Definitions
- Insolvency: a condition wherein a debtor is not able to pay debt
- Bankruptcy: legal process involving insolvent person or company unable to pay debt
- 2016: Insolvency & Bankruptcy Rules
- there will be an Insolvency & Bankruptcy Board of India (IBBI) to work as a platform for faster insolvency settlements
- when company applied for insolvency and bankruptcy settlement, an Insolvency Professional (IP) is assigned which provides complete roadmap of settlement
- as per rules, first dues of financial creditors are settled, then operational creditors
| Year | Change in IBC |
|---|---|
| 2017 | wilful defaulters will not be entertained |
| 2018 | if real estate, home buyers treated as financial creditors |
| 2020 | various creditors can liquidate their assets to each other |
Goal of IBC
Address insolvencies within time limits. Companies are subjected to 180 day moratorium which can be extended up to 270 days. (presently 300 days)
Resolution time for startups and small businesses is 90 days which can be extended by 45 days.
- one stop scheme for resolving insolvency procedures
- formerly time consuming process
- protects small investors’ interests aong with making business process easier
- establishes faster insolvency procedure to assess creditors such as banks
- in recovering debts
- avoiding bad loans
- establishes new legal structure focusing on a time bound resolution process & faster liquidation mechanism
Elements
- Adjudicating Authority
- starts resolution process
- appoints insolvency
- signs on creditor’s ultimate judgement
- NCLT is deciding authority for companies
- DRT for individuals and partnership firms
- Insolvency Professionals
- in charge of resolution process
- handle debtor’s assets
- provide information to creditors to help them make appropriate decisions
- Insolvency Professional Agency
- practitioners will be registered w/ the professional agency
- code of conduct will be enforced by these agencies
- Information Utility Centre
- maintain track of debtor
- facilitate imp info for conducting IBC procedure
- Insolvency and Bankruptcy Board
- oversees insolvency experts, professional agencies, information utility centres
- regulatory authority
Benefits of IBC
- addressing NPA problem
- faster resolution mechanism
- ensures credit discipline mechanism
- improves financial health
- ease of doing business
- increases certainty & reduced complexities
- will drive economic growth and investments
Challenges
- Haircut: the debt forgone by lender on total outstanding claim
- Poor approval rates: NCLT has approved only 15% of corporate insolvency cases from 2016-19
- lack of digitization delays
- greater emphasis on liquidation rather than revival
- as per IBB data for 3400 cases (in last 6 years), 50% cases ended in liquidation. Only 14% found proper resolution.