Daily Current Affairs : 12-January-2024
The Insolvency and Bankruptcy Code (IBC) of 2016 was introduced with the aim of addressing bankruptcy and insolvency concerns across various entities in India. However, recent events have sparked concerns about its efficacy and the resolution process.
Key Concerns with the Implementation of IBC:
The implementation of IBC faces critical issues that raise doubts about its effectiveness. Some key concerns include:
- Delayed and Ineffective Repayment Process:
- Resolution plan approval involves only 15% payment by the purchaser.
- Repayment periods extend for years without additional interest.
- Low Settlement Amounts and Prolonged Resolutions:
- Recent cases, like Reliance Communications Infrastructure Ltd. (RCIL), witnessed low settlement amounts and extended resolution periods.
- RCIL settlement amounted to only 0.92% of the debt and took four years, exceeding the stipulated maximum of 330 days.
- Challenges in Identifying and Acknowledging Defaults:
- Time-consuming processes in recognizing defaults lead to reduced recovery rates.
- Timely initiation of resolution proceedings is hampered.
- Promoters Exploiting “Haircuts” Concept:
- “Haircuts” involving loan and interest write-offs are being exploited by promoters.
- Promoters benefit significantly, leaving lenders with reduced recovery rates.
- Low Realizable Value to Creditors:
- The RBI’s 2023 Financial Stability Report highlights low realizable value to creditors.
- Banks recover only 10-15% in NCLT-settled cases.
- Discrimination in Interest Collection:
- Banks treat corporates differently in interest collection, raising concerns about fairness.
- The amount realized from liquidations is minimal, affecting the overall recovery process.
Regulatory Concerns in Corporate Insolvency Process:
The Corporate Insolvency Process (CIRP) under IBC faces significant regulatory concerns, as highlighted by various reports and authorities. Some notable issues include:
- Admitted Claims Discrepancy:
- The Financial Stability Report identifies concerns about CIRP, revealing that admitted claims fall short of dues.
- Banks or financial creditors recover only a fraction of the liquidation value and fair value.
- Parliamentary Standing Committee Report:
- The 32nd report of the Parliamentary Standing Committee on Finance expresses apprehensions about the CIRP.
- Recommends the necessity for a professional code of conduct for the Committee of Creditors (COCs) and advocates fixing a ceiling on haircuts.
- Issues with Resolution and Insolvency Professionals:
- The report identifies concerns related to Resolution Professionals (RPs) and Insolvency Professionals (IPs).
- Emphasizes the need for addressing issues within these professional roles.
- Judicial Shortage Impact:
- A shortage of judges in the IBC resolution process contributes to a slowdown in case processing.
- The shortage hampers the expeditious resolution of cases, leading to prolonged resolution times.
Key Highlights of the Insolvency and Bankruptcy Code, 2016:
The IBC is a comprehensive framework designed to address bankruptcy and insolvency concerns across various entities. Some key highlights include:
- Definition of Insolvency and Bankruptcy:
- IBC deals with resolving bankruptcy and insolvency issues of companies, individuals, and partnerships promptly.
- Insolvency refers to a state where liabilities exceed assets, hindering payment obligations.
- Amendment Act, 2021:
- The Insolvency and Bankruptcy Code (Amendment) Act, 2021 focuses on an alternative resolution framework for micro, small, and medium enterprises (MSMEs).
- Aims for efficient, cost-effective, and value-maximizing outcomes for stakeholders.
- Objectives:
- Maximizing debtor’s asset value.
- Promoting entrepreneurship.
- Ensuring timely resolution.
- Balancing stakeholder interests.
- Facilitating a competitive market.
- Providing a framework for cross-border insolvency.
- IBC Proceedings:
- Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings.
- National Companies Law Tribunal (NCLT) adjudicates proceedings for companies, while Debt Recovery Tribunal (DRT) handles proceedings for individuals.
- Courts play a crucial role in approving resolution initiation, professional appointments, and endorsing final decisions.
- Insolvency Resolution Procedure:
- Initiated by debtor or creditor upon default.
- Insolvency professionals manage the process, providing financial information and overseeing asset management.
- A 180-day period prevents legal actions against the debtor during resolution.
- Committee of Creditors (CoC):
- Formed by insolvency professionals, CoC includes financial creditors.
- Determines outstanding debts’ fate, deciding on revival, repayment schedule changes, or asset liquidation.
- Failure to decide within 180 days leads to asset liquidation.
- Liquidation Process:
- Proceeds from asset sale distributed in order: insolvency resolution costs, secured creditors, dues to workers, other employees, and unsecured creditors.
Important Points:
Key Concerns with the Implementation of IBC:
- Delayed and ineffective repayment process:
- Resolution plan approval involves only 15% payment by the purchaser.
- Repayment periods extend for years without additional interest.
- Low settlement amounts and prolonged resolutions:
- Recent cases like Reliance Communications Infrastructure Ltd. (RCIL) witnessed settlements of only 0.92% of the debt and took four years, exceeding the stipulated maximum of 330 days.
- Challenges in identifying and acknowledging defaults:
- Time-consuming processes lead to reduced recovery rates.
- Timely initiation of resolution proceedings is hampered.
- Promoters exploiting “haircuts” concept:
- “Haircuts” involving loan and interest write-offs are exploited by promoters.
- Promoters benefit significantly, leaving lenders with reduced recovery rates.
- Low realizable value to creditors:
- The RBI’s 2023 Financial Stability Report highlights low realizable value to creditors.
- Banks recover only 10-15% in NCLT-settled cases.
- Discrimination in interest collection:
- Banks treat corporates differently in interest collection, raising concerns about fairness.
- The amount realized from liquidations is minimal, affecting the overall recovery process.
Regulatory Concerns in Corporate Insolvency Process:
- Admitted claims discrepancy:
- The Financial Stability Report reveals concerns about admitted claims falling short of dues.
- Banks or financial creditors recover only a fraction of the liquidation value and fair value.
- Parliamentary Standing Committee Report:
- Expresses apprehensions about the CIRP, recommending a professional code of conduct for the Committee of Creditors (COCs) and advocating fixing a ceiling on haircuts.
- Highlights delays in the resolution process, with over 71% of cases pending for more than 180 days.
- Issues with resolution and insolvency professionals:
- Concerns related to Resolution Professionals (RPs) and Insolvency Professionals (IPs) need addressing.
- Emphasizes the need for addressing issues within these professional roles.
- Judicial shortage impact:
- A shortage of judges in the IBC resolution process contributes to a slowdown in case processing.
- The shortage hampers the expeditious resolution of cases, leading to prolonged resolution times.
Key Highlights of the Insolvency and Bankruptcy Code, 2016:
- Definition of insolvency and bankruptcy:
- IBC deals with resolving bankruptcy and insolvency issues of companies, individuals, and partnerships promptly.
- Insolvency refers to a state where liabilities exceed assets, hindering payment obligations.
- Amendment Act, 2021:
- Focuses on an alternative resolution framework for micro, small, and medium enterprises (MSMEs).
- Aims for efficient, cost-effective, and value-maximizing outcomes for stakeholders.
- Objectives:
- Maximizing debtor’s asset value.
- Promoting entrepreneurship.
- Ensuring timely resolution.
- Balancing stakeholder interests.
- Facilitating a competitive market.
- Providing a framework for cross-border insolvency.
- IBC Proceedings:
- Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings.
- National Companies Law Tribunal (NCLT) adjudicates proceedings for companies, while Debt Recovery Tribunal (DRT) handles proceedings for individuals.
- Courts play a crucial role in approving resolution initiation, professional appointments, and endorsing final decisions.
- Insolvency Resolution Procedure:
- Initiated by debtor or creditor upon default.
- Insolvency professionals manage the process, providing financial information and overseeing asset management.
- A 180-day period prevents legal actions against the debtor during resolution.
- Committee of Creditors (CoC):
- Formed by insolvency professionals, CoC includes financial creditors.
- Determines outstanding debts’ fate, deciding on revival, repayment schedule changes, or asset liquidation.
- Failure to decide within 180 days leads to asset liquidation.
- Liquidation Process:
- Proceeds from asset sale distributed in order: insolvency resolution costs, secured creditors, dues to workers, other employees, and unsecured creditors.
Why In News
The Insolvency and Bankruptcy Code (IBC), enacted in 2016, aimed to fulfill diverse objectives, yet recent events have sparked concerns regarding its efficacy and the resolution process, emphasizing the need for continuous evaluation and potential amendments to address emerging challenges in the ever-evolving financial landscape.
MCQs about Insolvency and Bankruptcy Code
-
What is a key concern in the implementation of the Insolvency and Bankruptcy Code (IBC)?
A. Delayed and ineffective repayment process
B. High interest rates for corporates
C. Excessive government intervention
D. Rapid resolution periods
-
According to the Parliamentary Standing Committee Report mentioned in the essay, what is a recommended measure to address concerns in the Corporate Insolvency Process (CIRP)?
A. Increasing the number of judges
B. Introducing more regulatory authorities
C. Implementing a professional code of conduct for Committee of Creditors (COCs)
D. Ignoring the concerns and maintaining the status quo
-
What is one of the objectives of the Insolvency and Bankruptcy Code (IBC) ?
A. Maximizing debtor’s asset value
B. Excluding micro, small, and medium enterprises (MSMEs) from the resolution framework
C. Slowing down the resolution process
D. Minimizing stakeholder interests
-
In the context of the Insolvency Resolution Procedure, what role does the Committee of Creditors (CoC) play?
A. Approving resolution initiation
B. Overseeing asset management
C. Adjudicating proceedings for companies
D. Implementing a code of conduct
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