(Practice Question: The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with very specific aims and goals. How far has the IBC succeed? Do you think further changes are required to better realize those aims and goals?)

Insolvency and Bankruptcy Code (IBC) – A Background

The IBC was enacted with the goal to deal with non-performing assets (NPAs) arising out of failed corporate ventures and help firms in easier revival process or painless liquidation. It ensures time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters—all critical in resolving India’s bad debt problem which has crippled bank lending.

The IBC also takes care of overlapping of jurisdictions by different forums which gave rise to systemic delays and complexities in the process. The code overcomes these challenges and reduces the burden on the courts as all litigation will be filed under the code before the National Company Law Tribunal (NCLT) for corporate insolvency and insolvency of LLPs, and before DRT for individual insolvency and insolvency of unlimited partnership firms.

The code envisages a new regulator—the Insolvency and Bankruptcy Board of India—while introducing professionals who will handle insolvency cases and insolvency professional agencies to oversee the overall supervision of the Insolvency Board.

Source: The Financial Express

How has the IBC performed:

IBC is a fast and very efficient loan recovery process. In 32 cases resolved till August, 2018, while creditors including banks had said they were owed Rs 89,402 crore, Rs 49,783 crore (more than 50% of the amount) has been recovered through IBC—had this not happened, the firms would have been liquidated at Rs 20,969 crore. Till IBC was implemented, just about 17-18% of loans were recovered using all existing schemes.

IBC has received commendation, not only from the Indian Industry, but from the global fraternity, including The World Bank and IMF, and has materially contributed to India’s 30 place jump in 2018’s Ease of Doing Business Ranking. International organisation Credit Suisse’s (in its latest Corporate Health Tracker) observes that IBC has been the key driver of debt recoveries in India.

Sources: Financial Express, The Hindu and PwC

Steps Ahead:

• There are some grey areas when it comes to foreign creditors. The Foreign Exchange Management Act, 1999 (FEMA), has not been amended and synced with these regulations, as FEMA requires Reserve Bank of India (RBI) approval in case of sale of assets or adhering to certain pricing guidelines. There may not serve the purpose of the IBC or could also lengthen the process thanks to prerequisite approvals.
• There is a requirement to introduce more National Company Law Tribunal Benches for faster resolution of pending cases.
• An exception may be considered for the power sector which has around 34 stressed accounts worth Rs 1.5 lakh crore and the timeline of 180 days has been considered less for the power sector.
• Also, there is a need for a new law to regulate valuers under the IBC as a faulty valuation can jeopardise the outcomes of the process.

Sources: The Indian Express and Forbes India