Home talk | How the new bill gives teeth to the Insolvency and Bankruptcy Code

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Parliament is the temple of democracy and parliamentary procedures the rituals through which the will of the people is translated into practice. But the terms and jargon involved in the Lok Sabha and Rajya Sabha processes can be difficult to grasp. News18 series House Talk brings you a calculator ready to make sure none of this is Greek to you.

Among the bills due to be listed in the current session of Parliament is the Insolvency and Bankruptcy Code (Amendment) Bill 2022. Bankruptcy is the next step, an initiated court proceeding where the remaining assets of an individual or business are sold to creditors partially or totally.

What is the Insolvency and Bankruptcy Code?

In 2016, the number of bad debts or non-performing assets (NPA) held by public banks quickly exploded. In just one year, there has been a 56.4% increase in NPAs. To put that into perspective, the Indian economy was struggling with Rs 2.2 lakh crore of bad debt six years ago. This was equivalent to the combined market capitalization of 33 of the 41 banks listed on the Bombay Stock Exchange.

Naturally, there was an urgent need to build a framework to fight against these loans and tackle insolvencies and bankruptcies in an effective and timely manner. Thus was born the legislation on insolvency and bankruptcy.

What is the bill about?

The debtor or the defaulting creditor can apply for the Business Insolvency Resolution Process (CIRP) if the non-payment exceeds Rs 1,00,000.

The creditors’ committee decides on an appropriate recovery plan. It can be a combination of corporate restructuring, mergers and acquisitions. But if this plan does not meet with the approval of 51% of secured creditors within 180 days, the company is forced into liquidation. However, the National Company Law Tribunal (NCLT) may extend this period for an additional 90 days.

To condense and streamline the process, the bill also proposes a Pre-Packaged Insolvency Resolution Process (PIRP) for Micro, Small and Medium Enterprises (MSMEs). A business with an annual turnover of less than Rs 5 crore and less than Rs 1 crore of investment in operational equipment is classified as a micro business, while one with a turnover of up to Rs 250 crore and up to Rs 50 crore investment in operational equipment is a medium business.

The resolution process can only be initiated by the debtor, who will retain control of the business during the interim period. But this is conditional on having a basic plan in place, which was approved by 66% of creditors. The default amount can vary between Rs 1 lakh-Rs 1 crore.

This resolution plan must be sanctioned within 90 days. However, if it does not succeed, the company will slip into liquidation.

Ineffective legislation?

The cases of liquidation and inadequate collections far exceed the number of companies challenged, defeating the purpose of the bill.

As of March 2022, the Board of Insolvency and Bankruptcy of India (IBBI) had 1,852 cases pending before it. This means that each case takes 495 days to conclude. This is when the law stipulates that the resolution of the insolvency of all corporate debtors must be concluded in less than one year (330 days).

More companies go under the hammer of liquidation than are saved. In the six-year period to March 2022, a total of 5,258 companies have filed for insolvency. Only 3,406 cases have been closed so far. Only 480 companies managed to escape financial death. But a large number, that is to say 1,609 companies, have been put into liquidation.

Reports suggest collection rates for creditors are also low. At 24%, many lenders were forced into massive loan cuts. For example, those at Videocon Industries had to take a 96% haircut on their loans which cost them Rs 62,000 crore.

In addition to weak recoveries from creditors and the higher number of affected companies being liquidated, other problems persist. For example, Indian financial creditors lack experience and expertise in developing a uniform and consistent loan recovery policy.

Moreover, the law also does not guarantee that the resolution plan is binding on the plaintiff. This means an increase in the time and cost involved since the plaintiff can file counterclaims.

Another point of contention is that the law neither stipulates nor disrupts the order of preference in which creditors receive their due. This causes legal chaos on the stand, as lenders disregard their agreed positions and opt for the positions that benefit them the most in financial terms.

The current bill is also woefully insufficient to deal with international cross-border liquidations. According to IBBI President Ravi Mittal, a similar model is ready. This is an aspect that will be examined during the monsoon session.

The Amendment

The amendment bill aims to strengthen the Insolvency and Bankruptcy Code by introducing provisions on cross-border insolvency. The upcoming changes aim to make resolution professionals (RPs) more accountable. Not only will they have to ensure full and complete disclosure of their relationship with the claimant, creditors or other stakeholders, but they will also have to issue invoices in their name.

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