Print Friendly, PDF & Email

Insolvency and Bankruptcy Code

Topics Covered: Inclusive growth and issues arising from it.

Insolvency and Bankruptcy Code

What to study?

For Prelims: Overview of the code.

For Mains: Significance and issues associated.

Context: The government promulgated an ordinance to amend the Insolvency and Bankruptcy Code (IBC) whereby fresh insolvency proceedings will not be initiated for at least six months starting from March 25 amid the COVID-19 pandemic. Default on repayments from March 25, the day when the nationwide lockdown began to curb COVID-19 infections, would not be considered for initiating insolvency the proceedings for at least six months. Insolvency proceedings would not be initiated for “any default arising on or after March 25, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf”. ”No application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period,”

The ordinance suspends sections 7, 9 and 10 on grounds that:

  1. the pandemic has created uncertainty and stress for business for reasons beyond their control
  2. the nationwide lockdown has added to disruption of normal business operations
  3. in such circumstances it would be difficult to find adequate number of resolution applicants for a distressed/defaulting business

The suspension will also curb operational creditors, such as vendors and suppliers, from filing insolvency proceedings against corporate debtors. It will also block corporate debtors from self-filing in order to restructure debt.

Background:

Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 allow for insolvency filings by financial creditors, operational creditors and the corporate debtor itself.

Implications:

While the ordinance is intended to provide respite to the corporate debtor, taking away recourse under IBC will only mean ballooning of the liabilities without resolution. Certain provisions in the amendment can spring unwarranted consequences and open up the possibility of gross misuse of the leeway by wilful defaulters and fraudulent promoters. Suspending Section 10 of the Code will also hurt businesses stuck in the vicious cycle of debt and wanting to exit.

What is insolvency and bankruptcy?

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.

Bankruptcy, on the other hand, is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.

About the IBC:

The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses.

The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The code stipulates that the resolution process of a stressed company will have to be completed in a maximum of 270 days.

 When does the Insolvency and Bankruptcy Code (IBC) apply?
In March this year, the government raised the threshold for invoking insolvency under the IBC to Rs 1 crore from Rs 1 lakh with a view to prevent triggering of such proceedings against small and medium enterprises that are facing currently the heat of coronavirus pandemic.

The Code creates various institutions to facilitate resolution of insolvency. These are as follows:

Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.

Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.

Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.  The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

InstaLinks:

Prelims Link:

  1. What is insolvency and bankruptcy?
  2. Various institutions established under the IBC code.
  3. NCLT- composition and functions.
  4. What are debt recovery tribunals?
  5. Sections 7, 9 and 10 of IBC.

Mains Link:

Discuss how suspension of initiation of fresh insolvency proceedings will help shield companies impacted by the outbreak of Covid-19.

Sources: the Hindu.