Source: Yojana – January 2018
Author: Indivjal Dhasmana
India is ranked 100th (an improvement of 30 places from 2017 in the Ease of Doing Business Rankings, 2018 released by World Bank. On the parameter of ‘resolving insolvency’, India ranked 103rd (ranked 136th in 2017 on this parameter).
The credit could be given to the enacting the Insolvency and Bankruptcy Code (IBC) in 2016 which provides for a regulator i.e. Insolvency and Bankruptcy Board of India. The IBC provides for well-defined and time-bound norms for insolvency proceedings.
Before the enactment of the IBC, the insolvency proceedings took a long time because of the following reasons:
- Overlapping jurisdictions of various laws (around 12 in number) governing insolvency resolution (eg. RDDBFI Act, SARFAESI Act).
- Some of such laws were almost a century old e.g. Presidency Towns Insolvency Act, 1909.
The National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies while the Debt Recovery Tribunal (DRT) shall do so for individuals.
The IBC creates time bound processes for insolvency resolution of companies. If the default is over Rs. One Lakh, the creditor may initiate insolvency resolution process and go to NCLT.
Taking a different approach from the earlier regime, the IBC shifts the responsibility to the creditor to initiate the insolvency resolution processes against the corporate debtor.
After a case is admitted by NCLT, resolution process will have to be completed within 180 days, extendable by another 90 days.
There is also a provision for fast tracking resolution process to complete it in 90 days which could be extended further by 45 days. However, only the following can opt for this method:
- A private entity having a paid up capital of upto 50 lakh or turnover of upto Rs. 2 crores)
- A start-up
- Unlisted company with total assets of upto Rs. 1 crore in the preceding financial year.
During the resolution process, the claims of the creditors are frozen and revival of the company is sought and liquidation is initiated as the last option.
The resolution process is conducted by a licensed insolvency professional. The hierarchy of priority to distribute assets during liquidation prefers secured creditors over unsecured creditors and lastly, the government dues.
In furtherance, The Banking Regulation Act (Amendment) Act, 2017 was enacted giving wide ranging powers to the Reserve Bank of India to direct the lenders to initiate insolvency proceedings for the recovery of bad loans.
To ensure that the firms facing insolvency proceedings do not go back to the persons who defaulted in repayment of loans initially, the regulator mandated the screening of the bidders by the committee of creditors and making strict norms for bidders bidding for insolvent companies. As per the IBC, wilful defaulters, dubious promoters, promoters of sister concerns, related party etc. cannot acts as bidders in insolvency proceedings.
However, more clarity is needed on the definition of the terms like dubious promoters, related party etc.
Categories: POINT IAS