Insolvency & Bankruptcy: Issues & Way forward

ECONOMY/ GOVERNANCE

Topic:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Insolvency & Bankruptcy: Issues & Way forward

About Insolvency & Bankruptcy

• Insolvency is the situation where the debtor is not in a position to pay back the creditor. 
• For a corporate firm, the signs of this could be a slow-down in sales, missing of payment deadlines etc. 
• Bankruptcy is the legal declaration of Insolvency. 

Salient features of the Insolvency and Bankruptcy Code:

• IBC was enacted in 2016 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
• IBC Code 2016 covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
• The adjudicating authority is National Company Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunal (DRT) for individuals and partnership firms.
• 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 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.

Has IBC worked well?

• Reduced Time for resolution: Today, on average, one can see maybe about three years [for recoveries and resolutions] as compared to an earlier timeline of five years, six years or more
• Promotes fiscal discipline & Reduces wilful default: The fear of losing the company under Section 49A will push the promoters to find a resolution.

Issues

• Infrastructure issues: There is shortage of NCLT member, lot of vacancies & delays in appointments all of which has a bearing on IBC working efficiency

• Legacy Issues: A lot of IBC cases are very old cases related to the stock of NPAs [Non-Performing Assets]. So, once this round is over, in future, perhaps, there will be fewer cases and IBC will be able to perform better than before.

• Procedural Delays: There are delays in implementation, whether it’s in terms of approvals, having an application admitted itself.

• Lack of Buyers: In India there are not many strategic investors. An asset will have interest or value only if there are more people who are ready to buy. Better asset value realization will lead to faster resolution of stressed companies (happy creditors)

Way Forward

• Increasing the predictability of IBC process so as to attract more & diverse range of strategic buyers who are willing to bid for assets, and submit resolution plans under the code

• Flexibility for Promoters: MSMEs have flexibility in terms of promoters being able to submit resolution plans for such companies. Similar type of relaxation can be extended to large companies with necessary safeguards built into it.
• Establishing National ARC(“Bad Bank”) will give the time to the banks to resolve these cases over a period of time. Government should make sure that it is adequately staffed & well-functioning.
• Capacity building in terms of NCLT: IBC cases are not the only mandate of the NCLT. They also consider various cases under the Companies Act (Ex: mergers or oppression). To improve IBC efficiency, NCLT strength has to be enhanced.
• Alternate Resolution: IBC is not the only solution for resolving stress. Other mechanisms pre-IBC mechanisms, one-time settlements, restructuring packages needs to be promoted as well.

Connecting the dots:

• Ease of Doing Business
• Twin Balance Sheet Problem faced by economy