What's the article about?
- It talks about the recently proposed amendments to the Insolvency and Bankruptcy Code in order to improve its efficacy.
- GS3: Issue related with Indian Economy;
- The Insolvency and Bankruptcy Code (IBC) was introduced in 2016.
- It brought a structural change in the resolution architecture in the country.
- However, despite its promise, the IBC, in its functioning, has fallen short of expectations.
- On its part, the government has tried repeatedly to address the Code’s shortcomings.
- And now, the Ministry of Corporate Affairs invited comments on a fresh set of changes it is considering to bring about in the Code.
Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
Bankruptcy 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.
What is IBC 2016?
- It amalgamates various laws relating to the insolvency resolution of business firms.
- It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.
Objectives of IBC:
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest of creditors including stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
- To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
- To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
What are the issues with the present functioning of the IBC?
- Realisations of creditors have been lower than expectations.
- The total realisable value in cases resolved till September 2022 stood at only 30.8 per cent of the admitted claims.
- The strict timelines prescribed in the Code for resolving cases have not been adhered to.
- 64 percent of the ongoing cases have crossed 270 days.
- In fact, as per reports, the average time taken for cases to be resolved has risen, driven in part by more time being spent on associated litigation.
Analysis of the proposals to improve the functioning of the Code:
- First, the changes aim to reduce the time for admitting cases and streamline the process by pushing for greater reliance on data with Information Utilities.
- Considering the delays in admitting cases, and the implications of recent judicial interventions, this proposal seeks to remove ambiguity, and bring about predictability in the process.
- Second, it has also been proposed that the pre-packaged insolvency resolution process that was introduced for micro, small and medium enterprises now be extended to other firms as well.
- While such a proposal should be appealing, so far very few cases have been admitted under this.
- Third, the changes proposed also seek to address some of the issues that have arisen in the resolution of real estate firms.
- A distinction is now being made between a particular real estate project and the larger corporate entity.
- The government’s rationale for doing so is that this could allow the corporate entity to continue on other projects, while the stressed project can be tackled separately.
- Fourth, the proposals have also sought to bring about changes to the manner in which proceeds will be distributed.
- This is surely a welcome step. After all, changes to the Code should be motivated by the desire to improve its functionality and outcomes. This should be done while keeping all stakeholders' incentive structures in mind.