NEW BANKRUPTCY CODE IS REFORMING INDIAN BUSINESS

INDIAN BANKRUPTCY CODE – AN INSOLVENCY REGIME

The new insolvency regime -
Banks run on the loans given to borrowers and the interest that comes on the loans given increases the profit
margins and increase the bank’s capability to lend more. But if the debtor does not pay money back to bank,
insolvency sets in and they are unable to repay their outstanding debt. During 2008-2014, the banks had
indiscriminately lent to borrowers that led to a rise in Non-Performing Assets. Therefore, Indian Bankruptcy
law was introduced in 2016 as a new bankruptcy law through an act of Parliament regulated by Insolvency and
Bankruptcy Board of India (IBBI) to rescue the failing business and in speedy and effective resolution of the
company and recover debt. If the company insolvency is failed to be resolved in a time bound manner, then
the company is set for liquidation. This law has consolidated the existing framework of insolvency and
bankruptcy acts to supersede them since those failed to contain the rising NPA problem in India.

How does IBC work?

 Creditors can initiate insolvency proceeding with National company law tribunal (NCLT)/Debt
Recovery Tribunal (DRT) and NCLT/DRT have to accept the appeal within 14 days.
 Once the case is admitted, a committee of financial creditors is formed and appoint Insolvency
professional and the insolvency professional runs the company in the interim period.
 The financial creditors committee will make debt recast plan and lenders will then conclude on the
final resolution.
 If lenders agree to the debt recast plan, then the insolvency case will be resolved within 180 or 270
days otherwise the borrower’s assets will be liquidated to recover money and distributed to
beneficiaries.

How has IBC been able to get debt recovery faster?

 There is a pre-admission out of court settlement happening in which the promoters are now paying
before the company is registered with National Company Law Tribunal (NCLT) for insolvency because
once the company comes under NCLT, the promoters lose their control over the management and
face difficulties. This helps in early identification of stressed assets.
 Companies are paying up their loans in anticipation of not being referred to NCLT after introduction of
Section 29-A which barred promoters of defaulting assets to buy back or bidding for their assets
removed.
 Banks are also recovering money from debtors in anticipation of default. When the banks recover
money back from debtors it increases the circulation of money with banks that improves the credit
culture of India.
 The asset reconstruction companies buy a major portion of bad loans from banks and make them
productive again leaving the smaller portion as haircut for banks.

Facts show IBC a success -

By the end of 2018,
 1332 cases have been admitted by NCLT
 452 cases have been disposed at pre admission stage and managed to get 2.02 lakh crore from them
before registering with NCLT.
 66 cases resolved after adjudication by NCLT/DRT.
 260 cases were set for liquidation.
Presently,
 As a result of IBC, the ease of doing business ranking for India has improved from 142 in 2015 to 52 in
2019.
  There has been 40 % recovery seen under IBC compared to 15% recovery seen under SARFAESI Act.

How has IBC helped eEconomy?

 The time bound resolution of insolvency cases has improved the ease of doing business in India. The
ranking has improved from 142 in 2015 to 52 in 2019. When the other countries notice that
insolvency cases are speedily resolved, the foreign investors increase their investments in India and
gives a boom to Indian economy with their capital inflows. The investors observe that the ease of exit
in the Indian market is becoming smoother.
 Secondly, the NPA levels in banks are reducing and the debt is recovered back. This gives rise to the
profitability of banks and the banks are able to lend more giving rise to credit growth giving boost to
Indian economy.

An example that proves the authenticityunquestionable existence of IBC lLaw -

Essar Steel was amongst the top 12 defaulters in Indian banking system. Essar Steel owes 54,500 crores to
creditors and has been put on block under IBC. It is a big established steel manufacturer and started to suffer
losses in 2010. It borrowed crores of rupees and saddled with financial dues exceeding 54,000 crores. Banks
however lent in anticipation that Essar Steel would pick up once again but it did not happen. SBI and Standard
Chartered bank filed a petition against Essar in NCLT and was soon admitted under IBC. Nevertheless, Arcelor
Mittal offered to buy Essar Steel and pay back its debt. NCLT approved Arcelor’s 42,000 crore bid for Essar
Steel. Then, Supreme Court giving supremacy to financial creditors over operational creditors ordered Arcelor
to repay the debt. This way under IBC, the 91.2% of the outstanding debt was said to be recovered. This way
the PSB's would have their NPA's low and put less pressure on government on recapitalisation terms. This hails
the success story of this one comprehensive law, Indian bankruptcy code.
This way under IBC, the 91.2% of the outstanding debt was recovered and hails the success story of this one
comprehensive law, Indian bankruptcy code.

Behavioural changes brought by IBC -

 The debtors are now taking corrective measures as soon as the companies land into stress as
compared to the situation before IBC where the debtors used to wait till the last tunnel to be
registered for insolvency. This has fairly resolved the insolvency cases. Due to the IBC, the people are
resolving the cases outside the court and this has reduced the burden on judiciary.
 IBC has changed the relationship between the creditors and debtors. The debtors are no longer
chasing creditors but vice versa.

Issues with IBC -

 The insolvency cases are facing delays from admission of the case to final approval of NCLT and the
cases are not resolved within 270 days and are dragged to litigation. This questions the efficiency of
the law. The government can further streamline the IBC process to avoid any delays in resolution of
the cases. As of June 2018, 977 cases were admitted for corporate resolution process, out of which 34
cases are successful, 91 cases were closed on appeal, 136 cases were ordered for liquidation and 716
cases have crossed more than 180 days of resolution process.
 Critics also express that investment in infrastructure is needed to build more NCLT courts and more
human resources are required to manage the increasing number of cases.

Recent changes in IBC Bill -

 IBC Amendment Bill 2019 - adds the resolution process must be completed within 330 days and can
be extended by the bill should be resolved within 90 days for resolution of the case..
 Key developments in IBC 2020 -
i) Insolvency proceedings extended by 6 months : Insolvency proceedings would not be initiated
and stands to suspend Section 7, 9 and 10 for "any default arising on or after March 25, 2020
for a period of six months or such further period, not exceeding one year from such date” amid
 coronavirus outbreak. This is positive for companies giving them a big relief defaulting on loans
but the companies who are already stressed and could have found resolution in these 6 months
would now have to wait for their resolutions.
ii) Threshold for default increased: The default threshold for stressed companies is increased to 1
crore from 1 lakh which largely insulates MSME’s which means that companies can initiate
insolvency proceedings on occurrence of default of minimum Rs 1 crore. However, the
coronavirus debt will be excluded from definition of default.

Final Words -
IBC ensures that the management which drives company into insolvency exits and a new transparent
management is selected thereby ensuring there is no political interference in it. Indian bankruptcy law is a
new law that has shown its success through improvement in recovering debt yet it will have to keep re-
organising itself according to the various challenges going forward in our economic environment.