India got a new Insolvency and Bankruptcy code in 2016. The new law was framed essentially to help banks and other financial institutions address the problem of NPAs. It also simplified the existing insolvency resolution mechanism which was being governed by multiple regulations.
The efficacy of the new regulation was put to test immediately by the Reserve Bank of India after its enactment. The country’s central bank directed that bankruptcy proceedings in 12 large corporate accounts be started under the code. These accounts are referred to as RBI-12 cases.
More than 36 months have been passed since the new insolvency and bankruptcy law was enforced. This is a good time to review the code and assess its effectiveness in addressing creditors’ problems.
Let’s take a look at the main features of the law and whether it has served its purpose or not.
How The New Code Works
Before assessing the impact of the regulations, it will be pertinent to understand how the bankruptcy and insolvency act functions.
– The code can be used by creditors as well as debtors to initiate the insolvency resolution process.
– The process can be started by all kinds of creditors and other stakeholders like employees against a debtor who is unable to repay the debts.
– One of the most important and useful features of the new law is that the entire resolution process is time-bound. Once it has been started, the procedure must be completed within 180 days. This period can be extended to 270 days.
– Cases related to companies and LLPs have to be referred to the National Company Law Tribunal (NCLT). Any appeal against the order of this adjudicating authority’s order must be made at the National Company Law Appellate Tribunal. An appeal against the NCLAT order must be filed in the Supreme Court of India.
– A creditor has to appeal to the Debt Recovery Tribunal (DRT) for starting the procedure against individuals and other entities. Applicants can appeal against DRT’s orders at the Debt Recovery Appellate Tribunal followed by the Supreme Court.
– A committee of creditors (CoC) is formed which works with the IP to settle the case. This committee enjoys all the powers of the board of directors/ promoters of the firm.
– The IP in consultation with the CoC decides whether the entity can be revived or must be liquidated. A buyer must be identified if the stakeholders decide to revive the organization. The creditors also must agree to take a “haircut”. The haircut is a reduction in debt that all lenders agree to take.
– A new regulatory authority called the Insolvency and Bankruptcy Board of India (IBBI) has been established under the code. This agency is headed by a chairperson and has representation from other government arms like finance ministry, the ministry of corporate affairs, law ministry, and the RBI. the board monitors all resolution processes being undertaken in the country. It also handles the appointments of IPs and oversees subordinate agencies and information utilities.
Impact Of The Code
The new Insolvency and Bankruptcy code is undoubtedly a welcome reform. However, as it is said the proof of the pudding lies in its eating. The best way to assess the effectiveness of the law is by looking at the numbers.
What The Statistics Say
About The RBI-12 Cases
– Out of the 12, five cases have been resolved while the rest are still unresolved.
– The five settled cases took an average of 333 days to reach the final outcome. However, the remaining 7 are still awaiting their fate even after more than 450 days.
– According to rating agency ICRA’s research, the creditors in these cases have lost Rs 4,000 crore in additional income.
About All Cases Admitted For Insolvency Resolution
Take a look at the statistics related to all cases which have been registered under the bankruptcy law in India. This will help in easily understanding the current scenario.
According to ICRA’s report presented earlier this year:
– Out of the 1484 cases admitted by the NCLT until December 31, 2018, 898 remain unresolved.
– 31% of ongoing cases have passed the 270-day threshold period. 18% of cases have crossed the 18-day mark.
– The number of cases being admitted for the resolution process is increasing in every quarter. 264 cases were admitted in the quarter that ended in December 2018. This was more than the figure of 235 cases admitted in the preceding quarter.
Assessment Of The Current Situation
After looking at the numbers, it can be safely said:
– The investors have confidence in the new law as is evident by the rising number of applications.
– However, the process is suffering from long delays. The ICRA’s report cites litigations filed by interested parties as the main cause for delays. Another reason for delays is the inadequate infrastructure of NCLT.
It can be safely said that the new law is a step in the right direction. The government is looking at some ideas to improve the effectiveness of the regulation. It is looking at:
– Project Sashakt: A three-point scheme to deal with stressed corporate assets without initiating bankruptcy proceedings. Under the project, depending upon the size of the debt, banks can resolve bad loans through different suggested ways.
– Debt Settlement Plan: Both parties discuss and agree upon a debt settlement plan and avoid the insolvency resolution process.
– Pre-arranged Restructuring Plan: A restructuring plan is included in the agreement at the time of lending. This clause can then be used in the event of bankruptcy.
However, the government needs to
– strengthen the current infrastructure of NCLT and other bodies to deal with the workload.
– make modifications to minimize the litigations.
Only then the Insolvency and Bankruptcy Code will fulfill its objectives and be called a success.