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RSTV: THE BIG PICTURE- INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) BILL, 2020

RSTV

Introduction:

Parliament passed amendments to the insolvency law that will help safeguard successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters. The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by voice vote in Rajya Sabha. It was approved by Lok Sabha on March 6. The Bill replaces an ordinance. Replying to a short debate on the bill, Finance Minister Nirmala Sitharaman said amendments are in sync with the time and also adhere to a Supreme Court order in “letter and spirit”. The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. The latest changes pertain to various sections of the IBC as well as the introduction of a new section.

Highlights and analysis:

  • The amendment brings the much awaited changes needed in the insolvency sector.
  • Finance Minister said amendments are sync with time and also adhere to a Supreme Court order in “letter and spirit”.
  • It allows creditors to initiate an insolvency resolution process, if a company defaults on its payments. It introduces an additional threshold for certain classes of financial creditors, including allottees of real estate projects, for initiating the resolution process. At least 10% of them or 100 such persons have to jointly initiate the process.
  • It empowers the resolution professional to require suppliers to continue providing goods and services. This provision will not apply if the debtor has unpaid dues arising from such supplies during the moratorium period.
  • It provides that the company will not be liable for any offence committed prior to the insolvency resolution process, if there is a change in the management or control of the company.
  • Under it, the insolvency resolution process commences when the Insolvency Resolution Professional (IRP) is appointed. It states that the IRP must be appointed on the date of admission of the application by NCLT, which will be considered as the insolvency commencement date.
  • In case of defaults by real estate developers, the insolvency resolution application should be filed jointly by at least 100 homebuyers or 10% of their total number. The rationale for adding such a threshold only for certain creditors is unclear. Further, a homebuyer wishing to initiate the process may not have details of other allottees. The FM clarified that requirement of minimum number of home buyers in the IBC has been included to avoid “frivolous litigations“.
  • The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners
  • It empowers the resolution professional to require suppliers to continue providing goods and services during the moratorium period. This provision overrides the agency of suppliers to negotiate and decide whether to continue a contractual arrangement. It may also force supply of goods and services even if the supplier finds it risky or unviable.
  • In order to balance the rights of the suppliers, it provides that suppliers have to continue supplying only if their current dues are paid. In other countries, additional safeguards are available. These include the right to seek a payment guarantee, and court-granted permission to terminate contract in cases where the supplier demonstrates that continuation will cause hardship.
  • However, even after anticipation, cross border insolvency framework has not been included in the amendment.

Success of IBC:

  • The interest of all partiese. lenders, borrowers and even operational creditors is now addressed under a unified law under the IBC.
  • RBI report says that gross NPA has come down from 11.2% to 9.2% from 2017-18 to 2018-19.
  • The IBC has given more teeth to lenders and has changed the credit behavior of borrowers. Now, there is a heartening trend of defaulters paying up dues before the case is admitted for insolvency under IBC.
  • IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor In Control’ regime, as now the Board of Directors is suspended in case of default and and the IP manages the enterprise in the best interest of all its stakeholders.
  • IBC has made possible for struggling companies to ‘exit’ easily allowing creditors to take the company to the NCLT for winding up.
  • IBC has reduced crony capitalism, under and over invoicing, serial defaulters and lead to better allocation of capital by limiting the escape routes for defaulters and water tight frame for disposal of cases
  • The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
  • 4452 cases were dismissed at the pre-admission stage. Hence, it shows the effectiveness of IBC.
  • Presently, there are 1332 cases before NCLT.
  • Realization by creditors around Rs 80,000cr in resolution cases.
  • Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
  • The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
  • 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr

Conclusion:

  • By the IBC process, we are trying to use legal instruments to address problems which are of essentially business and economic nature.
  • IBC as a structural reform has demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders.
  • There is a requirement of enhanced IU infrastructure.
  • A constant monitoring of resolution which is happening right now should be continued and then it should feedback into legislature framework.
  • The strict timelines for resolution of insolvency and liquidation proceedings would definitely be an incentive and provide the requisite impetus for economic growth.
  • When implemented in letter and spirit, provide a major boost to the India economy, especially on account of timely resolution and certainty in recover