INDIAN ECONOMY

CURRENT AFFAIRS 2017

3. INSOLVENCY AND BANKRUPTCY CODE, 2016
PURPOSE:
- In India, there has been a lack of global standards in dealing with default of debt.
- The bankruptcy proceedings and recovery by creditors is plagued by a plethora of
Acts. E.g.: Sick Industrial Companies (Special Provisions) Act, 1985, Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 etc.
- Some of these laws are almost a century old, and have not kept up with the times.
E.g.: Presidential Towns insolvency Act, 1909 and Provincial Insolvency Act, 1920.
- Due to the overlapping jurisdictions of these laws and lack of clarity in their
provisions, there have been delays in the Insolvency Resolution.
- The existing laws have failed to aid recovery for lenders or restructuring of firms.
- This has hindered the confidence of lenders, which has in turn diminished debt
access for borrowers.
- It hampers ease-of-doing business. The World Bank has stated that it takes 4 years
to resolve a bankruptcy case in India.

FEATURES:
- To speedily identify financially distressed companies and its resolution, if the
underlying business is viable. The Code will also ensure time-bound settlement of
insolvency and create a database of serial defaultersall critical in resolving Indias
bad debt problem which has crippled bank lending. This will make it easier for
financial institutions to deal with Non-Performing Assets (NPAs) arising out of
failed ventures.
- To consolidate existing laws relating to insolvency and reorganization of
companies.
- To facilitate the easy exit of companies, an issue which has been plaguing the
industry for long.
- To addresses cross-border insolvency.
- To promote entrepreneurship and availability of credit to all stakeholders in a
time-bound manner.
- To maximize the value of assets concerned.

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PROCESS:
The Code creates time-bound processes for insolvency resolution of companies
and individuals. These processes will be completed within 180 days. If insolvency
cannot be resolved, the assets of the borrowers may be sold to repay creditors.
The essential idea is that when a firm defaults on its debt, control shifts to a
Committee of Creditors, who has a fixed time period to evaluate proposals from
interested parties about resuscitating the company or to enable liquidation.
It may be initiated by the debtor or creditor.

The Code essentially contains 4 pillars of Institutional Infrastructure;

I. First is a class of regulated persons; the Insolvency Professionals. They play
a key role in the working of the insolvency resolution process by initiating it or
managing and liquidating distressed assets. They would in turn be regulated
by Insolvency Professional Agencies.
II. Second is the electronic database; the `Information Utilities'. They would
collect and disseminate information about lenders and terms of lending, so as
to facilitate the Insolvency Resolution.
III. Third is adjudication. The NCLT (National Company Law Tribunal) will be the
forum where firm insolvency will be heard and DRT (Debt Recovery Tribunal) will
be the forum where individual insolvencies will be heard. These institutions,
along with their Appellate Bodies; NCLAT and DRATs will be adequately

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 strengthened so as to achieve world class functioning of the bankruptcy
process.
IV. Fourth pillar is a regulator; The Insolvency and Bankruptcy Board of India.
This body will have regulatory over-sight over the whole process.

ISSUES:
- Market Slump: Several Non-Performing Assets (NPAs) are in sectors where market
conditions are in a slump, such as steel, power and textiles. In this environment, it is
difficult for banks to find suitable buyers of distressed assets at desired
valuations.
- Ambiguous Provision: Although there is a provision in the Code that no legal
proceedings can be permitted against insolvency professionals or concerned officials
for anything done in good faith, they find it difficult to prove if a particular act was
done in good faith or not.
- Flexibility and Autonomy: The tight resolution timelines envisaged under the
code cannot be achieved if bankers do not have the flexibility and the autonomy to
sell distressed assets.
- Promoters Ignored: Role Promoters play in delaying NPA resolutions has been
ignored. Majority of businesses in India remain under the control of their
Promoters. In order to resolve the issue of NPAs, the involvement of Promoters is
paramount for bankers to make significant management changes.
- No Scope for Settlement: It is alarming that the Code prohibits withdrawal of the
application once the same has been admitted. This means that there is no scope
whatsoever for settlement.
- Creditors Over Debtors: The debtor is not given any opportunity to put forth
his/her case or representation in the entire process. In this manner, the Code
ignores rights enshrined in the Constitution.
- Capacity Concerns: The severe capacity constraints of the NCLT and DRT in
handling the present and past backlog of cases are yet to be resolved. Insufficient
technical expertise and infrastructure could also hinder the smooth functioning of
the process.
- Selection of IPs: Regarding IPs (Insolvency Professionals), it is critical to develop a
robust way to select the most qualified, and to ensure that they are independent
and do not allow Promoters or other stakeholders to manipulate the resolution
process in any unfair manner. This is crucial for the successful implementation of
the IBC.

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- Secure MSMEs: It is necessary to ensure that the Code has no adverse impact on
the MSME sector, which is constantly grappling with problems of delayed payment
of their dues, which may result in the filing of insolvency petition
- Purpose of Insolvency and Bankruptcy Fund: The Code creates an Insolvency
and Bankruptcy Fund for those concerned under the Code. However, it does not
specify the manner in which the Fund will be used.
- Initiate International Agreements: Regarding Cross-Border Insolvency, it is
necessary for the central government to enter into reciprocal arrangements with other
countries which could benefit sectors such as aviation, shipping, and infrastructure,
amongst others. These reciprocal arrangements would also be useful in all those
cases where the creditors are pursuing remedies abroad or the company has
overseas assets.

MODEL QUESTION
1. The Insolvency and Bankruptcy Code, 2016 is said to increase the ease of doing
business in India. How does it propose to do so? Discuss the issues involved in the
code, if any.

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