Amendments to Insolvency and Bankruptcy Board of India (IBBI)

In News

• Recently, the Insolvency and Bankruptcy Board of India (IBBI) has amended the regulations with the objective to maximise value in resolution. 

Recent Amendments

• Sale of assets:
  • IBBI has amended its regulations to allow sale of one or more assets of an entity undergoing the insolvency resolution process.
• Committee of Creditors (CoC):
  • The Committee of Creditors can now examine whether a compromise or an arrangement can be explored for a corporate debtor during the liquidation period.
• Corporate Debtor:
  • The resolution plan to include sale of one or more assets of Corporate Debtor to one or more successful resolution applicants submitting resolution plans for such assets and providing appropriate treatment of the remaining assets.
    • It will help in wider dissemination of information to a wider and targeted audience of potential resolution applicants.
• Timeframe:
  • The amendment also enables a longer time for the asset in the market.

Significance of the recent amendments  

• Market-linked solutions: It will provide better market-linked solutions for stressed companies.
• The amendments will ensure that better quality information about the insolvent company and its assets is available to the market including prospective resolution applicants in a timely manner.
• Clearer picture about the debt: a resolution professional will have to actively seek claims from known creditors of the company concerned, a move that will help in making available a clearer picture about the debt. 
• Avoidance of transactions: Details of any applications filed for avoidance of transactions will be made available to resolution applicants before submission of resolutions plans and can be addressed by the applicants in their plans.
• Information memorandum: is required to contain material information which will help in assessing its position as a going concern, and not only information about its assets, thereby addressing a critical need of the market.

Insolvency and Bankruptcy Code, 2016 (IBC)

• It was enacted in 2016, against the backdrop of mounting non-performing loans, with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner
  • The Insolvency and Bankruptcy Code (IBC) provides for a market-linked and time-bound resolution of stressed assets.
• Companies have to complete the entire insolvency exercise within 180 days under IBC and the deadline may be extended if the creditors do not raise objections to the extension.
• It seeks to tackle the non-performing asset (NPA) problem in two ways.
  • Behavioural change on part of the debtors to ensure sound business decision-making and prevent business failures is encouraged. 
  • It envisages a process through which financially ailing corporate entities are put through a rehabilitation process and brought back up on their feet.

• The IBC sets out three classes of persons who can trigger the corporate insolvency resolution process (CIRP) – financial creditors, operational creditors and corporate debtors.
• The most important aspect under the IBC is the timeliness of insolvency resolution. 
  • The Supreme Court in Kridhan Infrastructure Vs Venketesan Sankaranarayan, observed that the insolvency resolution should not suffer from an indefinite delay in complete abeyance of the timelines fixed under the IBC.

Aims and Objectives

• To protect the interests of small investors and make the process of doing the business less cumbersome
• To promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.

Achievements

• The IBC has undoubtedly revived India’s insolvency regime and it has been successful in combating the growing threat of NPAs.
• It has also benefited the economy in a variety of nuanced ways, including improving credit discipline. 
  • As per reports, a total of 2.5-lakh crore has been introduced back into the banking system from 2016 upon resolution of insolvencies under IBC.
• Post the implementation of IBC, as per the World Bank’s report, India’s rank in resolving insolvency went from 136 in 2017 to 52 in 2020. 

Criticism & Challenges

• There have been more liquidations than resolutions.
• The recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.
• The recovery rates under the IBC are low. There are matters where haircuts of as much as 95 per cent are being granted during the insolvency resolution.
  • Since 2016, the lenders took an average of 61 per cent haircut on claims.

•  There are inordinate delays in the resolution procedure
  • Around 71 per cent of the cases are pending for more than 180 days which is a marked deviation from the intent of swiftly resolving insolvency.
• Another important challenge is the digitisation of the IBC ecosystem. 
  • The lack of digitisation has led to the insolvency process being stymied with long delays much beyond the statutory limits. 

Way Forward

• The IBC has reformed the Indian insolvency law landscape to a great extent.
• It is important for the key stakeholders to make their best endeavours to ensure that the power of the IBC does not diminish. 
• The goal must be to fill the voids that are discovered and move towards a more complex legal system over time. 
• The government needs to cater appropriate budgetary allocations to upskilling insolvency professionals, improvement of tribunal infrastructure and digitisation of the insolvency resolution process.
• There is a long way ahead for the Indian insolvency regime to meet the standards of other mature global jurisdictions.

Source: BS