PremiumThe IBC helped improve debt recovery from 26% to 39.3%. Under IBC, an ordinance for allowing use of pre-packs as a resolution process for small firms is lined up for the monsoon session of Parliament. Mint takes a look at the new process
The Insolvency and Bankruptcy Code (IBC) helped improve debt recovery from 26% to 39.3%. Under IBC, an ordinance for allowing use of pre-packs as a resolution process for small firms is lined up for the monsoon session of Parliament. Mint takes a look at the new process.
What is the Insolvency and Bankruptcy Code?
IBC, enacted in 2016, is meant to combine laws relating to reorganization and insolvency resolution of corporates, partnerships, and individuals in a time-bound process. It is a one-stop resolution for resolving insolvencies and improving the ease of doing business. IBC has helped India improve its Ease of Doing Business ranking to 63rd position in 2019 as against 77 in 2018. Under the ‘resolving insolvency’ parameter, the rank improved to 52 from 108. In repayment default, creditors gain control over the assets of debtors and can take decisions for initiating of insolvency proceedings.
What are IBC’s aims and objectives?
IBC was initiated to simplify insolvency and bankruptcy proceedings in India, safeguarding the interests of all stakeholders and resolving the issue of non-performing assets (NPAs). It was a shift to a ‘creditor in control’ regime from a ‘debtor in possession’ one, and aimed at building a robust business environment and generating confidence for creditors by creating a time-bound recovery process in case of payment default. Either the debtor or the creditor can initiate the recovery process. The insolvency process is to be completed in 330 days and legal action against the debtor in this time is prohibited.
What has been the trend in bankruptcy resolution?
A total of 4,376 corporate insolvency resolution processes (CIRPs) have been initiated up to 31 March 2021, of which 2,653 have been closed. Of the closed cases, 48% have ended in orders for liquidation, 23% were closed on account of appeal or review or settled, 16% were withdrawn and 13% ended in approval of resolution plans.
Why was IBC amended amid the pandemic?
With the covid-19 pandemic resulting in a humanitarian and economic crisis and leading to significant financial stress for borrowers, the government increased the minimum default threshold for the initiation of CIRP from ₹1 lakh to ₹1 crore. It also suspended filing of applications in case of defaults for the initiation of CIRP for a year from 25 March 2020. However, the application of IBC norms should not be relaxed further as Ease of Doing Business ranking improved because of this code and helped contain NPAs.
What is the proposed pre-pack resolution?
The government promulgated an ordinance on 4 April 2021 under IBC in case of MSMEs for allowing the use of pre-packs as an insolvency resolution mechanism. A debt resolution agreement between a financial creditor and a potential investor is arrived at for which subsequent approval is sought from the National Company Law Tribunal. The process can be initiated by the debtor with approval of 75% of partners or 66% of unrelated financial creditors.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.
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