All about Insolvency and Bankruptcy Code

What is the Insolvency and Bankruptcy Code?

  • Passed in 2016, the code was formulated to make the process of shutting down and exiting a business easier and less time-consuming. Apart from helping companies, it was also expected to improve India’s rankings in the World Bank’s ease of doing business index. India currents ranks 130th overall — out of 189 countries — and 136th on the parameter of ‘resolving insolvency’, with the World Bank saying it takes four years to resolve a bankruptcy case. The code aims to bring this down to within a year.

What does the Insolvency Code seek to do?

  • When a firm defaults on its debt, its control will shift to a committee of creditors. They will have 180 days to evaluate proposals from various interested parties on how to either resuscitate the company or enable liquidation.
  • The code has provisions for the creation of ‘insolvency professionals’ who would handle the commercial aspects of the resolution process. Insolvency professional agencies will train and regulate these professionals.
  • The Debt Recovery Tribunal (for individuals and unlimited partnership firms) and National Company Law Tribunal (for companies and limited liability entities) are to act as adjudicating authorities.
  • Finally, the code lays down the procedure for the creation of an Insolvency and Bankruptcy Board of India, which will be the overall regulator.

What is the progress so far?

  • According to experts, while the government has completed the tasks it had to carry out towards the implementation of the code, the private sector is yet to participate. So, the Insolvency and Bankruptcy Board of India has been created, but the progress in creating insolvency professional agencies, and in recruiting insolvency professionals, has been minimal so far.

What are the reasons for the delay?

  • While there is no real consensus on why the private sector is not acting swiftly, experts feel that one reason could be that the entire matter of insolvency is inextricably tied to the non-performing assets (NPA) issue.
  • Many companies may be plagued by the non-payment of dues. Only after their assets are rationalised, through the NPA-linked initiatives taken by the Reserve Bank of India, can they be wound up.
  • The RBI will look at them on a case-by-case basis, which means that the entire process will take time.
  • The overall consensus is that — excluding some solitary cases — there won’t be much progress on the implementation of the code even by the end of this year.

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