The Insolvency and Bankruptcy Code (IBC), 2016 was enacted with the intention of improving the ease of doing business in India
The code is however said to have certain loopholes that goes against this principle.
What is IBC?
It aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals.
It attempts to ease the process of recovery of money by operational and financial creditors in a timely manner.
It places the onus on professionals to put forth the resolution plans.
How does it operate?
When a firm defaults on its debt, its control will shift to a committee of creditors.
The committee will have 180 days to evaluate the proposals from various interested parties on how to either revive the company or enable liquidation.
The code has provisions for the creation of ‘Insolvency Professionals’ who would handle the commercial aspects of the resolution process.
Insolvency professional agencies will train and regulate these professionals.
The Debt Recovery Tribunal act as adjudicating authorities for individuals and unlimited partnership firms, and National Company Law Tribunal would deal with companies and limited liability entities.
Insolvency and Bankruptcy Board of India will be the overall regulator.
What are the shortcomings?
The code fails to provide adequate safeguards to protect the rights of the company before handing over the management to the resolution professional.
The Code rides substantially on the unquestionable word of the creditors.
The Code fails to provide any opportunity to the corporate debtor to make a representation at any stage of the resolution process.
The Code is also deficient in providing criteria for the qualification of the interim and of the final insolvency resolution professionals.
It also leaves too much discretion in the hands of the IP.
It allows for any person to access the information memorandum put together by the insolvency professional without restricting competitors or imposing any confidentiality obligations.
This goes against the right to business.
The Code fails to define a resolution applicant. All such resolution plans are placed before the financial creditors and is implemented by way of an order by the NCLT.
If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.
The Code prohibits withdrawal of the application once it has been admitted. This means that there is no scope for settlement.
What could be done?
The code must be robust, decentralized, less costly, inclusive and speedy.
This would help businesses exit sooner and capital to be redeployed faster to productive firms, thereby improving economic output and employment.
The code should encourage decentralization, reduce the role of courts or insolvency professionals and allow for a greater role for a market-friendly approach.
