Prelims level : “Economy-growth, development and national income.” Mains level : GS-3 “Indian economy, issues related to planning and mobilisation of resources, growth, development and employment.”
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  • The government introduced the Insolvency and Bankruptcy Code in 2016 to resolve claims involving insolvent companies.
  • This code was intended to tackle the bad loan problems that were affecting the banking system.
  • Two years on, the IBC has succeeded in a large measure in preventing corporates from defaulting on their loans.
  • According to Finance Minister, the IBC process has changed the debtor – creditor relationship. A number of major cases have been resolved in two years, while some others are in advanced stages of resolution.

2-year Working – A commendable work:

  • The finance minister stated that so far 1322 cases have been admitted by NCLT, while 66 have been resolved after adjudication and 260 cases have been ordered for liquidation.
  • In 66 resolution cases, realization by creditors was around Rs 80000 crore. As per NCLT database, in 4452 cases were disposed at pre-admission stage and the amount apparently settled was around Rs 2.02 lakh crore.
  • As per the finance minister, there has been increase in conversion of NPAs into standard accounts and decline in new accounts falling in NPA category, which shows a definite improvement in the lending and borrowing behaviour.
  • The NCLT has become a trusted forum of high credibility. Those who drive the companies to insolvency, exit from management. The selection of new management has been an honest and transparent process. There has been no political or Governmental interference in the cases.
  • The recoveries of monies parked in insolvent companies has taken place through three methods:
  • Firstly, after the introduction of Section 29(A) such companies are paying up in anticipation of not crossing red line and being referred to NCLT. As a result, the banks have started receiving monies from the potential debtors who pay in anticipation of the default. The defaulters know well that once they get into IBC they will surely be out of management because of Section 29(A).
  • Secondly, once a petition of the creditor is filed before the NCLT many debtors have been paying at the pre-admission stage so that the declaration of insolvency does not take place.
  • Thirdly, many major insolvency cases have already been resolved and many are on the way of resolving.
  • Those which cannot be resolved move towards liquidation and the banks are receiving the liquidation value.
  • The functioning of NCLT and the Tribunal has led to a large number of cases being filed. The NCLT is over-crowded, its capacity is now being further enhanced.
  • Realizing the urgency, the Supreme Court has pronounced several judgements expeditiously, laying down the Law on the new Legislative provisions.

Salient Features of the Code:

  • The Code creates time-bound processes for insolvency resolution of companies and individuals.
  • These processes will be completed within 180 (extended to 270) days.
  • The resolution processes will be conducted by licensed insolvency professionals (IPs). These IPs will be members of insolvency professional agencies (IPAs).
  • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
  • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.
  • The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
  • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.
  • Given that many corporate transactions and businesses involve an international element, the Code attempts to address this by including provisions for cross border insolvency.

Objective behind Framing the Code:

  • An act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner .
  • For maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues
  • The vision of the new law is to encourage entrepreneurship and innovation.

Provisions of IBC (Amendment) Ordinance 2018:

  • Home buyers would be treated as financial creditors and shall have the right to be represented in the Committee of Creditors (CoC).
  • ‘Related party’ now defined in relation to the individual as well, in addition of the company only previously, to bar it from bidding under the resolution process
  • Vote share changes: CoC to decide on extension of insolvency process beyond 180 days to 270 days and for appointment of IP by 66% vote share (from earlier 75%); other decisions can be taken by 51% vote (it was 75% earlier). The process can be withdrawn altogether by 90% vote share.
  • Promotors and guarantors of the MSMEs are exempted from disqualification from bidding; it further empowers the Centre to allow further exemptions or modifications w.r.t. the MSME sector.
  • Moratorium from parallel proceedings will not be available to guarantors of the company.
  • If a financial creditor or its authorised representative is a related party to the company facing insolvency, it shall not have any participation or voting during a meeting of the CoC .
  • A company can file an insolvency application, provided it seeks shareholders’ approval and at least three fourth of the stakeholders approve the proposal .
  • Many of changes were made on the basis of the recommendations of the IBC review committee headed by Corporate Affairs Secretary Injeti Srinivas.
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