- Insolvency and Bankruptcy Code, 2016
- Insolvency and Bankruptcy Code (Amendment) Bill, 2019
- Resolution plan
- Time-limit for resolution
- Challenges in implementation
- Demystification of Myths
- Primary Objective
- Myth regarding job losses
- Early Resolution
Insolvency and Bankruptcy Code
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Recovery is incidental under the Insolvency and Bankruptcy Code (IBC). Its primary objective is rescuing companies in distress. There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation.
Insolvency and Bankruptcy Code, 2016:
- The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
- Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.
- The process may be initiated by either the debtor or the creditors.
- The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
- Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.
Insolvency and Bankruptcy Code (Amendment) Bill, 2019:
- The Bill amends the Insolvency and Bankruptcy Code, 2016.
- Under the Code, a financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process.
- The NCLT must find the existence of default within 14 days.
- Thereafter, a Committee of Creditors (CoC) consisting of financial creditors will be constituted for taking decisions regarding insolvency resolution.
- The CoC may either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets.
- The Code provides that the resolution plan must ensure that the operational creditors receive an amount which should not be lesser than the amount they would receive in case of liquidation.
- The Bill amends this to provide that the amounts to be paid to the operational creditor should be the higher of: (i) amounts receivable under liquidation, and (ii) the amount receivable under a resolution plan, if such amounts were distributed under the same order of priority (as for liquidation).
- Further, the Bill states that this provision would also apply to insolvency processes: (i) that have not been approved or rejected by the National Company Law Tribunal (NCLT), (ii) that have been appealed to the National Company Appellate Tribunal or Supreme Court, and (iii) where legal proceedings have been initiated in any court against the decision of the NCLT.
Time-limit for resolution:
- The Code states that the insolvency resolution process must be completed within 180 days, extendable by a period of up to 90 days.
- The Bill adds that the resolution process must be completed within 330 days.
- This includes time for any extension granted and the time taken in legal proceedings in relation to the process.
- On the enactment of the Bill, if any case is pending for over 330 days, the Bill states it must be resolved within 90 days.
Challenges in implementation:
- The insolvency reform (IBC) faced tough resistance from day one.
- The beneficiaries of the old order build public opinion against the reform, challenge it before every possible forum, create hurdles in implementation, misrepresent facts and figures and even spread rumours and canards.
- The intensity increased with its implementation, as defaulters gradually lost their impunity and companies changed hands.
- The IBC started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.
- Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
- There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation.
- The number of companies getting into liquidation is thus four times that of the companies being rescued.
- Numbers, however, to be seen in context.
- The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
- Thus, in value terms, assets that have been rescued are four times those sent for liquidation.
- It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.
Demystification of Myths:
- There is a need to demystify some myths around the IBC outcomes.
- Two hundred companies had been rescued till December 2019 through resolution plans.
- They owed Rs 4 lakh crore to creditors.
- However, the realizable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
- The IBC maximizes the value of the existing assets, not of the assets which do not exist.
- Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 % of the realizable value of these companies.
- The excess recovery of Rs 100 is a bonus from the IBC.
- Despite the recovery of 200 % of the realizable value, the financial creditors had to take a haircut of 57 % as compared to their claims.
- This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
- Nevertheless, as compared to other options, bank is recovering much better through IBC, as per RBI data.
Myth regarding job losses:
- The next myth is that the IBC is resulting in huge job losses through liquidation.
- It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
- Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
- The IBC process would release the idle or under-utilized assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
- Fifty-one companies having assets valued at Rs 93 crore have been completely liquidated.
- The Rs 96 crore realized from the sale of these assets has been released.
- One also needs to consider the jobs saved through rescue of 80 % of the distressed assets, and job being created by these companies, post-rescue.
- A distressed asset has a life cycle. Its value declines with time, if the distress is not addressed.
- The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
- Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
- They are settling when default is imminent, on receipt of a notice for repayment but before filing an application, after filing application but before its admission, and even after admission of the application.
- These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness.
- Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
- At this stage, the value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
- The recovery may be low at this stage, but in the early stages of distress it is much higher — primarily because of the IBC.
- If the entire universe of distressed assets is considered, the percentage of companies or distressed assets getting into liquidation is insignificant.
- The increasing number of applications being filed under IBC indicate the value and trust that stakeholders place on the law and is the ultimate test of its efficacy. Stakeholders should increasingly address the distress in early stages and the best use of the IBC would be not using it all.