Daily Answer Writing
07 April 2021

Q) The end of moratorium on loans is expected to spur the cases of Insolvency. Is Insolvency and Bankruptcy code(IBC), 2016 equipped enough to handle the rise in number of such cases? Critically analyze in the context of IBC (ordinance), 2021. (250 Words)

Source: The IE Editorial: EASING THE PAIN

GS 3: Indian Economy

Approach Answer:

 

Introduction: In 2020, in the wake of COVID-19 pandemic, the government had increase the minimum default threshold for insolvency proceedings from Rs 1 Lakh to Rs 1 Crore. This 'moratorium' delayed the insolvency situation rather than solving it. However the IBC code is an effective mechanism which can deal with such insolvencies.

 

Advantages of IBC, 2016 in handling insolvency proceedings effectively:

               1. Lesser resolution time: Not only for the big corporates, but also for MSMEs it has led to faster liquidation and debt recovery.

               2. Early detection of default Possible: The Adjudicating Authority are often approached, before a celebration becomes insolvent, at the outset of a default.

               3. Wide coverage: To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals.

               4. Painless revival mechanism: For entities it is possible that a resolution plan agrees on revival of the asset by instead of liquidation, the asset is sold to bring a new management.

 

In 2020, India has jumped to the 63rd position in simple Doing Business, as compared to its 130th position in 2017. This demonstrate the effectiveness of the code. However, in the present scenario, this might not be sufficient.

 

Specific challenges in the wake of present economic situation:

               1. Rise in insolvency of even economically efficient firms: The firms which were efficient before the COVID crisis and have turned sour only after lockdown, would too be deemed insolvent under the code.

               2. Reduced recovery value: If insolvency happens on a bulk scale then the available liquidity in the market would not be able to absorb all the assets, pushing the recoverable value down. This would eventually be a loss making situation for the creditors.

               3. Large scale economic disruption: If too many firms are closed, it would eventually lead to high rates of unemployment and supply chain disruptions.

               4. Impact on MSMEs: Since the moratorium was on the loans below ?1Crore, its removal would impact MSMEs the most.              

               5. Delays in proceedings: Over 86% of the 1717 on-going insolvency resolution proceedings had crossed the 270-day threshold.

               6. Against entrepreneurial spirit: The original mechanism and the subsequent 2017 ordinance, prevented the owner of the control of the firm, which they have set up with sweat and blood.

              

IBC's ability to resolve such issues after IBC (ordinance), 2021:

               1. Quicker resolution: Pre-packaged scheme under the ordinance is an arrangement wherein the corporate debtor proposes a resolution plan to the secured creditors before the initiation of corporate insolvency resolution procedure (CIRP).

               2. Securing ownership of the companies: During this process, the company will continue to be controlled by the existing management rather than coming under the control of the resolution professional — considered to be a less disruptive process.

               3. Securing creditors: The resolution plan can then be taken for approval by the secured creditors to the National Company Law Tribunal (NCLT), provided it is approved by 66% of them.

               4. Prevention from liquidation: It considers that there aren't enough buyers for stressed assets in the economy in the first place, not allowing existing promoters the option of participating in the resolution process would lead to capital destruction.

               5. Cost effective: It will bring down the costs associated with the resolution process.

               6. Woul stop Frivolous litigation: The owners are secured against litigations brought by defaulting promoters, in hopes of clinging on to their firms, will be reduced.

                             

Conclusion: Thus IBC which is already an effective piece of legislation, is made ready to face the mountains of insolvencies expected in the coming times, by securing both the creditors as well as debtors. However, we cannot be sure that this alone can save the economy from all troubles of Non-Performing assets. Thus, the government has taken various pre-emptive measures such as formation of a Bad Bank and Development Financial institution(DFI) in the Union Budget on 2021-22. 

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