Insolvency and Bankruptcy Code (IBC)

Resolving insolvency is a key parameter behind the “ease of doing business” index. A solid insolvency resolution infrastructure not only saves interests of creditors from defaults but also extend a second chance to promoters who are not wilful defaulters; who have suffered true business losses. And that is what our country lacks.

India stood 130th in terms of “ease of doing business” and 39th in the list of “global competitiveness” for the period 2016-2017. One major reason behind such a alarming business environment in the world’s largest democracy is poor insolvency resolution practices. Just to give a bird’s eye view, over 60,000 insolvency related cases are awaiting legal proceedings at different stages in different Indian courts. On an average, it takes over 4 years to shut down an insolvent company. And the recovery rate is also very unreliable.

To overcome all these obstacles, a new bill has been passed by Indian Parliament in May 2016, with the assent of the President of India, to make resolving insolvency a time-bound and consolidated legal process. This is known as Insolvency and Bankruptcy Code, 2016 or IBC.

Why do we need proper insolvency legislation?
Insolvency is the inability of a legal entity, be it a company or an individual, to pay back monetary dues to its creditors on time. A monetary due can be any one or a combination of the following types;

• Salary to its employees
• Rent to the landlords
• Tax to the governments
• Payment to the suppliers
• Repayment of loans, including the interest, to financial institutions
• Dues to homebuyers from real estate companies

Insolvency can be of two types – cash flow insolvency and balance sheet insolvency. The former is a situation where a debtor has sufficient assets compared to its total liabilities but still cannot repay for not having enough cash flow or other liquid assets. The latter is commonly known as technical insolvency; it is lacking enough assets to repay all the debts, which means total liability is more than total asset.

Such situations can arise for various reasons; like,

• disruption in cash flow due to non-receipt of dues from customers;
• sudden disruption in market conditions; or, even,
• intentional defaults to avoid loan repayment.

It might seem that liquidation of available assets is an obvious choice in similar situations but modern insolvency resolution practices consider liquidation as the last resort. Any attempt to sell off assets of an insolvent entity generally results in distress sale and yields much less than the actual market value of the assets. So, modern insolvency resolution primarily promote restructuring of debts to devise a payment plan to creditors and also giving second chance to insolvent promoters where there is no wilful default or business inefficiency.

We require an efficient and effective insolvency legislation to look after the interests of all the parties and establish an ambience conducive to “doing business”.

What does IBC 2016 want to achieve?
The major objectives behind Insolvency and Bankruptcy Code 2016 are very specific. They are;

1. Consolidating, streamlining and amending, if required, the existing laws in the field of reorganization and insolvency resolution of any legal entity
2. Establishing a time-bound resolution for maximization of value for all the interested parties
3. Promoting genuine entrepreneurship and improving credit availability for such initiatives
4. Maintaining a balance amongst all the stakeholders through prioritization of claims to the payments

Salient features of IBC 2016
First of all, the Code covers all types of companies, including partnerships, limited liability partnerships, and individual defaulters. NCLT or National Company Law Tribunal intervenes as negotiator in case of defaults by companies; DRT or Debt Recovery Tribunal negotiates in cases concerning individual defaulters. National Company Law Appellate Tribunal serves as appellate authority.

IBC 2016 explicitly promotes a new class of professionals in the field of insolvency resolution. They are called insolvency professionals or IPs. These are individual professionals with single point professional agenda of helping sick debt-ridden entities. They are allowed to appoint other professionals as support in the insolvency resolution process.

Collation and assimilation of debtor related information is a crucial task for an effective and efficient insolvency resolution. For this purpose, the new legislation advocates establishing information utilities or IUs, who will collate all relevant information. For regulating IPs and IUs, there is Insolvency and Bankruptcy Board of India or IBBI.

The code allows any creditors, like, lenders, employees, debtors, to initiate insolvency proceedings. The proceedings official start only when NCLT or DRT verifies the initiators’ claim.

Standard procedures of insolvency resolution as per IBC 2016

1. As the first step, the tribunal appoints interim resolution professional or IRP as per the preference or proposal of the creditor(s) or initiator(s). The board of directors of the sick company is suspended and IRP takes over the charge. For day to day operations IRP is allowed to appoint other professionals like accountants, lawyers for resolution purpose. It is the job of the IRP to gather information through IUs; verify claims of different stakeholders and interested creditors and establish control over the cash flows. On the 30th day from the appointment date, IRP convenes meeting with committee of creditors or CoC to update them about latest situation. CoC can retain IRP as resolution professional (RP) or appoint a new RP.
2. The job of the RP is to find out, propose and get approval of CoC on the restructuring plan. For that RP is given a stipulated time period of 180 days. A one-time extension of 90 days is allowed for complex cases over and above the initial 180 days. However, for MSMEs and start-ups with less complexities RPs are initially allowed 90 days’ period with one-time extension of only 45 days.
3. For approval on any restructuring plan it must have backing of at least 75% of CoC. This is sacrosanct as per the legislation.
4. Assets of the insolvent unit is enlisted for liquidation in case the proposed restructuring plan fails to gain backing of 75% of CoC even after 270 days, i.e., initial 180 days and the one-time extension of 90 days, or if the tribunal rejects the plan on any technical basis.

Major drawbacks of IBC 2016

Some of the key loopholes in the current IBC framework are discussed here.

1. Insolvency cases with big companies, for obvious reasons, involve international stakeholders and foreign jurisdictions. However, at present IBC does not scope strong synergy with international insolvency courts. This will create trouble in resolving such cases.
2. IBC allows too much of government interventions in appointment, regulation and termination of IPs. It is not conducive to fare professional practices.
3. There is lack of autonomy for NCLT/DRT; it makes these authorities susceptible to political interventions.

However, we must understand that, since independence of India, this is the first concrete attempt to bring in an order in the insolvency resolution in the country. NCLT/DRT has just started operating from 2017. RBI is pushing public sector banks to initiate insolvency resolution through NCLT for big ticket NPAs on their books. In coming days, the bill will surely witness lot of amendments and updates. We can never deny that for improving the credit availability and encouraging more and more entrepreneurial ventures in India, IBC 2016 is surely a huge step. Course correction has already started; slowly and steadily. Sentiment has started improving too globally; India’s ‘ease of doing business’ rank has been upgraded globally to 100th in 2018; a steep rise of 30 ranks. We hope the business future is all bright for this country of billion plus population.