INSOLVENCY AND BANKRUPTCY CODE - ECONOMY
News: Overall
recovery rate under insolvency resolution falls
What's in the news?
● 30.18
percent, the declining cumulative recovery rate under the insolvency resolution
processes of debt-ridden companies at the end of the September quarter,
indicating that lenders took more haircuts on their exposure, according to a Care
Ratings study.
● The
recovery rate has fallen from a peak of 43% in Q1 FY20.
Insolvency and Bankruptcy Code:
● IBC
was introduced in 2016 when India’s
Non Performing Assets (NPA) and debt defaults were piling up and older loan
recovery mechanisms were performing badly.
Aim:
● To
overhaul the corporate distress
resolution regime in India.
● To
consolidate existing laws to create a time bound mechanism with a
creditor-in-control model as against the debtor in possession system.
Outcome:
● As
per the IBC triggered insolvency, there are just two outcomes: resolution or liquidation.
Features:
The
Code establishes a new legal structure. This framework aided in the
formalization and liquidation of an insolvency resolution process that was time-bound.
The framework consists of the following elements.
● Insolvency Professionals:
They will be in charge of the resolution procedure. They also handle the
debtor's assets and provide information to creditors to help them make
decisions.
● Insolvency Professional
Agencies: Insolvency practitioners will be
registered with professional agencies for insolvency. Exams would be conducted
to certify insolvency specialists, and a code of behavior for their performance
would be enforced by the agencies.
● Information utilities:
They will maintain track of debts owed to creditors, as well as repayments and
debt defaults.
● Adjudicating authorities:
They will sanction the start of the resolution procedure, appoint the
insolvency professional, and sign off on the creditors' ultimate judgement.
○ The
National Company Law Tribunal (NCLT)
is the deciding authority for corporations and limited liability firms.
○ Individuals
and partnership firms have their debts adjudicated by the Debt Recovery Tribunal (DRT).
● The
Insolvency and Bankruptcy Board will
oversee insolvency experts, professional agencies, and information utilities
established under the Code.
IBC Amendment Act 2021:
● Pre-packaged insolvency
resolution: Pre-Packaged insolvency resolution
can now be used as an alternative resolution process for MSMEs, according to the amendment. The amount required to initiate
a Pre-Packaged insolvency resolution is between Rs 10 lakh and Rs 1 crore.
● Section 54A: It
enables the adoption of pre-packaged insolvency resolution options (PPIR).
○ PPIR
is a type of restructuring in which creditors
and debtors collaborate on an informal plan before submitting it for approval.
○ Financial
creditors will consent to the terms of a possible investor under this method.
○ They
will also seek clearance from the
National Company Law Tribunal for the settlement plan (NCLT).
● Approval of financial
creditors: The resolution plan, however, cannot be
submitted directly to NCLT. Before submitting a resolution plan, it must be approved by a minimum of 66 percent of
financial creditors who are unrelated to the corporate debtor.
● Minimum default amount: In
the event of a default of at least one lakh rupees, an application for PIRP can
be submitted. By issuing a notification, the national government could raise
the minimum default level to one crore rupees.
● Moratorium:
The debtor will be granted a moratorium during the PIRP process, during which
certain measures against the debtor will be forbidden. Suits can be filed or
continued, court orders can be carried out, and property can be recovered.
● Initiation of CIRP:
Before allowing a Corporate Insolvency Resolution Process (CIRP), the NCLTs
must evaluate a pre-pack insolvency process.
○ The
Insolvency and Bankruptcy Code, 2016, defines CIRP as the process of resolving
corporate insolvency in accordance with its provisions.