Insolvency and Bankruptcy Code (Amendment Bill), 2021

Context:

The Insolvency and Bankruptcy Code (Amendment Bill), 2021 was passed in the Lok Sabha (without any discussions due to disruptions).

Relevance:

GS-III: Indian Economy (Banking Sector & NBFCs, Growth & Development of Indian Economy), GS-II: Governance (Government Policies and Initiatives)

Dimensions of the Article:

1. Insolvency and Bankruptcy Code (IBC), 2016
2. Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019
3. Issues with Implementation of IBC
4. Insolvency and Bankruptcy Code (Amendment Bill), 2021

Insolvency and Bankruptcy Code (IBC), 2016

• Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
• The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been pulling the Indian economy down for years.
• Objectives of IBC
  1. To consolidate and amend all existing insolvency laws in India.
  2. To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
  3. To protect the interest of creditors including stakeholders in a company.
  4. To revive the company in a time-bound manner.
  5. To promote entrepreneurship.
  6. To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
  7. To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
  8. To set up an Insolvency and Bankruptcy Board of India.
  9. Maximization of the value of assets of corporate persons.

Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019

• The amendment also intends to provide protection to a corporation from criminal proceedings against offences committed by previous management or promoters.
• Additionally, it also provides a faster revival process for stressed companies.
• The amendment brings the much-awaited changes needed in the insolvency sector. It clears the air on various aspects and provides relief to both corporate debtor as well as the creditors.
• The thresholds introduce will prevent admission of unnecessary cases to the insolvency court.
• However, even after anticipation, cross border insolvency framework has not been included in the amendment.

Issues with Implementation of IBC

• In India there are not many strategic investors and an asset will have interest or value only if there are more people who are ready to buy. Therefore, better asset value realization will lead to faster resolution of stressed companies (happy creditors).
• There are delays in implementation of IBC whether it’s in terms of approvals, having an application admitted itself.
• A lot of IBC cases are very old cases related to the stock of NPAs [Non-Performing Assets]. So, once this round is over, in future, perhaps, there will be fewer cases and IBC will be able to perform better than before.
• There is shortage of NCLT member, lot of vacancies & delays in appointments all of which has a bearing on IBC working efficiency.

Insolvency and Bankruptcy Code (Amendment Bill), 2021

• The Insolvency and Bankruptcy Code (Amendment Bill), 2021 introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
• The Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
• A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
• CIRP is a time taking resolution and one of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.
• The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.
• Distressed Corporate Debtors (CDs) [a corporate person who owes debt to any other person] are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
• Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.

-Source: The Hindu