National Conference – 2018
TITLE- INSOLVENCY AND BANKRUPTCY CODE – INDIA vs. WORLD
PRESENTED BY- KHUSHBOO BELLANI AND VISHAKH CHHIKARA
(B.COM HONS SEM 4 EVENING; 9873778930, 8802101506)
COLLEGE – INSTITUTE OF INNOVATION IN TECHNOLOGY AND MANAGEMENT (IINTM)
This research paper concentrates on the phrase “Insolvency and Bankruptcy Code” for which act was passed in the Parliament on 28th May, 2016. The Insolvency and Bankruptcy Code, 2016 – An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.
Until the commencement of the Insolvency and Bankruptcy Code
(Here in after referred to as IBC) in May, 2016, there was no single legislation dealing with matters of insolvency and bankruptcy in India. It was widely known and accepted that a plethora of the erstwhile legislations apropos insolvency and bankruptcy were inadequate and could hardly cater to the needs of those who required quick resolution of their disputes since insolvency matters in India took 4.3 years on an average to be resolved, exponentially higher than the normal clearance ratio in other countries.
Experts suggest there is still uncertainty on the pricing and loose ends with unknown liabilities in the entire resolution process.
KEYWORDS – Insolvency, Credit, Stakeholders
Bankruptcy is a financial condition where a firm/individual is unable to repay debts to creditors. Under India’s Insolvency and Bankruptcy Code 2016, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority through passing a bankruptcy order.
Insolvency and Bankruptcy Code 2016
This act was recommended by TK Vishwanathan Committee. This code will be regulated by Insolvency and Bankruptcy Board of India (IBBI) consisting of 10 members.
The law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation. Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.
The salient features of the law are as follows:
· Clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.
· Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”.
· Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authority and deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liabilities entities respectively.
· Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
· Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals.
· Information utilities would collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.
· Enabling provisions to deal with cross border insolvency.
The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholders / promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is in complete departure with the experience under the SICA regime where there were delays leading to destruction of the value of the firm.
The vision of the new law is to encourage entrepreneurship and innovation. Some business ventures will always fail, but they will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past.
A key innovation of the Insolvency and Bankruptcy Code is four pillars of institutional infrastructure.
The first pillar of institutional infrastructure is a class of regulated persons, the ‘Insolvency Professionals’. They would play a key role in the efficient working of the bankruptcy process. They would be regulated by ‘Insolvency Professional Agencies’.
The second pillar of institutional infrastructure is a new industry of `Information Utilities’. These would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.
The third pillar of institutional infrastructure is in adjudication. The NCLT will be the forum where firm insolvency will be heard and DRTs will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate bodies, viz., NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.
The fourth pillar of institutional infrastructure is a regulator viz., ‘The Insolvency and Bankruptcy Board of India’. This body will have regulatory over-sight over the Insolvency Professional, Insolvency Professional agencies and information utilities.
The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.
Need for Bankruptcy Code
In every economy, there should be a legal procedure accompanied by institutions that collectively can resolve or settle the problems of failed institutions. An early resolution with sound principles will help the related parties like banks not to suffer from the failure of the business entity to whom they have provided a loan. Similarly, the Insolvency and Bankruptcy Procedures will help to ensure confidence of banks, foreign investors, associated companies in crisis mitigation mechanism related to business entities in the country.
A situation where investable money locked for a long time in litigations is the least preferred situation for business partners and lenders. Use of the bankruptcy procedure also may help the failing entity to resolve its problems early without going to a worst case scenario.
This paper follows the case study analysis method through which we compare and analyze the data obtained from different case studies to complete our research on the topic ‘Insolvency and Bankruptcy Code’.
The case study methodology enables us to explore differences within and between cases. The goal is to replicate findings across cases. Because comparisons will be drawn, it is imperative that the cases are chosen carefully so that we can predict similar results across cases, or predict contrasting results based on a theory. In this paper we are analyzing the defaulters of the Insolvency and Bankruptcy Code and also we are comparing the situations before and after the act have come into action.
3. FINDINGS OR DISCUSSIONS
3.1 INSOLVENCY AND BANKRUPTCY CODE – AS A REFORM
Insolvency & Bankruptcy Board of India (IBBI) Chairman M S Sahoo has said the new Insolvency and Bankruptcy Code provided the ultimate economic freedom, the freedom to exit, and described it as the “biggest” economic reform in recent years. The code seeks to consolidate and amend laws relating to reorganisation as well as insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.
Under the new law, employees, creditors and shareholders would have powers to initiate winding up process at the first sign of financial stress such as serious default in repayment of bank loan.
Sahoo mentioned that information utility was about to come and the entire regulatory framework about the corporate insolvency resolution was also in place. Admitting that there were hiccups at the beginning, Sahoo said many things had already been sorted out. “200 transactions are on, including 12 big accounts of the RBI out of which 7 have already been admitted and many legal issues have already been sorted out by National Company Law Tribunal, even the Supreme Court sorted out one matter recently,” he added.
The economic objectives are similar in corporate and personal bankruptcy.
· One important objective of bankruptcy is to require sufficient repayment that lenders will be willing to lend – not necessarily to the bankrupt debtor but to other borrowers. Reduced access to credit makes debtors worse off because businesses need to borrow in order to grow and individuals benefit from borrowing to smooth consumption. On the other hand, repaying more to creditors harms debtors by making it more difficult for financially distressed firms to survive and by reducing financially distressed individuals’ incentive to work. Both the optimal size and the division of the pie in bankruptcy are affected by this trade-off.
· A second important objective of both types of bankruptcy is to prevent creditors from harming debtors by racing to be first to collect. When creditors think that a debtor is in financial distress, they have an incentive to collect their debts quickly, since the debtor will be unable to repay all creditors in full. But aggressive collection efforts by creditors may force debtor firms to shut down even when the best use of their assets is to continue operating, and may cause individual debtors to lose their jobs (if creditors repossess their cars or garnish their wages).
· A third objective of personal bankruptcy law that has no counterpart in corporate bankruptcy is to provide individual debtors with partial consumption insurance. If consumption falls substantially, long-term harm may occur, including debtors’ children leaving school prematurely in order to work or debtors’ medical conditions going untreated and becoming disabilities. Discharging debt in bankruptcy when debtors’ consumption would otherwise fall reduces these costs.
· An additional objective that applies only to corporate bankruptcy is to reduce filtering failure. Financially distressed firms may be economically either efficient or inefficient, depending on whether the best use of their assets is the current use or some alternative use. Filtering failure in bankruptcy occurs when efficient but financially distressed firms shut down and when inefficient financially distressed firms reorganize and continue operating. The cost of filtering failure is either that the firm’s assets remain tied up in an inefficient use or that they move to an alternative use when the current one is the most efficient.
3.2 EFFECT OF INSOLVENCY AND BANKRUPTCY CODE
The effect of this economic reform – the insolvency and bankruptcy code is majorly on three segments which are as follows :
The new Insolvency and Bankruptcy Code will make it impossible for Indian banks to lend with compassion –
When the Reserve Bank of India dropped a bombshell on the evening of June 13, ordering banks to take the top-12 defaulters to bankruptcy courts, it also laid the foundation for changing the way Indian banks engage with big business families hereon. A week after the regulatory whiplash, bankers have buried the hopes of business as usual. While they are working out strategies to emerge from the unprecedented shock, the bankers find themselves walking alongside insolvency professionals in an unknown territory with little clue on how to go about resolving the problem.
But a positive outcome of this purgatorial step will be that for the first time in decades, there would be a level-playing field at the negotiating table between bankers and borrowers. And in all likelihood, it could make an ever-elusive resolution of bad loans a reality as the defaulters are now certain they stand to lose their crown jewels — howsoever faded they might be — if they do not cease to act irresponsibly.
The new bankruptcy procedure, which lays down timeline to recover from defaulters unlike
discretionary and opaque ways of the past, capping of bank loans to conglomerates, and
the increasing realisation to minimise the asset-liability mismatch, is promising a new
Indian banking landscape.
The government has set up a 14-member committee to review and improve the implementation of the insolvency and bankruptcy code (IBC) a year after it came into being.
The committee, led by the secretary at the ministry of corporate affairs (currently I. Srinivas) includes Insolvency & Bankruptcy Board of India chairman (IBBI) M.S. Sahoo, representatives from the Reserve Bank of India and the department of financial services and other experts, a notification on the ministry’s web site said.
The committee will look into issues that impact the efficiency of the corporate insolvency resolution and the liquidation framework and also prescribe recommendations to improve the functioning of the code, the notification said.
Government may seek cabinet nod to amend insolvency and bankruptcy code –
The government is likely to seek cabinet approval for amending the insolvency and bankruptcy code (IBC) to streamline the process of selecting buyers of stressed assets. It is aimed at preventing promoters who are wilful defaulters or have a history of fraud from buying companies cheap.
Resolution under Insolvency and Bankruptcy Code may be limited: Moody’s
Global rating agency Moody’s has said the effectiveness of a resolution under the Insolvency and Bankruptcy Code (IBC) is expected to be limited as the existing management may continue to play a role even after transferring control to insolvency professionals. Once a resolution under IBC is initiated, control of the company shifts from the existing management to insolvency professionals.
Nevertheless, given the nature of the assets, the management team in some cases will continue to play a role in preserving day-to-day operations. In addition, the strict timelines of a resolution may force some companies into liquidation and may have a negative effect on banks, particularly in cases where little collateral is available, the rating agency said in a statement.
3.3 ANALYSIS OF STATISTICAL DATA
The 12 accounts are led by SBI (six of them), PNB, ICICI Bank, Union Bank, IDBI Bank and Corporation Bank, according to bankers. These accounts have an exposure of more than Rs 5,000 crore each, with 60% or more classified as bad loans by banks as of March 2016.
According to RBI, these 12 accounts owe Rs2.5 trillion (Rs 2.5 lakh crore) to the system, which constitute around 25% of gross bad loans.
3.4 INDIA AND THE WORLD
Insolvency in India is still a major issue and a lot of changes are required and to be at a better place India still requires more major reforms. A detailed comparison of India and the world is listed below.
Resolving Insolvency DTF
Resolving Insolvency rank
Recovery rate (cents on the dollar)
Cost (% of estate)
Outcome (0 as piecemeal sale and 1 as going concern)
Strength of insolvency framework index (0-16)
After analysing the above graphs we have come to a conclusion that the following nations have been at progressing when it comes to solving insolvency cases with the best outputs. There are still various loopholes in the Indian bankruptcy code that need to be fixed to improve the insolvency ranking of India.
Right off the bat, the enactment neglects to furnish a structure to manage issues including cross-outskirt bankruptcy. Numerous worldwide organizations have interests in India. Lately, Indian organizations have become multinational in character and have made prominent and high stake acquisitions abroad. Various remote organizations have backups or branches in India. Additionally, Indian organizations have set up business substances abroad. Remote banks and loan bosses have financed Indian resources and Indians banks have branches abroad.
Furthermore, the new code neglects to give an appropriate structure to pull in quality experts to join the team of bankruptcy experts. A key segment of a compelling and proficient indebtedness framework is the part embraced by the bankruptcy proficient. In situations where a ward has a very much created framework of bankruptcy experts who credit to the most noteworthy gauges of direct, together with the fitting oversight, the indebtedness framework should work adequately and productively. The stature of bankruptcy experts, their capacity to draw trust and their level of aptitude, empower them to connect the contrasts between different partners and to help guarantee that business resources are conveyed to amplify esteem.
The code tilts vigorously for lenders, denying indebted individuals of reasonable interest and a level playing field. The Committee of Creditors has been made the sole, all-effective expert that can either acknowledge or dismiss the restoration design of the account holder organization. Every other loan boss and partners have been kept out of the basic leadership forms. The interest of all partners is vital for a definitive recovery of an organization. The code does not require the corporate borrower to be heard before requesting the beginning of procedures and the takeover of the administration and indebted individuals’ forces by the indebtedness proficient. There are numerous different arrangements that are in opposition to standards of normal equity. This approach may not be helpful for the business condition of the Indian economy.
THE MODEL LAW
As per UNCITRAL, a lawful body inside the United Nation framework in the field of International Trade, national indebtedness laws were either not well prepared or falling behind to manage the instances of Cross Border Insolvency. The issue has dependably been that every nation has its own particular manner of managing the issues of Cross Border Insolvency and different national indebtedness laws and practice are just excessively various. A few nations have marked arrangements with each other yet there has never been a uniform way to deal with settle Cross Border Insolvency issues.
The Model Law concentrates on four parts recognized as key components for the direct of Cross Border Insolvency cases: Access, Recognition, Relief (Assistance) and Cooperation
a. Access: This arrangement gives the agent of outside bankruptcy procedures and the leasers a privilege of access to the courts of an ordering state to look for help to designate and approve a delegate of the neighborhood procedures, being directed in an authorizing state, to look for help somewhere else.
b. Recognition: One of the key destinations of Model Law is to build up improved strategies for acknowledgment of qualifying outside procedures keeping in mind the end goal to stay away from tedious enactment and to furnish sureness regarding choice to perceive.
c. Relief: The fundamental rule of model law is that the alleviation considered vital for the systematic and reasonable direct of Cross Border Insolvency ought to be accessible to help the outside courts. By indicating the help that is accessible, the Model Law imports the outcomes of outside law in to the indebtedness arrangement of the authorizing states.
d. Co-operation and Co-appointment: These procedures address participation among the courts of the states where the indebted person’s benefit is situated in coordination of simultaneous procedures worried that account holder. The Model Law explicitly enables courts to collaborate in the regions represented by the Model Law and to discuss straightforwardly with remote partners.
The death of the Insolvency and Bankruptcy Code by parliament has at long last prepared for a truly necessary present day structure to manage the indebtedness and liquidation of corporate substances and regular people in India. While numerous budgetary division laws have experienced an enormous change after the advancement of the economy, the indebtedness law, which is a basic piece of any nation’s monetary design, stayed obsolete and unreformed, with the recovery or ending up of organizations containing a long-drawn and tedious process.
The globalization of exchange and business has created worldwide weight on countries to authorize laws and furnish foundation that can manage assortment of Cross Border Insolvency issues. Without particular enactment for managing cross outskirt Insolvency, courts in India are yet to be set up to manage the plenty global Insolvency issues. Such nonattendance can block India’s development to improve and enhance its monetary status in an extreme way. Legal contribution and dedication in directing monetary viewpoints is only a characteristic conclusion to its financial improvement. UNCITRAL Model Law on Cross Border Insolvency can possibly present a chance to India to prepare its legal to direct one such monetary angle Cross Border Insolvency by enabling its courts to stretch out coordination to outside courts and collect advantages out of the responding coordination.