The Modi government presented the Insolvency and Bankruptcy Code (IBC) in 2016 to settle claims concerning insolvent companies. This Insolvency and Bankruptcy Code was designed to catch the bad loan problems that were affecting the Indian banking system.
After two years the IBC has succeeded in a large measure in preventing corporates from defaulting on their loans. A number of major cases have been resolved in two years, while some others are in advanced stages of resolution. Finance Minister Arun Jaitley said that the IBC process has changed the debtor-creditor relationship.
Two Year Of Insolvency and Bankruptcy Code
- The insolvency and bankruptcy code was passed in the year 2016
- 1332 cases before NCLT
- 4452 cases disposed at the pre-admission stage
- Amount settled around Rs 2.02 lakh crore
- 66 cases resolved after adjudication
- The realisation by creditors around Rs 80,000 crore in resolution cases
- 12 big cases likely to be resolved in this financial year
- The realisation in these cases expected to be around Rs 70,000 crore
- 260 cases ordered for liquidation
How Insolvency and Bankruptcy Code Has Helped?
- Companies paying up in anticipation of not being referred to NCLT after the introduction of Section 29(A).
- Banks receiving monies from potential debtors who pay in anticipation of default.
- Defaulters know they will get into IBC they will be out of management because of Section 29(A).
- Once a creditor’s petition is filed before NCLT, debtors pay at the pre-admission stage.
- Many major insolvency cases resolved, several on way of resolution.
- Those that can’t be resolved move towards liquidation, banks receive liquidation value.
- Improved ratio of the amount recovered to the NPAs involved by much as 41.3% in 2017-18.
- Banks recovered Rs 5.28 lakh crore compared to just Rs 38,500 crore in the 2017-16.
- The maximum amount recovered was Rs 4,92,500 crore from 21 companies
- The ratio of the amount recovered from 21 companies to the amount involved was 49.6%.
“LEGACY OF ANACHRONIC SYSTEM’ During 2008-2014, Banks lent indiscriminately. This lead to a very high percentage of NPAS which was highlighted by the Asset Quality Reviews of the RBI. This led to prompt action by the Government, appointing an Expert Committee, which in its Report in 2015 recommended the IBC.”- Arun Jaitley, Finance Minister
Streamlining Insolvency: Insolvency and Bankruptcy Code, 2016
- Code consolidated existing acts including Securitizations and Reconstruction of Financial Assets and Enforcement of Security
- Interest Act, 2002 and the Sick Industrial Companies (Special Provisions) Act, 1985.
- The bankrupt entity is a debtor adjudged a bankrupt by adjudicating authority.
- Provides for time-bound processes for insolvency resolution of companies and individuals.
- Applicable to companies, limited liability entities, firms and individuals
- All firms other than financial service providers fall under IBC’s scope.
Companies – 180 days, can be extended by 90 days.
Startups, small companies – 90 days, can be extended by 45 days.
- Insolvency professionals manage insolvency process.
- IPs are members of insolvency professional agencies.
- IPs furnish performance bonds equal to assets of a company under insolvency resolution.
- Information Utilities collect, collate and disseminate financial information.
IBC: Adjudicating Authority
- Has jurisdiction over cases by or against the debtor.
- NCLT has jurisdiction over companies, other limited liability entities.
- DRT has jurisdiction over individuals and partnership firms other than LLPs, NCLAT, DRAT is appellate authorities.
- 21 PSU banks had combined gross NPAs of Rs 7.3 lakh crore at the end of Sep 2017 quarter.
- The growth of over 27% as compared to Sep 2016 quarter.
Amendments In Insolvency and Bankruptcy Code
- Applicability to MSME Ordinance gives special benefits to MSME sector
- Ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be applicable to people applying for resolution of MSMEs.
- Applicability to MSME Govt may, in public interest, notify applicability of certain other provisions of the Code to MSMEs.
- Promoters of MSMEs are allowed to bid for their companies as long as they are not willful defaulters.
- Applicability to MSME Anomaly in section 29A of the existing act which barred promoters of defaulting assets from bidding for their assets removed.
- IBBI Regulations, 2018 – IBBI regulations, 2018 included provisions of bankruptcy to be applicable for personal guarantors of corporate debtors
- Section 2 of the IBC Code is amended.
IBBI Regulations, 2018
- Guarantor included as a category different from individuals Provisions of Insolvency and Bankruptcy Code, 2016 applicable to personal guarantors Part-Ill does not apply immediately to other individuals and partnership firms.
- Home Buyers categorised as Financial Creditors, Expands the definition of ‘financial debt.
- Includes any amount raised from an allottee under a real estate project which shall be deemed to be an amount having the commercial effect of borrowing for the purposes of Section 5(8) (f) of the Code.
- Classification as a ‘financial creditor’ also enables home buyers to initiate Corporate Insolvency Resolution Process against large real estate houses.
Amendments In Insolvency and Bankruptcy Code: Authorised Representatives
- The ordinance allows financial creditors to appoint authorised representatives in certain cases, such as when debt is in the form of securities or deposits.
- Representatives can participate and vote in the committee of creditors as per prior instructions received from the creditors.
If the creditor does not give prior instructions, then the representative will abstain from voting.
AMENDMENTS IN IBC Significance for Real Estate Ordinance recognises home buyers as financial creditors.
Due representation in the Committee of Creditors makes them an integral part of the decision-making process.
Section 7 will allow financial creditors to file an application seeking insolvency resolution process.
Amendments In Insolvency and Bankruptcy Code Why Section 29a was needed
- Corporate debtors tried to get backdoor entry and gain control of the defaulted body through associate companies and group companies and were getting loan waivers.
- Section 29A specifically inserted to clear criteria of a person ineligible to submit a resolution plan.
- Clearly excludes all defaulters and their associated companies or group companies to be a resolution applicant.