The Insolvency and Bankruptcy Code of 2016 was enacted to bring together all the existing laws related to insolvency and bankruptcy under one law. Theoretically, it is a one-stop solution which addresses all insolvencies in a time-bound and economically viable setup.

The law has allowed the country to create an infrastructure of systems that support ailing businesses and helped boost its ranking in the ease of doing business list. Under this law, all the stakeholders of a company have a standard procedure to perform for any matters relating to insolvency and bankruptcy.

Under the IBC code, the insolvency process for individuals, companies and partnership firms has been laid out in detail. This law puts both the creditors and debtors at equal footing equipping them with the power to initiate proceedings against each other.

Why do we need the IBC?

The key role of the IBC is to resolve the debt crisis surrounding our economy with growing Non-Performing Assets (NPA’s) which has been haunting both the private and public banking sector.

Over the past couple of years, companies like Vedanta and Tata Steel have acquired bankrupt companies like Electrosteel Steels and Bhushan Steel. The two companies were among the RBI’s list of top 12 corporate borrowers that account for 1/4th of Indian banking industry NPAs.

These are amongst the positive developments that have resulted due to the implementation of the IBC. 2,100 companies have cleared their bank dues and pumped in Rs. 83,000 crores back into the system. Additionally, at least 2434 fresh cases have been filed before the National Company Law Tribunal (NCLT) and 2,304 other cases seeking insolvency have been transferred from various high-courts to the NCLT.

However, the IBC has had its fair share of failures too. One of the biggest questions surrounding the IBC’s functioning is regarding the eligibility criteria of bidders. During the proceedings of Essar Steel, the same issue caused trouble and delayed the resolution of the case significantly.

Another loophole that hovers over the bill is whether the Insolvency Resolution Professional (IRP) is supposed to give the details to the bidders whose bids have been rejected. It has been speculated that unsecured lenders have been sidelined completely under the IBC causing them to go on appeal against winning bids in several cases. A major chunk of the companies that reach the NCLT belongs to the depressed Real Estate sector of India.

Relief for Operational Creditors?

In a judgement on the 17th of December 2018, the Supreme Court of India suggested that operational creditors of bankrupt companies should be given a voice in the resolution proceedings in proportion to their debt, including voting rights. A two judge bench led by Justice R Fali Nariman is yet to resume the hearing of the case.

However, the Attorney General defended the IBC in its current form and requested the court to not dilute the said law. In the current system, operational creditors are not included on the Committees of Creditors (CoCs), which include only financial creditors like banks, private lenders or Non-banking financial institutions (NBFC’s). Under this system, the COC decides what to do with an asset and the operational creditors are not granted any voting rights.

The court is yet to hear the petitions seeking amendments in the existing law. While it would be impractical to involve all operational creditors in case of large companies, their involvement in smaller cases may be practically feasible. In the coming times, the IBC is sure to be amended and revised as more and more companies end up defaulting on their loans and on generating sustainable business models that generate revenue.

Sources: Economic Times, Business Today
Image Credits: Moneycontrol

Leave a Reply