The Prime Minister mentioned the Insolvency and Bankruptcy Code (IBC 2016) as one of the key legislative reforms that would help aid India’s path to self-reliance on a high growth trajectory.
The IBC, along with the Goods and Services Tax regime, among other key reforms, were helping in significantly improving the ease of doing business in India and enabling it to emerge as a ‘Make for World’ platform.
PM Modi also credited these reforms for a surge in Foreign Direct Investment into India in 2019-2020, to the tune of nearly $74.5 billion, or a significant increase of 20 per cent from the previous year
Background: Need for Insolvency and Bankruptcy Code:
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 Insolvency and Bankruptcy Code IBC:
- Insolvency and Bankruptcy Code, 2016 is considered as one of the biggest insolvency reforms in the economic history of India.
- This was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons.
- Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
- The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been pulling the Indian economy down for years.
- Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
- Insolvency professionals handle the commercial aspects of insolvency resolution process.
- Insolvency professional agencies develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals.
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 IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
The IBC goes beyond other similar pieces of legislation across the world, and through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.
Objectives achieved so far by IBC:
- Two key drivers for the IBC are relatively short time-bound processes, and the focus on prioritising resolution rather than liquidation to support companies falling within its ambit.
- Its core implication has been to allow credit to flow more freely to and within India while promoting investor and investee confidence.
- It has successfully instilled confidence in the corporate resolution methodology as IBC has streamlined insolvency processes in a sustainable, efficient, and value retaining manner.
- Improvement in India’s Ease of Doing Business Rankings to 63 rd place.
- According to the Resolving Insolvency Index (component of Ease of Doing Business), India’s ranking improved to 52 in 2019 from 108 in 2018, which is a leap of 56 places.
- The Recovery Rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019. And the overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.
Limitations that need to be addressed:
- According to the data from the Insolvency and Bankruptcy Board of India (IBBI), of the 2,542 corporate insolvency cases filed between December 1, 2016 and September 30, 2019, about 156 have ended in approval of resolution plans — a mere 15%.
- High number of liquidations is a cause for major worry as it violates IBC’s principal objective of resolving bankruptcy.
- Slow judicial process in India allows the resolution processes to drag on, this was the same reason for slow recovery under SICA or RBBD.
Other legislative measures that will further improve the investment climate, include the rolling out of the commercial courts, commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts, and the removing of over 1,500 obsolete and archaic laws.
Together with the IBC, these highlight a major and multi-dimensional effort by the government to provide comfort, relief and reliability to the potential investors.
Going forward, there could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process, the need for which is highlighted by the necessary suspension of the IBC proceedings.
This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.
Given the need for social distancing and the suspension or limitation of physical hearings, a concerted effort should be made to enhance the role of digitally conducting all processes and hearings to achieve greater efficiency in the new normal.
Bringing in technology would help ease of access to justice and greatly help ease of doing business from a process and efficiency standpoint as well.
The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs.
Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.