- Key amendments of IBC bill
- How does IBC help in addressing the Non-performing assets (NPA) issue?
- What was the Recent Essar steel case?
- What if financial creditors and operational creditors are treated same?
- Significance of IBC bill
- Which are the sections that will benefit once this bill is passed?
- How does the IBC affect home-buyers?
- Way Forward
[RSTV The Big Picture] Insolvency & Bankruptcy Code Bill
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- The Rajya Sabha has passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2019.
- The Bill seeks to amend the Insolvency and Bankruptcy Code (IBC), 2016 which provides a time-bound process for resolving insolvency in companies and among individuals.
- It also seeks to remove ambiguities that had arisen due to an order by the National Company Law Appellate Tribunal on Essar Steel’s insolvency resolution.
- It is set to help classes of creditors such as homebuyers who are represented on committees of creditors by a single authorized representative.
- The amendments clarify that unsecured financial creditors and operational creditors need not be treated on par with secured financial creditors for a resolution to be considered fair and equitable.
Key amendments of IBC bill
- The amendments give committee of creditors of a loan defaulting company explicit authority over the distribution of proceeds in the resolution process.
Time-limit for resolution process:
- The IBC states that the insolvency resolution process must be completed within 180 days, extendable by a period of up to 90 days. As per Bill, the resolution process must be completed within 330 days.
- This change is important as many of the resolution cases need more time and if it crosses 330 days, then the company will be liquefied.
Supremacy to financial creditors
- As per bill, the operational creditors will receive an amount not less than the liquidation value of their debt or the amount that would have been received if the amount had been distributed in accordance with the order of priorities of the Code, whichever is higher.
- Hence, the bill gives the supremacy to financial creditors over operational creditors.
- Moreover, the financial creditors who do not vote in favour of the resolution plan will also receive an amount that is not less than the liquidation value of their debt.
Allowing corporate restructuring
The amendment also allowed resolution plan to include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger to enable the market to come up with dynamic resolution plans.
- Previously for this purpose they used to go the judiciary and now it is clearly stated if they want to go in for a particular framework they can.
Initiation of resolution process
- As per the IBC, the NCLT must determine the existence of default within 14 days of receiving a resolution application. Based on its finding, NCLT may accept or reject the application.
- However, the Bill states that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
Representative of financial creditors:
- The Code specifies that when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the committee of creditors by an authorised representative. These representatives will vote on behalf of the financial creditors.
- The Bill states that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.
- Hence, the bill has provided unsecured creditors a level playing field, through the voting framework.
How does IBC help in addressing the Non-performing assets (NPA) issue?
- IBC is one of the reform measure taken by the government. After the inception of IBC in 2016, there has been a certain amount of responsibility and accountability that has been thrust upon the borrowers.
- About the 20 years before IBC, there were about 16 lakh crores of NPA that was waived off by the government from banks and financial institutions due to the absence of any framework addressing the NPA issue.
- This wavier was given from the taxes collected from the people. Hence, ultimately, the absence of such framework affected the citizens of India.
- At the time of enactment of IBC, there was around 7.4 lakh crores of NPA in India. Today, about 5.24 lakh crores of NPA have been resolved through the IBC.
What was the Recent Essar steel case?
- In Essar Steel insolvency case, in which Essar steel was bought by the ArcelorMittal, the lenders and operational creditors were treated at par by the bankruptcy court for distribution of auction proceeds
- The NCLAT granted almost equal treatment to financial and operational creditors in the proceeds, by giving financial creditors 60.7% of their dues, almost same as operational creditors which contradict the IBC rules.
- Under IBC rules, the Code provides an order of priority for the distribution of assets in case of liquidation of the debtor. This order places financial creditors ahead of operational creditors (e.g., suppliers).
- See the above ambiguity, the finance minister in the amendment maintain the hierarchy of the creditors under IBC rule as it is.
- The rationale behind the giving priority to financial creditors is that they give loans to the borrower at an interest rate which factors that if there is a resolution of that company, the financial creditors will get primacy.
- Currently, the Supreme Court put a stay order on the NCLAT order in the Essar case.
What if financial creditors and operational creditors are treated same?
- If the financial creditors and operational creditors are treated same, then there is no basis for financial creditors to provide loans as they will attract far more risk because they will not be paid if there is resolution of that company.
- Moreover, as the financial creditors will not provide loans, the interest rate will increase significantly. The financial creditors will provide loans only after checking the company profile thoroughly.
Significance of IBC bill
- IBC has facilitated bringing the money that is in the market but could not be brought back into banks and financial institutions due to the absence of any adequate resolution mechanism.
- Other acts of the old IBC which were giving certain preferences to certain segments in the company for their resolutions have been set aside. Now, IBC is bringing out equity by giving banks and financial lenders preference.
- The new amendments will further facilitate in bringing people’s money back to the system, which can then be used for growth and development of country through MSME or MUDRA or any other means employed by the government.
- There are not a lot of laws in India with a date or timeline for settling disputes. This amendment provides the benchmark of 330 days which will serve as an example to other regulators.
Which are the sections that will benefit once this bill is passed?
- All the creditors will benefit, including the homebuyers.
- The entire economy will also benefit because the money which is locked up will be recycled and fresh investment will come in.
- Credit culture will come back and people will borrow money with a sense of responsibility, knowing that if they don’t pay back they may even lose their company.
How does the IBC affect home-buyers?
- In a 2018 Amendment, home-buyers who paid advances to a developer were considered as financial creditors. Note that the Financial creditors are given preference over operational creditors.
- However, the status of financial creditors given to the home-buyers could be question very soon.
- The IBC code should not be seen as the substitution of Real Authority for the Real Estate (RERA).
- Three is a lot money stuck in the real estate sector. In the presence of resolution process, the consumption returning to the market, demand revival etc. won’t happen. The people get back the money through resolution process and can invest more in market.
- Some NPAs in India were formed due to the 2008 global financial markets while some due to crooked dealings or practices.
- Through IBC, those who were inclined earlier to treat bank loans as their personal property, to be retuned or not to be returned, will get corrected.
- The government should bring a check on the way some regulators are bringing new norms which are killing large part of industrial segments from growth.
- The regulators should talk to the institutions which are giving out the loans addressing their problems and make sure that they get their money back and are put in order as well.
- There is need to make Governments, the boards of banks and the senior officers of the banks and financial institutions accountable.
Acts and Mechanism before IBC:
- Before the IBC came into force, there were various measures like Sick Industrial Companies (Special Provisions) Act, 1985, the Securitization and Reconstruction of Financial Assets and enforcement of the Security Interest (SARFAESI) Act, 2002, 25 by 25 scheme etc.
- However, except SARFAEST act, most of the act/schemes are persuasive in nature as they tried to convince the borrowers that it’s good practice to pay back the money they borrow.
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA):
- The Sick Industrial Companies (Special provisions) Act, 1985 defined the concept of the ‘sick company’ and a ‘potentially sick company’.
- It defined the sick company as any company that existed for at least five years and the accumulated losses exceeded net worth of any financial year.
- However, the SICA failed due to its backward approach in dealing with the bankruptcy issues. There was a balance sheet approach to detect a sick unit rather than the prospective cash flow approach.
- It took a fairly long time for the net worth to erode and the grave liquidity issues were never addressed.
The Companies (Second Amendment), Act 2002
- It bought about amendments which directed to replace Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) with NCLT and the NCLAT as the adjudicating authorities.
The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act):
- Under this Act, the Tiwari Committee constituted with the objective of solving the problem of recovery by the Banks and the Financial Institutions, proposed establishment of the specialized Tribunals, called the Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals.
- This assisted in unlocking the huge amount of public money and to move towards proper utilization of the funds for the development of the country.
- The provisions of this Act did not apply to those Banks and Financial Institutions where the amount due is less than ten lakh rupees.
The SARFAESI Act, 2002
- The Securitization and Reconstruction of Financial Assets and enforcement of the Security Interest Act, 2002 was established with the purpose of the enforcement of the security interest created in favor of only the secured creditor.
- The act deals with the enforcement of Security Interest by the secured creditor after giving due notice to the parties for the discharge of their liabilities within sixty days of the date of notice failing which the secured creditor can take actions.
CDR and SDR mechanisms
- The corporate debt restructuring (CDR) mechanism was first issued in 2001 for implementation by the banks. The CDR mechanism was only limited to the banks and the financial institutions that had an aggregate exposure not exceeding 10 crore rupees. The mechanism was a non-statutory voluntary system or agreement entered between the creditors and borrowers for restructuring of the debt.
- Strategic Debt restructuring (SDR) was announced by the RBI in 2015 to deal with the stressed assets. The number of cases that were resolved by such schemes turned out to be few in number and the desired results could not be achieved.
Difference between Financial creditor and Operational Creditor?