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Insolvency and Bankruptcy Code (Amendment) Bill, 2021 Passed

Posted on July 29, 2021 by admin1  233

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Recently, the Insolvency and Bankruptcy Code (IBC) (Amendment) Bill, 2021 has been passed by the Lok Sabha.

Insolvency and Bankruptcy Code (Amendment) Bill, 2021

  • It proposed the Pre-packaged Insolvency Resolution Process (PIRP), also called ‘pre-packs’ as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs).
  • It will replace the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on 4th April 2021.

Pre-pack

  • It envisages the resolution of the debt of a distressed company through a direct agreement between secured creditors and the existing owners or outside investors, instead of a public bidding process.
  • Under the pre-pack system, financial creditors will agree to terms with the promoters or a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
    • The approval of at least 66 per cent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT.
    • The NCLTs will be required to either accept or reject an application for a pre-pack insolvency proceeding before considering a petition for a Corporate Insolvency Resolution Process (CIRP).
  • This system has become an increasingly popular mechanism for insolvency resolution in the United Kingdom (UK) and Europe over the past decade.

Advantages of Pre-packs

  • Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate.
  • Benefits of Pre-Packs over CIRP
    • CIRP is a time taking process due to prolonged litigation by erstwhile promoters and potential bidders.
      • At the end of December 2020, over 86 per cent of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
    • The pre-pack in contrast is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
    • In case of CIRP, a resolution professional takes control of the debtor as a representative of financial creditors while in case of pre-packs, the existing management retains control, allowing for minimal disruption of operations.
  • Protection to Creditors
    • It will provide adequate protections so that the system is not misused by firms to avoid making payments to creditors.
      • Currently, only corporate debtors themselves are permitted to initiate a PIRP after obtaining the approval of 66 per cent of their creditors.
    • However, the pre-pack mechanism allows for a Swiss challenge to any resolution plan that provides less than full recovery of dues for operational creditors.
      • Under the Swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forgo the investment.
    • Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan put forth by the promoter.
  • It helps corporate debtors to enter into consensual restructuring with lenders and address the entire liability side of the company.

Challenges

  • According to experts, the timeline for the PIRP may be difficult to meet for lenders and distressed firms.
  • Forensic audits were particularly important in cases where the control of the firm remains with the same management. Ordinarily where haircuts are involved, forensic/transaction audits become imperative and a negative report becomes a roadblock in resolution involving the same management.
    • The term haircut is most commonly used when referencing the percentage difference between an asset’s market value and the amount that can be used as collateral for a loan.
  • If a firm restructures its outstanding debt through a PIRP with the existing management retaining control, the Non Performing Asset (NPA) status of the company’s account with lenders may not be automatically upgraded under Reserve Bank of India (RBI) guidelines.
  • It has also been noted that the debtor-in-possession model may militate against the Swiss challenge option, as the existing management may create hurdles for an outside investor seeking information to potentially invest in the company.
    • Under CIRP, a resolution professional is in charge of running the company and providing information to potential investors.

Way Forward

  • The government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.
  • In order to motivate resolution under the PIRP, the RBI guidelines on account status may be aligned with the objective of IBC.
  • The lenders may be given the benefit of account upgradation upon resolution. There is a need for the Insolvency and Bankruptcy Board of India (IBBI) and RBI to find middle ground on these regulations to make the PIRP more attractive.
  • The pre-pack mechanism is effective in arriving at a quick resolution so it should be rolled out to all corporations over time as legal issues are settled through case law.

Insolvency and Bankruptcy Code, 2016

  • It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy and was implemented through an act of Parliament.
    • The law was necessitated due to a huge pile-up of non-performing loans of banks and a delay in debt resolution.
    • Insolvency: Situation where individuals or companies are unable to repay their outstanding debt.
    • Bankruptcy: Situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. 
  • Aim: To protect the interests of small investors and make the process of doing the business less cumbersome.
  • IBC applies to companies, partnerships and individuals and provides a time-bound process to resolve insolvency. 
    • When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency.
    • Under IBC, debtor and creditor both can start ‘recovery’ proceedings against each other.
  • Timelines: 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. 
  • Regulator: The IBBI has been appointed as a regulator and can oversee the proceedings.
    • It consists of representatives of the RBI and the Ministries of Finance, Corporate Affairs and Law.
  • Key Components of IBC in Resolution Process
    • Insolvency Professionals: These administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
    • Insolvency Professional Agencies: These conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
    • Information Utilities: Creditors report financial information of the debt owed to them by the debtor. Such information includes records of debt, liabilities and defaults.
    • Adjudicating Authority: The proceedings of the resolution process is adjudicated by
      • National Companies Law Tribunal (NCLT) for companies and limited liability partnerships.
      • Debt Recovery Tribunal (DRT) for individuals.
    • Committee of Creditors: It consists of the financial creditors who lent money to the debtor and decides the future of the outstanding debt owed to them.
      • They may choose to revive the debt owed to them by changing the repayment schedule or selling the assets of the debtor to get their dues back.
      • If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
      • The minimum vote required to approve the resolution plan is 75 per cent in a meeting of COC.
    • Order of Proceeds from Sale: If a company goes under liquidation, proceeds from the sale of the debtor’s assets are distributed in the following order
      • First: Insolvency resolution costs, including the remuneration to the insolvency professional.
      • Second: Secured creditors, whose loans are backed by collateral.
      • Third: Dues to workers, other employees.
      • Fourth: Unsecured creditors.

Corporate Insolvency Resolution Process

  • The CIRP may include necessary steps to revive the company such as raising fresh funds for operation, looking for a new buyer to sell the company as a going concern. 
  • The outstanding debts may be satisfied by way of another person submitting a Resolution plan to take over the company and pay off the remaining debts.
  • In the event a resolution plan is not submitted or not approved by the COC, the CIRP process is deemed to have failed. 
    • In such a situation the liquidation proceeds.

Source: IE

 
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