Insolvency and Bankruptcy Code – Complete Analysis with recent issues

There has been an extension of another three month for the suspension of Insolvency and Bankruptcy Code (IBC). Finance Minister Nirmala Sitharaman said that the bankruptcy law will remain in suspension till March 31, 2021 now.

Compelled to help businesses deal with the economic disruptions induced by the coronavirus pandemic and continuous lockdowns, the suspension was initially scheduled to stay in effect for six months from March 25, when Centre enforced a nationwide lockdown to stop the spread of COVID-19. It was then extended for three more months and was expected to end on December 25 this year. Now defaults for an entire year since March 25 will not be subject to insolvency proceedings.

Why in News?

Insolvency and bankruptcy code (IBC) was introduced in 2016 to address the mounting bad loans (NPAs) problem. In this scenario, there are new performance and legal issues arising from the implementation of IBC.

What are the key features of Insolvency and Bankruptcy Code?

  • IBC was enacted for the purpose of recovering bad debts build up in recent years by making the resolution process easier and less time-consuming.
  • Either Creditor or the Defaulter can initiate insolvency proceedings under the Code by submitting a plea to the adjudicating authority, that is, National Companies Law Tribunal (NCLT).
  • The Debt Recovery Tribunal act as adjudicating authorities for individuals and unlimited partnership firms and National Company Law Tribunal for companies and limited liability entities.
  • IBC mandates that the cases should be resolved within 14 days and the resolution process should be completed in 180 days and can be extendable by 90 days.
  • IBC provides for Insolvency Resolution Professionals (IRPs) who will take charge of a company when it’s taken to the bankruptcy court.
  • Insolvency and Bankruptcy Board of India will be the nodal regulator for the entire process.

Most probable and repeated topics of upsc prelims

What is the significance of Insolvency act?

  • It creates a single insolvency and bankruptcy framework by replacing others.
  • It reduces the time period for resolving insolvency.
  • It develops investor confidence.
  • It eliminates confusion caused by a complex judicial framework.
  • It addresses the NPA situation decisively.
  • It develops the credit and bond market.
  • It provides a commercial solution to a commercial issue.
  • It allows genuine business failures a second chance.
  • It provides confidence to lenders of their rights and their enforcement.

How is the performance?

  • Backlogs – The NCLT started off well but they are affected by mounting backlogs as they’re taking much longer time than they did earlier. More than 9,000 cases are before the 11 NCLT tribunals that have been set up around the country and that includes more than 2,500 insolvency cases.
  • Regarding the time stipulation, in few cases the tribunal laid down that the 14-day period is only directive and not mandatory.
  • Also, the NCLT has held that the provisions of the Limitation Act, which sets out the time-limits under which a complainant can approach the courts for redress, do not apply to proceedings under the Insolvency Code.
  • The reasons for the delay are as follows
    • The entire matter of insolvency is inextricably tied to the non-performing assets (NPA) issue.
    • Many companies may be plagued by the non-payment of dues.
    • Only after their assets are rationalised, through the NPA-linked initiatives taken by the RBI, can they be wound up.
    • The RBI will look at them on a case-by-case basis, which means that the entire process will take time.
  • Poor quality of Professionals The IBC’s provision to throw the management out and replacing them with IRPs is considered to be draconian.
  • IRPs are a mix of chartered accountants, cost accountants, MBAs and retired public sector executives but there are many concerns has raised over the quality of the IRPs.
  • Loopholes in the Act Inevitably, there are loopholes in the Insolvency Act and some lawyers complain of poor drafting too.
  • For instance, the act has no provision for an amicable settlement once a case has been admitted.
  • Furthermore, the private sector participation in the process is poor.

What is the way forward?

  • Set up more tribunals in different parts of the country to handle the greater-than-expected volume of cases.
  • Existing management should be allowed to run the company due to the knowledge, information and expertise.
  • Government is more concerned with the recovery of NPA, not with the running of banks, thus the first step needed is to save the banking system.
  • Therefore the banks must also press the policy makers towards this move because they’re unlikely to get more if the case comes before the NCLT.
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