INSOLVENCY AND BANKRUPTCY CODE (IBC) 2016 — (MORATORIUM)

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In the last couple of years, there is been the issue of non-performing assets as per the report of the world bank. Non-performing assets compromised over 2.6 percent of the total loans issued by the banking sector in the year 2011, and In the year 2016, the non-performing assets of the Indian banking sector have increased to more than 9.1 percent that is in five years the NPS in the case of India has more than tripled. Now to control the hazard of the non-performing assets government of India, as well as the Reserve bank of India has implemented a host of reforms, and one of the biggest reforms that were implemented by the Government of India in December 2016 is insolvency and bankruptcy code.

What are Insolvency and Bankruptcy?

For example, in a market, ‘A’ is a manufacturer who has been taken a loan from a bank ‘B’ and has also taken and purchased certain raw materials from a vendor ‘C’. Now the bank ‘B’ has given a credit to ‘A’ as well as the vendor ‘C’ has also provided raw materials to ‘A’ on the creditor. Now, ‘A’ will be referred to as a borrower or debtor, ‘B’ and ‘C’ as the creditor. As per the insolvency and bankruptcy code in the market, there are two types of creditors, one is referred to as the financial creditors, and the second is referred to as an operational creditor. A financial creditor is one who has provided or has given us a certain consideration that is a financial creditor accepts certain collateral or takes certain collateral from the borrower and in turn, it will be a loan to the borrower. Since he collects collateral right he is also referred to as a secured creditor. Whereas in the case of an operational creditor he provides goods and services on a credit to the buyer in the market and since he has the project on credit that he is expecting certain payment in front of the buyer in the market and since he not taking any kind of collateral before giving the credit does the buyer he is referred to as unsecured credit in the market. In this particular example banker ‘B’ becomes a financial creditor and ‘C’ becomes an operational creditor. Now, being a financial creditor or operational creditor both of them are expecting payments from the buyers or the borrower in the market. Let us assume ‘A’ is unable to make the repayments to the bank ‘B’ or make the payments to the creditor ‘C’, now the inability of making repayments to the creditors is referred to as a concept of insolvency. The inability of the borrower to make a repayment to the creditors is called insolvency. To resolve this insolvency we follow up with a legal process or a legal framework which is referred to as bankruptcy.

What is the necessity for an Insolvency and bankruptcy code (IBC)?

• The multiplicity of laws — before insolvency and bankruptcy code there were different laws or different pieces that took care of insolvency resolution in the case of corporate borrowers and the case of retail borrowers. In the case of corporate borrowers, there were laws such as — Companies Act of 1956, Companies Act of 2013, SICA 1985 that is the SiC industrial companies Act of 1985. In the case of retail borrowers or individual borrowers, there were laws such as — SARFAESI Act of 2002 and the recovery of a debt due to banks and financial institutions Act of 1993. A SURFAESI Act of 2002, basically stands for securitization and reconstruction of financial assets and enforcement of security interest Act and Recovery of Debt Due to Banks and financial institutions, they give rise to the quasi-judicial bodies of debt recovery tribunals. Rather than having this kind of fragmented legislative framework. Insolvency and bankruptcy code provides a single framework for resolving insolvency for both retail borrowers ad well as corporate borrowers.
• The time required for resolution and recovery rates — The time required for the competition of insolvency resolution was very high and the recovery rates were very low in the case of India, that is as per the survey that was conducted the time required for completion of insolvency proceedings in India were somewhere around 4.3 years and the recovery rates represent how much of the loan or how much of the debt is recovered by the traitors once the insolvency resolution proceedings are done. Recovery rates in the case of India are very low were hovering around 25.7 and usually, the recovery rates are represented in the form of cents to dollars, that is for one dollar how much is recovery in the form of cents and it is obvious, that the recovery rates are higher and it is better for the creditors. India is one of the worst-performing economies in terms of recovery of time consumption and the recovery rates.
• Non-Performing assets — Since the time consumption for insolvency proceedings was very high we also saw that the non-performing assets in the case of the Indian market have kept or climbing up in the last couple of years as already mentioned in the World bank report sites that the non-performing assets over around 2.6 percent of the total loans issued in the year 2011 and by 2016 these are climes up to more than 9.1 percent. India is one of the economies amongst a BRICS community that is sitting on a huge pile of non-performing assets. Non-performing assets raise is despite the Reserve bank of India taking many measures in the last couple of years such as a strategy credit restructure such as S4A that is a Scheme for a sustainable structuring for rest assets such as 5:25 reforms asset quality reviews etc. After taking many measures the Non-performing assets in the Indian economy have kept on claiming and there is an adverse effect of this increase in the Non-Performing assets on the whole economy. The impacts are, lending rates usually keep on increasing, which will affect the investment cycle in the economy as well as the credit cycle of the economy and it will affect investor confidence in the economy and it will also have to limit the impact on the growth potential of the economy. Non-performing assets will be resolved within a timeframe of 180 days and the recovery will also increase.
• Ease of Doing Business — The present government of India is given a lot of importance to the concept of doing Ease of Doing Business and it is represented by India’s ranking in the ease of doing business report which is published annually by the world bank. In this particular report, the world bank ranks various countries based on their performance on the ten parameters. Resolving insolvency is one of the parameters considered in resolving insolvency with the implementation of the insolvency bankruptcy code. The government of India or India is a ranking under this particular report has improved over some time. In 2016, India was ranked at the 136th position in this particular parameter, and as per the latest report that 2018, India’s ranking under the 103rd position shows the improvement. Overall the ten parameters India’s ranking has improved to 100th position. So we have seen that with the implementation of IBC India’s ranking under this particular report has increased over some time.

Provision of IBC –

• The debtor in Possession (DIP) to the creditor in control (CIC) — Before IBC was implemented the debtor used to file for insolvency but used to continue to the owner the assets of the particular company or the borrowing company. Under the new regime once the creditors lose the faith in the repayment capacity of the borrower they can simply approach the NCLT and file for the insolvency resolution process. Once the case has been accepted and admitted by the NCLT the insolvency professional will be made in charge of the company.
• Establish — the passage of IBC has led to establishing three types of authorities — insolvency and bankruptcy board of India (IBBI), insolvency professionals(IPs), information Utilities(IUs). The insolvency and bankruptcy board of India ensures that all the stakeholders in the process of insolvency the resolution will withstand the provisions of the IBC. Insolvency professionals are experts in conducting and solving the resolution process. Information Utilities are the central repositories of financial as well as credit-related information of the borrowers.
• A separate process for individuals and companies — Apart from these three authorities, there is an involvement of two quasi-judicial bodies as such — debt recovery tribunal this take an insolvency resolution cases of individual borrowers, national company law tribunal which will take up the insolvency resolution cases of the corporate borrowers apart from this the insolvency resolution has to be provided within a period of 180 days. Now, this period is also referred to as a moratorium period, and during this particular moratorium period no further cases will be accepted against this particular company and there won’t be any recovery proceedings that can be conducted against this particular company. The moratorium period can also be extended by another ninety days which is the prerogative to the insolvency professional. Insolvency resolution means either the traitors will decide to sell this particular company to a new buyer in the market who is also referred to as a resolution applicant or else they come to the conclusion to liquidate the company. Apart from this, the provision of insolvency and bankruptcy code are not applicable to financial institutions or financial firms in case of insolvency resolution in these particular firms. The government of India has very recently introduced the FRDI bill that stands for financial resolution as a deposit insurance bill which is in a lot of discussions because of a provision of bail which has been provided under the bill so these are the features.

Process of Insolvency Resolution –

Creditor/Debtor will approach the Adjudication Authority (DRT/NCLT): The corporate insolvency resolution, the traitors will be either a financial creditor or operational creditor and these will approach a national company law tribunal. Once they have approached the NCLT and file a case of insolvency within the next 14 days, an NCLT either has to accept or admit the case or else has to reject the case. In case of acceptance, the NCLT will appoint an insolvency professional who is made in charge of the operations of the company and he will appoint the committee of creditors that is the committee of the financial creditors and he will seek financial as well as credit-related information from information utilities and provided it to the committee of creditors.

The Committee of creditors is given a moratorium period or a time thread of 180 days during which they are expected to deliberate and discuss and come to a decision of insolvency resolution that is either sell the company to a buyer in the market or else liquidate the company. If the committee of creditors is unable to come to a decision within 180 days then the insolvency professional can provide an extra 90 days to deliberate and come to a decision and whenever the decision is done by the committee of creditors the decision can be done through consensus or voting. Under consensus, all the creditors agree to a particular decision whereas in the case of voting we require at least 75 percent of creditors by the value that is the creditors who want a decision to be agreed upon by the committee of creditors should be cumulatively gave given at least 75 percent of the debtor to the borrower in this particular scenario. If the committees of creditors come to a decision the insolvency professional will convey the decision to the adjudicating authority. If the committee of creditors do not come to a decision whether at the end of 180 days or the end of 270 days then the insolvency professional by default will give a recommendation of liquidating the company to the adjudicating authority and the adjudicating authority will issue an order giving effect to this particular recommendation this is the basic process that has been prescribed under insolvency and bankruptcy code for conducting the insolvency resolution process.

Comparison between the UK’s law and Indian law:

For a simple reason, the UK code is considered to be one of the best working models of the insolvency resolution process amongst the global markets. In both the code or in both the law, they follow the concept of a creditor in control under both the laws The insolvency resolution process can be initiated either by the creditor or by the debtor. The insolvency professional once is appointed and is in charge of the operations of the company and finally, under both the code there is a concept of the moratorium period.

If the insolvency professional has to be appointed under the UK’s code has to provide a bond whose value is equivalent to the value of the assets under the considerations. This particular provision has been implemented to ensure that the insolvency professional does not get involved in fraudulent practices. Whereas in the case of India there is no provision of providing the bond in case of insolvency professional. Once the insolvency professional is appointed under UK’s law has got more autonomy or more powers to take care of the operations by implementing various decisions in the case of the UK. Once the insolvency professional is appointed he is quite more autonomous under the UK’s law to take care of the operations and take the decisions in case of operations of the company. Under India’s code at the various scenarios, the insolvency professionally is supposed to take the approach from the committee of creditors in order to take decisions to ensure the operations of the company. In the case of the moratorium period under India’s law, the moratorium period has been fixed at either 180 days which can be extended by another 90 days whereas in the case of a UK code there is no fixed time trade. In terms of voting under India’s code, only the financial creditor will form the committee of creditors and are given the right to vote. Whereas in the case of the UK all the creditors are the financial creditors or operation creditors will participate in the insolvency resolution and also given the right to vote.

Conclusion –

In the last year, it has been seen that more than a thousand cases have been filed under IBC last one year of which more than 400 cases have been admitted by adjudicating authorities if we dissect this particular number that is 400 cases what we find is around 47 percent of the cases have been filed by the operational creditors and 32 percent have been filed by financial creditors and the remaining part of 21 percent of the cases have been filed by the debtors themselves. This number that is 47 percent of the operational creditors is very important or a simple reason before IBC since the operation creditors do not have any kind of collateral and it is very difficult for this kind of creditor to get the payments from the companies which are under financial stress. But, under the Insolvency Bankruptcy Code irrespective of whether you are an operational creditor or financial creditor if you lose faith in the repayment ability of the borrower can simply approach and file for an insolvency resolution process. In the last one year, an average of more than three cases have been filed under the code daily basis, and of these cases, one is admitted by the adjudicating authorities. Implementation of the insolvency bankruptcy code is being picked by some of the issues such as taxation issue, withdrawal issue, moratorium period issue, recent ordinance issue. Insolvency and bankruptcy code is a revolutionary reform that will reduce non-performing assets.