Assignment Number 2

Aveek Dutta PGP/23/008

Mihir Umesh Bade PGP/23/010

Insolvency and Bankruptcy Code:-

Insolvency and Bankruptcy was passed on the 11th May 2016. The purpose of the IBC code
was to simplify the insolvency, bankruptcy and reorganisation procedure by consolidating all
the laws related to the insolvency resolution.
The code is comprehensive and covers all individuals, private companies, Limited liability
companies and partnerships. The adjudicating authority in case of companies and LLP is
National Company Law Tribunal and for individuals and partnership Debt Recovery
Tribunal.
The process of insolvency resolution can be declared by any stakeholder such as Debtor,
creditor or employee on default of debt payment. If the adjudicating authority approves of the
process, then they appoint an Insolvency Professional (IP) and forms a credit committee.
After the credit committee approves the IP runs the company for the given moratorium
period. In the moratorium period the company is run on the going concern basis and no action
can be taken against the company or the assets of the company. The IP in the moratorium
comes up with the resolution plan and after the approval of the plan by credit committee. If
they decide to revive they will have to find a suitable buyer and the creditors may have to
take a reduction in their debt
Benefits of IBC:-
 Till 2019 IBC has helped recovered debts of value Rs 3 lakh crore
 Banks recovered Rs 5.28 Lakh crore in 2017-18 compared to Rs.38500 crore in 2016-
17
 According to World Bank, in 2 years’ time the recovery rate has improved from 26%
to 48% and the time to recovery has come down from 4.3 yrs to between1-1.5 yrs.
Amendments to IBC:-
Two amendments were done to the act on 6 June 2018
1) Home buyers are now recognised as financial creditors giving them representation in
creditor committee
2) Promoters of MSME are allowed to bid for their own companies as long as they are
not wilful defaulters
3) In the light of recent economic situation government has raised the minimum default
level by corporate to Rs 1 Crore from the earlier Rs 1 lakh
4) No application for initiation of corporate insolvency resolution process of acorporate
debtor shall be filed for any default arising on or after 25th March 2020 for six months
or such further period
Challenges:-
1) It is argued that the process gives the resolution decision in the hands of creditors who
in their bid to maximize the debt recovery may prefer selling the assets rather than
evaluating the risk to run the company
2) The moratorium period of 180+90 days can be extended by excluding certain days as
part of the moratorium as the code does not specifically talk about time delay due to
 any unforeseen circumstances. This was visible in Quinn logistics India and Mack
soft Tech case
3) One of the advantage of the IBC was timely resolution but the progress on that front
has been only in comparative terms and not absolute terms
Evolution of insolvency regulations
Sick Industrial Companies (Special  Balance sheet approach hence leading to
provisions) Act, 1985 delays
 Objective: Revival of sick industries
(SICA)  Mentions Board for Industrial and
Financial Reconstruction (BIFR) and
Appellate Authority for Industrial and
Financial Reconstruction (AAIFR)

Recovery of debts due to banks and  Mentions Debt Recovery Tribunal and
financial institutions Act, 1993 Debt Recovery Appellate Tribunal
 Objective was to ease recovery of bad
(RDDBI) debts by banks which, previously by
normal court procedure, was an arduous
task; hence, establishment of specialised
tribunals
 Balance Sheet Approach
Securitization and Reconstruction of  Secured creditors given primary
Financial Assets and enforcement of the importance
Security Interest Act, 2002  Creditors given power over property of
borrowers
(SARFAESI)  Establishes asset reconstruction
companies
Companies (Second Amendment) Act,  Replaces BIFR and AAIFR of SICA with
2002 NCLT and NCLAT respectively.
 Deals with all disputes related to
company law and wind up petitions
IBC, 2016  Cash flow approach for quick debt
resolution
Prompt Corrective Action Framework
PCA is a framework by which the RBI helps banks to maintain safe financial metrics by
alerting them through progressive and continuous triggers. Banks become risky if they fall
below certain norms in the following 4 parameters and PCA may be triggered. Respectively,
3 risk threshold levels have been created to trigger the alerts, 1 being the lowest and 3 being
the highest.
Threshold 1 Threshold 2 Threshold 3
Capital to risk- 7.75%<=CRAR<10.25% 6.25%<=CRAR<7.75% <3.625%
weighted assets
ratio
 Asset quality >=6.0% but <9.0% >=9.0% but < 12.0% >=12.0%
Profitability -ve ROA for 2 -ve ROA for 3 -ve ROA for 4
consecutive years consecutive years consecutive years
Leverage <=4.0% but > = 3.5% < 3.5%
PCA framework applies to all banks in India including small banks or foreign banks
operating through branches. On the breach of the risk thresholds, RBI invokes a corrective
action plan. Depending on the level of risk threshold, RBI can place restrictions on branch
expansion, management compensation, and dividend distribution.
References
https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about/article25656136.ece#
https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=10921&fn=2&Mode=0
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2401842
https://blog.ipleaders.in/laws-on-insolvency-before-and-after-the-ibc/
https://taxguru.in/income-tax/recovery-debts-due-t-banks-financial-institutions-act-1993-important-facts.html
https://economictimes.indiatimes.com/industry/banking/finance/banking/changes-challenges-and-interpretation-of-bankruptcy-law/articleshow/69017429.cms?from=mdr
https://www.drishtiias.com/loksabha-rajyasabha-discussions/in-depth-insolvency-and-bankruptcy-code-act
http://economyria.com/insolvency-bankruptcy-code-explained/
https://theleaflet.in/ibc-amendment-ordinance-2020-a-pandemic-of-bad-drafting/#:~:text=Based%20upon%20practical%20experience%2C%20the,the%20ongoing%20COVID
%2D19%20pandemic.