Insolvency and Bankruptcy Board of India

March 11, 2018

 

Ministry : Ministry of Corporate Affairs

 

Background:

At the time of introduction of this bill, India ranked 130 in ease of doing business index of World Bank. One of the major reason for this poor ranking for India is the difficulty in exit of sick industries. Also, for a capital starved country like India, frittering away of capital on weak and unviable business is a challenge for the development of the country. Thirdly, multiple legislations for the exit of company leads to low investment as per the investors. In this light, Insolvency and Bankruptcy Code is a long awaited structural reform of Indian Economy. 

 Recommending Committee : T. K. Vishwanathan Committee

Terminology:

  1. Insolvency: Insolvency refers to a situation where individuals or organisations are unable to meet their financial obligations. If insolvency cannot be resolved, a company proceeds towards liquidation of assets, and an individual goes in for bankruptcy resolution

  2. Bankruptcy: Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

Legislations for Bankruptcy proceeding in India before IBBI:

  1. SARFAESI Act

  2. Companies Act

  3. Sick Industrial Companies Act

 Aim of Insolvency and Bankruptcy Code:

  1. to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals

  2. Provide Insolvency resolution in a time bound manner

  3. Maximisation of value of assets of such persons, to promote

    1. entrepreneurship,

    2. availability of credit and

    3. balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. 

Features of Insolvency and Bankruptcy Code 2016:

  1. Time Bound Insolvency resolution:

    • These processes will be completed within 180 days. 

    • If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.

  2. New Class of Professionals and New Agency:

    • The resolution processes will be conduced by licensed Insolvency Professionals (IP) who will be member of Insolvency Professional agencies (IPAs).

    • Insolvency Professional Agencies will furnish performance bonds equal to the assets of a company under Insolvency resolution.

  3. Information Utilities(IUs):

    • To collect, collate and disseminate financial information to facilitate insolvency resolution.

  4. Adjudication:

    • National Company Law Tribunal will adjudicate insolvency resolution for companies.

    • The Debt Resolution Tribunal (DRT) will adjudicate insolvency resolution for individuals.

  5. Regulator:

    • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

Issues with 2016 Insolvency and Bankruptcy Code:

  1. Capacity:

    1. Time bound resolution needs establishment of new entitites.

    2. Given the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role.

  2. Too many institutions:

    1. Board will regulate IPAs who will regulate Insolvency professionals creates too many institutions which might lead to unnecessary delay and red tapism.

  3. The Code provides an order of priority to distribute assets during liquidation.  It is unclear why:

    1. Secured creditors will receive their entire outstanding amount, rather than up to their collateral value,

    2. Unsecured creditors have priority over trade creditors, and

    3. Government dues will be repaid after unsecured creditors.

  4. Information from information Utility:

    1. The Act creates multiple Information Utilities but fails to mention the procedure for getting information about a company.

  5. Insolvency  and Bankruptcy Fund:

    1. The bill creates a Insolvency and Bankruptcy fund but fails to specify the manner for utilization of money from this fund.

 Insolvency and Bankruptcy Code (Amendment) Bill 2017:

  1. The Bill prohibits certain persons from submitting a resolution plan in case of defaults.  These include:

    • Wilful defaulters,

    • Promoters or management of the company if it has an outstanding non-performing debt for over a year, and

    • Disqualified directors, among others

  2. Further, it bars the sale of property of a defaulter to such persons during liquidation.

Issues with Amendment:

  1. The Bill prohibits certain persons from submitting resolution plans or participating in the liquidation process.  One argument may be that these persons may be considered undesirable to take charge of the company.  However, this may reduce competition among applicants and result in lower recoveries for creditors.  

  2. A company that is liquidated ceases to exist, and the background of persons bidding for its assets may be irrelevant.

Structure of Insolvency and Bankruptcy Board:Organisational

  1. One Chairperson.

  2. Three members from Central Government officers not below the rank of Joint Secretary or equivalent.

  3. One member nominated by RBI.

  4. Five members nominated by the Central Government; of these, three shall be whole time members.

Benefits of Insolvency and Bankruptcy Code:

  1. It will help solve the Twin Balance Sheet problem plaguing Indian Economy.

  2. It will increase investment and help improve India's ranking in Ease of Doing Business Index.

  3. For Private sector employees, this will make the market more competitive and thus will lead to survival of the fittest. 

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