By Ravi Seth
The Insolvency and Bankruptcy Code (IBC) — billed as the biggest economic reform in India after the Goods and Services Tax (GST) — is a rare example of a speedy rollout and implementation of a much-needed law. Although it is undergoing an initial period of adjustment and cleaning-up, the law lays down a robust framework and time-bound road map to deal with distressed or failed businesses, a welcome contrast from the earlier, seemingly never-ending process:
BEFORE AND AFTER: HOW THE LAW HAS CHANGED DEALING WITH DEFAULTS
INSOLVENCY : Inability to pay debt/erosion of net worth (was balance sheet-based).
FRAMEWORK : Reorganisation and winding up were dealt with under separate laws. There was no surety of debt recovery under various laws (such as the Contract Act, Recovery of Debts Due to Banks and Financial Institutions Act 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002). Besides, the firms’ recast under SICA (Sick Industrial Companies Act) or winding-up action under the Companies Act 1956 wasn’t successful; laws dealing with individual insolvency were also a century-old.
INSOLVENCY : Proceedings can be initiated upon default of more than Rs 1 lakh (based on payment default).
* One-stop shop. Laws relating to insolvency consolidated into a single legislation; time-bound resolution of insolvency via new framework
* Genuine business failures get a second chance.
* In the new dispensation, control shifts from shareholders/promoters to a committee of creditors.
HOW LONG DOES THE PROCESS GO ON
* The admission of a company under the CIRP has to be decided in 14 days.
* The resolution plan must be approved within 180 days.
* There can be a 90-day extension for the last step.
WHAT’S STILL WORRYING
* New dispensation allows rivals to buy the company for a song, in the absence of sufficient competition in the market for corporate control or liquidated assets.
* Refinancing banks would need capital to cover for haircut
* There is no mechanism to prevent future buildup of bad loans
SINCE THE ENACTMENT OF THE INSOLVENCY BANKRUPTCY CODE, 2016
THE NEW FRAMEWORK: IT HAS FOUR PILLARS
Insolvency Professionals (IP) : Have a key role in the working of the bankruptcy process. Regulated by Insolvency Professional Agencies; 2 IP entities have been registered so far.
Information Utilities (IU) : Will electronically store facts about lenders; National e-Governance Services Ltd (NeSL) is the first IU to be registered.
Adjudication : It will be done by the National Company Law Tribunal (NCLT) for firm insolvency; Debts Recovery Tribunals (DRTs) will consider bankruptcy cases of individuals/unlimited liability partnerships. (Appellate authorities are NCLAT, DRATs).
Regulator : The Insolvency Bankruptcy Board of India.
Source: Insolvency and Bankruptcy Board of India, EY & media reports