How the Insolvency and Bankruptcy Code Changed the Default Policies

Introduction to the Code

India had the highest economic growth rates after the internet boom in the year 2000. A huge amount of investments were pouring inside the country as big companies saw it as a vast market and wanted to put solid footing in India. Companies had over-leveraged themselves in fear of losing lucrative opportunities. During the financial year of 2007-08, the Global Financial Crisis hit, and the high growth levels stopped. It led to low revenues, and subsequently, the high inflation levels caused RBI to increase the interest rates. This all led to the creation of an enormous number of NPAs in the financial sector. 

The government introduced the 12 Debt resolution mechanisms, but it was a failure in the end as all the laws failed to curb NPA’s. The borrowers used the loose provisions of law and created ambiguity in the judicial proceedings. They kept delaying it, and even when the cases were resolved, the creditors ended up taking massive cuts in debt recovery. 

The Ministry of Finance, in the year 2015, estimated that it would take 326 years to complete the backlogs. The Insolvency and Bankruptcy Code (IBC) was enacted in the year 2016 to tackle problems relating to insolvent companies and their closure. Many public sector banks, operational creditors, and financial institutions were facing challenges. The Code aimed to tackle the bad loans which were affecting the banks due to these insolvent companies. The Code has introduced a time-bound process under which insolvency will take place. Enactment of the Code has helped many employees working in these companies in India. They are now able to claim their dues quickly with the help of the National Company Tribunal (NCLT) established under this Code. IBC, after its enactment has successfully stopped many companies from defaulting their loans. The Code improved India’s ranking in “Ease of Doing Business” drastically. Currently, India stands at the 66th position. Before this Code was enacted, India’s ranking was 133. 

Objective and Purpose of the Code

  • Resolve Conflicts between the creditors and the debtor – The Code defines procedural certainty and the process of negotiation. The Code works in a way that reduces the problems of common property. This Code reduces the information asymmetry for all the economic participants.
  • The Code provides flexibility to the parties to reach the most efficient solution to achieve the maximum value during negotiation.
  • A platform for negotiation between the creditors and the external financers are created through this Code to create the possibility of rearrangements.
  • To amend the laws relating to the reorganization and insolvency resolution of the partnership firms, individuals, and corporate firms. 
  • A time limit is to be set in which the insolvency proceedings will be completed i.e., 180 days.
  • To raise the value of the assets of the interested parties.
  • This Code works in increasing the global ranking of the world in doing ease of business. 
  • The Code will help in promoting entrepreneurship. 
  • The Code establishes an Insolvency and Bankruptcy Board of India to act as a regulatory body. 
  • The Code proposes to regulate the insolvency professionals and professional insolvency agencies. The role of these agencies would be to develop professional standards and work as a disciplinary committee. 
  • Three types of resolution professionals are set up under the Code i.e., the Interim Resolution Professional, Final Resolution Professional, and the Liquidator.
  • Information Utilities has been set up under the Code. The work of these information utilities is to various types of data from the listed companies and also the data of the creditor’s companies. 
  • Individual Insolvency database is to be set up to provide information about the insolvency status of individuals.
  • An Adjudicating authority is set up to exercise the cases over a debtor. 

Relevant Social & Political Scenario at the time of enactment

At the time when the Code was passed in the parliament, big defaulters like Vijay Mallya and Nirav Modi’s defaults were putting pressure upon the public sector banks of India. There was no unified law against these defaulters. The rules which dealt with defaulters came under the likes of the Indian Contract Act, the Sick Industrial Companies (Special Provisions) Act, 1985, (SICA), the Securitizations, and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Code aims to bring all the laws under one roof to provide ease to the primary creditors. The then Finance Minister Mr. Arun Jaitley said that “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”. However, at the time of enforcement of the Code, there were no special provisions for cross-border insolvency. 

Amendments

1. The Code went under a lot of changes since its inception; the first change came with the Insolvency and Bankruptcy Code (Amendment Act), 2017. Partnership firms, a proprietorship firm, individuals, and personal guarantors will be included under the heads “applicability” With this amendment, frivolous applications made by the personal guarantor will be avoided after the moratorium period is declared. Section 29A is inserted in the Code which lists the persons who cannot submit a resolution plan. It includes the undischarged insolvent, person convicted of an offence, disqualified from the post of director, account is NPA, a willful defaulter etc. If a person is NPA, if he pays his/her dues within 30 days, then they can submit the resolution plan. 

2. The Insolvency and Bankruptcy Code (Amendment) Ordinance Bill was introduced in the year 2018. The objective of the Ordinance Bill was to strengthen the Corporate Insolvency Resolution Process (CIPR). The Ordinance states that “to balance the interests of various stakeholders in the Code, especially the interests of home buyers and micro, small and medium enterprises, promoting resolution over the liquidation of corporate debtor by lowering the voting threshold of the committee of creditors and streamlining provisions relating to the eligibility of resolution applicants.” 

 One significant change brought with this Ordinance was the inclusion of “Home Buyers” under the definition clause of Financial Creditors. The home buyers will be able to recover the amount paid as advanced through this addition. Another significant addition to this Act was that CIPR can now be initiated by the guardian, administrator, and the executor of the financial creditor. 

 A “Committee of Creditors” will be formed that will consist of all the “financial Creditors.” They will majorly work as a body to make routine decisions regarding the CIPR. 

3. Insolvency and Bankruptcy (Second Amendment) Bill, 2018 – The approval of the Competition Commission of India is required to finalize the resolution plan set by the financial creditors. This will reduce the chances of extending the time of the CIPR, i.e., 90 days of extension. 

4. Insolvency and Bankruptcy Code (Amendment Bill), 2019 – The amendment proposes to strengthen the time-limit provisions in the Act. Secondly, a specific minimum payout is defined for the operational creditors for any resolution plan. Thirdly, it provides the manner in which the group of financial creditors should vote. 

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