INSOLVENCY AND BANKRUPTCY CODE

  • On October 1, Union Finance Minister Nirmala Sitharaman said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy Code (IBC).
  • The IBC was introduced in 2016 to consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as opposed to the debtor-in-possession system. When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation, with the former being the preferred solution.
  • However, when one looks at official data for the 3,400 cases admitted under the IBC in the last six years, more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution.

Background

  • Speaking at the sixth anniversary of the Insolvency and Bankruptcy Board of India (IBBI) on October 1, Union Finance Minister Nirmala Sitharaman said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy Code (IBC).
  • Addressing the issue of haircuts — or the debt that banks forgo — she said it was unacceptable that banks should take a hefty haircut on loans that go through the resolution process.

IBC

  • In a growing economy, a healthy credit flow and generation of new capital are essential, and when a company or business turns insolvent or “sick”, it begins to default on its loans.
  • In order for credit to not get stuck in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible from the defaulter, as quickly as they can.
  • In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery mechanisms were performing badly
  • The IBC was introduced to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as opposed to the debtor-in-possession system.
  • When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation.

Challenges for the IBC

  • According to its regulator IBBI, the first objective of the IBC is resolution — finding a way to save a business through restructuring, change in ownership, mergers etc.
  • The second objective is to maximise the value of assets of the corporate debtor while the third is to promote entrepreneurship, availability of credit, and balancing of interests.
  • Keeping this order in mind, when one looks at the IBBI data for the 3,400 cases admitted under the IBC in the last six years, more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution.
  • Furthermore, the IBC was touted as a time-bound mechanism. Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further.
  • The IBC was thus initially given a 180-day deadline to complete the resolution process, with a permitted 90-day extension.
  • It was later amended to make the total timeline for completion 330 days — which is almost a year. However, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore.
  • The average number of days it took to resolve such cases increased rapidly over the past five years, experts said.
  • When we come to haircuts — the debt foregone by the lender as a share of the outstanding claim — the Parliamentary Standing Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on an average had to bear an 80% haircut in more than 70% of the cases

SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB

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