The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Before the introduction of IBC existed various statutes like The Sick Industrial Companies Act, 1985, the Securitisation and Reconstruction of financial assets and Enforcement of securities interest Act, 2002, the Recovery of Debt due to banks and financial institutions act, 1993, and the Companies Act, 2013 all of whose operations were involved in the insolvency process now reduced to IBC only. All these multiple legal avenues ultimately led to a large number of NPA’s being piled up and a number of creditors waiting for many years to recover their money. IBC aims at combining all these different avenues for better flow of credit within country.
The code gives rise to various institutions all of which have specialised roles in the insolvency process.
Insolvency and Bankruptcy board of India (IBBI) is the regulator and supervisory authority. IBBI has the overall responsibility to implement and operationalise the bankruptcy code.The code also sets up the existence of professional insolvency practitioners, known as Resolution Professionals (RP) who are tasked with monitoring various aspects of bankruptcy code.
The code was set up with certain objectives to be achieved, thus defining the existence of the entire code.
The code intends to consolidate and amend the various laws on insolvency in a time bound manner; to promote entrepreneurship and availability of credit and to improve the ease of doing business and facilitate more investments leading to higher economic development.
Also India’s ranking in the World Bank Ease of Doing Business Index improved by another 14 places to 63 in 2019 because of a sharp improvement in its ranking in resolving insolvency, one of the seven indicators used to build the index. According to world bank ease of doing business report it takes more than 4 years to resolve insolvency in India. But with the introduction of IBC,2016, it is expected to cut down the same to less than a year thus facilitating ease of doing business in India.
Also before IBC debt recovery rate in India was around 26%, which now after implementation of IBC, is around 43% in case of financial creditors and 49% in case of operational creditors.
Financial creditors and operational creditors are explained below –
Financial creditor is one whose relationship with the debtor is a pure financial contract, where an amount has been provided to the debtor against the consideration of time value of money.
On the other hand Operational creditor is a creditor who has provided goods or services to the debtor, including employees, central or State government.
IBC also facilitates a better and faster debt recovery mechanism. It is widely believed that this legislation, when implemented in letter and spirit, will change the negative perception of NPAs, recovery and litigation associated with India.
So these are some of the objectives for which this code was brought into existence. The following is a snapshot of the process of IBC-
The entire process of initiating Corporate Insolvency Resolution Plan (CIRP) by a financial creditor is as follows:
- A financial creditor either by himself or along with other financial creditors may file an application before the adjudicating authority when a default occurs.
- The financial creditor shall along with the application furnish any evidence available relating to default, name of the resolution professional to act as an interim resolution professional and any other information as specified.
- The Adjudicating authority shall, within fourteen days of submission of application of default shall ascertain the existence of such default on the basis of available evidence and information.
- Where the Adjudicating authority is satisfied that a default has occurred after scrutinizing the available evidence and information it may, by order, admit such application or reject if no default has occurred after necessary checks are done. Provided that the Adjudicating authority shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application.
- The corporate insolvency resolution process shall commence from the date of admission of the application.
- The Adjudicating Authority shall communicate the order of default to the financial creditor and the corporate debtor, within seven days of admission or rejection of such application, as the case may be.
The entire concept of IBC 2016 provides an ease to the overall insolvency procedure and lays much more clear instructions as to how to deal with such conditions. With clear instructions and restricted time frame for the entire process, IBC 2016 aims at providing faster solutions to such insolvency conditions to promote entrepreneurship in India and providing ease of doing business.
Recovery through IBC was 70000 crores in fiscal 2019 double of what was recovered through other resolution mechanisms. Indeed, as per a report available on Insolvency and bankruptcy board of India’s website almost Rs. 2.02 lakh crore of debt relating to 4452 cases were disposed even before admission to IBC process as the borrowers made good the amounts in default to the creditors.
As per the latest report in the Resolving Insolvency Index, India’s ranking jumped 56 places to 52 in 2019 from 108 in 2018. Recovery rate too has increased from 26.5% in 2018 to 71.6% in 2019 and time taken in recovery improved from 4.3 years in 2018 to 1.6 years in 2019.
What needs to be seen is whether these measures can be successfully used to reduce the burden of stressed assets on the banking system.
To quote the Finance Minister Mr. Arun Jaitley “A systemic vacuum exists with regard to bankruptcy situations in financial firms. This code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance firms and financial sector entities. This code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy,”.
Written by Archit Jindal for The Connectere.