insolvency of partnerships with unlimited liability, entities with limited liabilities and individuals into a single legislation, in order to rule out the ambiguity in the insolvency resolution processes.

Pillars of IBC-

There are four pillars of IBC institutional mechanism – Insolvency Professionals (IP), Information Utilities, Adjudicators (NCLT, DRT) and Regulators (The Insolvency and Bankruptcy Board of India).The resolution processes are conducted by licensed insolvency professionals (IPs) which are members of Insolvency Professional Agencies (IPAs). Information utilities (IUs) have been established to collect, collate and disseminate financial information to facilitate insolvency resolution. The National Company Law Tribunal (NCLT) is created for adjudicating insolvency resolution for companies. The Debt Recovery Tribunal (DRT) is meant to adjudicate insolvency resolution for individuals. The Insolvency and Bankruptcy Board of India are set up to regulate functioning of IPs, IPAs and IUs. Given that many corporate transactions and businesses involve an international element, the IBC also attempts to address the issue by including provisions for cross border insolvency.

Procedure for Insolvency Resolution

 The creditors (financial/operational) are required to submit a plea for insolvency to the adjudicating authority i.e. NCLT. The plea has to be accepted/rejected within 14 days from the filing of the plea. In case of acceptance of the plea, an Insolvency Resolution Professional (IRP) is appointed. The IRP has to draft an insolvency resolution plan within 180 days (can be extended by 90 days in exceptional cases) while the Board of Directors of the company remain suspended and the promoters do not have a say in the management. If the resolution plan is accepted by 75% of the creditors, it is put into action. In case of rejection of the insolvency resolution plan, the company is liquidated.

 

Positive Impact of IBC

  The Insolvency and Bankruptcy Code, 2016 is a major economic reform next only to the adoption of Goods and Services Tax in India. It offers advantages to corporate sector, banking sector, Government and corporate employees as well. The corporate entities would have a sigh of relief as IBC provides easy and hassle free ‘exit’ to sick companies. Solving bankruptcy and insolvency cases in a quick manner also creates a positive effect in the eyes of foreign investors. With IBC in place, the Indian lending system has gotten teeth in dealing with stressed borrowers and a difficult macroeconomic situation. IBC is expected to bring better financial discipline among companies, which would help to ensure that all their creditors are paid on time. IBC provides an effective mechanism to the banks to resolve their Non Performing Assets (NPA) burden and handle their stressed assets. Government is being benefited by IBC in terms of improvement in ‘Ease of doing business’ scenario in a country and thereby attracting more foreign investment. It also helps to free up productive resources of Government to be utilised for welfare purposes.

              The recently released data in Economic Survey 2018 related to IBC is encouraging. The number of companies facing liquidation under the Insolvency and Bankruptcy Code (IBC) has been reported thrice that of companies where a resolution plan has been approved. Of the 525 insolvency petitions filed in NCLT, 30 companies have been ordered to be liquidated, 10 companies have got their resolution plans approved, 34 have been closed by appeal or review and 451 companies are still undergoing the process. In terms of the quantum of loans involved for companies under the insolvency process, the steel sector tops the list with Rs 57,000 crore of debt, followed by retail at Rs 12,719 crore. The total loans to be resolved through the bankruptcy court are to the tune of  Rs 1.28 lakh crore. It is worth noting that introduction of IBC, 2016 has transformed India from the list of a relatively weak insolvency regimes to one of the world’s best insolvency regimes. The strict implementation of the time limits for resolution of insolvency issues and implementation of IBC, 2016 in true letter and spirit would certainly give a new impetus to economic growth of new and resurgent India.

(The author of this article ,Lt Col (Dr) Satish Dhage, is an ex Army officer and has been qualified for IPS (Indian Police Services) through IPS LCE 2012. Presently, he is Director, MGM Institute of Competitive Exams Aurangabad.                                

 For any queries or feedback, he can be contacted on email id : drsatishdhage@gmail.com)