Daily Answer Writing
28 July 2021

Q) The Insolvency and bankruptcy code has not been able to achieve stellar outcomes as were expected from it. Enumerate the reasons behind it and suggest critical improvements required in this regard.  (250 Words)

Source: <https://indianexpress.com/article/opinion/editorials/ibc-regime-corporate-insolvency-resolution-process-7425512/>

GS 3: Economy

Approach Answer:

Introduction: The Insolvency and Bankruptcy Code was passed in 2016 by the Parliament of India with an intention of resolving the mounting insolvencies as well as addressing the menace of wilful defaulters in India. Thereby introducing a tool to manage the current NPA crisis as well as the crisis of the future.

 

Major issues in the IBC:

              1. Delays: In cases where a resolution plan has been accepted, the average time taken stands at 459 days, higher than the 330 limit.

              2. Recovery value too low:  creditors have realised only 39.2 per cent of their admitted claims.

              3. More liquidation than recovery: Of the 4,376 cases that have been admitted into insolvency proceedings till March 2021, resolution plans have been approved in only 7.9% cases, while 29% cases have ended in liquidation.

             

Possible reasons behind subdued outcomes of the resolution process:

              1. COVID-19 Crisis: The firms which were efficient before the COVID crisis and have turned sour only after lockdown. The uncertain future prospects may have reduced the number of interested buyers or depressed the bids for companies

              2. Reduction in 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. Not allowing proceedings on MSMEs during lockdown: 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.

              4. Preventing inclusion of promoters in the process: The threat of losing control over their company has emerged as a powerful deterrent for errant promoters not wanting to meet their financial obligations.

              5. Siphoning off of the assets: It is also possible that in some cases assets may have been siphoned off, leaving very little value in the company. In cases that were carrying on under earlier regimes, the value of assets would have been significantly eroded.

              6. Legal hurdles by the Promoters: promoters have repeatedly tried to mount legal hurdles causing considerable delay — would have led to significant value destruction.

 

Ways to improve the system:

              1. Not allowing Promoters to manipulate the system: by putting penalties or attaching personal assets.

              2. Adhering to timelines: with more frequent hearings,  and setting up the timelines for resolution which need to be strictly adhered to as speedy resolution was one of the most appealing aspects of IBC.

              3. Capacity augmentation: The capacity of the system to handle cases also needs to be augmented by increasing the number of benches and appointing more insolvency professionals.

              4. Allowing Pre-packaged schemes: an arrangement wherein the corporate debtor proposes a resolution plan to the secured creditors before the initiation of corporate insolvency resolution procedure (CIRP) must be the prime way. A recent ordinance in IBC allows pre-packaged schemes too.

              5. Profit Maximization: By not letting the promoters & people in management rebuy the firms, the cost of the asset may not get recovered due to low bidding. Thus promoters may be allowed to participate in the final bidding to rebuy the firm.

 

Conclusion: In 2020, India has jumped to the 63rd position in Ease of 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 in wake of the mountains of insolvencies expected in the coming times due to the COVID crisis and thus addressing the challenges becomes necessary.

 

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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