03-June-2024-Special-Article

THE INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016 

The Insolvency and Bankruptcy Code (IBC), 2016, provides a comprehensive framework for resolving insolvency and bankruptcy issues for companies, individuals, and partnerships in India. Recent data from the Insolvency and Bankruptcy Board of India (IBBI) highlights the progress and challenges in the implementation of the IBC, with a focus on recovery rates and the timeliness of resolutions. 

Key Highlights of the Latest Data 

Recovery Rates and Timeliness 

• Overall Recoveries: Since the inception of the IBC in 2016, creditors have recovered ₹3.36 lakh crore from 947 financially stressed companies, which is 32.1% of their total claims. 
• Improvement and Challenges: While the stress resolution process has improved, the recovery rates have not kept pace. 
• Past Recoveries: Recovery rates were at 54% in FY18 and FY19 but fell to 22% in FY21 due to the COVID-19 pandemic. 
• Recent Trends: Recoveries increased to 23% in FY22 and 36% in FY23 but declined again to 27% in FY24. 
• Record Resolutions: The number of resolutions reached a record 269 in FY24, up from 189 in FY23 and 144 in FY22. This improvement is partly due to the government filling vacancies at the National Company Law Tribunal (NCLT). 
• Stronger Cumulative Recoveries: Creditors have seen recoveries amounting to 85% of the fair value of distressed companies at the point of insolvency admission. 
• Liquidation Value: The recovery rate has reached 161.8% of the assets in terms of liquidation value. 
• Delays and Recovery Rates: The average delay of 679 days in the resolution process has reduced recovery rates to 26%, impacting asset value and debt recovery. 

Proposed Measures to Strengthen IBC 

Reduce Delays 

• Streamlining Processes: Efficiently resolving insolvency cases within the 330-day deadline is crucial. The current average duration of 679 days indicates a need for process streamlining and reducing litigation. 

Improve Recovery Rates 

• On-Time Resolutions: The percentage of claims recovered by creditors needs improvement. It dropped from 49% for on-time resolutions to 26% for delayed ones. 
• Judges and Staff: Ensure sufficient judges and staff at the NCLT to handle cases efficiently and reduce delays caused by backlogs. 
• Simplify Procedures: Evaluate and streamline IBC procedures to remove redundant steps and speed up the approval process. 

Sector-Specific Regimes 

• Unique Challenges: Consider specialized insolvency regimes for sectors like real estate, which may face unique challenges compared to other industries. 

Cross-Border Insolvency Framework 

• International Framework: Establish an effective legal framework based on the UNCITRAL (United Nations Commission on International Trade Law) to handle insolvency cases involving companies with assets in multiple countries. 

Review Timelines 

• Re-Evaluation: Re-evaluate the timelines mandated by the IBC to ensure they are efficient and minimize unnecessary delays. 

Formal Prepack for All Companies 

• Pre-Packaged Insolvency: Allow a formal pre-packaged insolvency process for all companies, not just Micro, Small, and Medium Enterprises (MSMEs). This entails reaching an agreement on a resolution plan prior to commencing formal bankruptcy proceedings. 

About Insolvency and Bankruptcy Code, 2016 

About the IBC 

• Framework: The IBC provides a framework for resolving the bankruptcy and insolvency of companies, individuals, and partnerships in a time-bound manner. 
• Insolvency Definition: Insolvency is a state where liabilities exceed assets, and an entity cannot raise enough cash to meet obligations or debts as they become due. 
• Bankruptcy Definition: Bankruptcy is when a person or company is legally declared incapable of paying due and payable bills. 

Amendments and Updates 

• Amendment Act, 2021: Modified the 2016 Code to offer a more efficient insolvency resolution framework for MSMEs, ensuring quicker, cost-effective, and value-maximizing outcomes for all stakeholders. 

Insolvency and Bankruptcy Board of India (IBBI) 

• Regulatory Authority: IBBI serves as the regulatory authority overseeing insolvency proceedings in India. 
• Composition: The IBBI’s Chairperson and three full-time members are appointed by the government and are experts in finance, law, and insolvency. It also has ex-officio members. 

Adjudication of Proceedings 

• National Companies Law Tribunal (NCLT): Oversees adjudication of company-related proceedings. 
• Debt Recovery Tribunal (DRT): Manages proceedings for individual cases. 

• Roles: Both tribunals play a pivotal role in approving the initiation of the resolution process, appointing professionals, and endorsing the final decisions of creditors. 

Procedure for Insolvency Resolution under the IBC 

Initiation 

• By Debtor or Creditor: Insolvency can be initiated by either the debtor or the creditor upon default. 
• Insolvency Professionals: These professionals manage financial information and debtor assets, with a 180-day legal action prohibition during resolution. 

Committee of Creditors (CoC) 

• Formation: Formed by insolvency professionals and comprises financial creditors. 
• Responsibilities: Determines the fate of outstanding debts through debt revival, repayment schedule changes, or asset liquidation. 
• Deadline: The CoC has a 180-day deadline before the debtor’s assets are liquidated. 

Liquidation Process 

• Proceeds Distribution: Proceeds from the sale of the debtor’s assets are distributed in the following order: 
• Insolvency resolution costs. 
• Secured creditors. 
• Dues for workers and employees. 
• Unsecured creditors. 

Mains question: 

1. “Discuss the key amendments and proposed measures to strengthen the implementation of the Insolvency and Bankruptcy Code (IBC), 2016, in India.” (150 WORDS)