IBC 2016 was introduced as a single law for insolvency and bankruptcy.
It is facing practical constrains, this need to be addressed.
What are the significance of IBC?
The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.
The process may be initiated by either the debtor or the creditors.
The Insolvency and Bankruptcy Code (IBC) envisions a 180-day period in which bids are invited for a defaulted firm.
If 75 per cent of the debt votes in favour of a bid, that bid is accepted.
Insolvency and Bankruptcy Board of India has been appointed as a regulator and it can oversee these proceedings.
IBBI has 10 members from Finance Ministry and Law Ministry the Reserve Bank of India.
IBC permits hiring services of licensed professionals who have total control over assets of debtor while the proceedings are going on at a tribunal.
Two tribunals have been authorised to resolve insolvency issues and pronounce their judgement on them.
One is National Company Law Tribunal for companies and the other Debt Recovery Tribunal for individuals
What areas IBC was expected to address?
Bankrupt firms – If a company goes bankrupt the creditors of the companies where in a distressing situation due to the uncertainty in recovering the debts.
In the bankruptcy process, there is an open opportunity for many people to bid for the firm so that recovery of debts is guaranteed.
Real estate firms – Bankrupted real estate companies delayed payments, and took capital from buyers and they became unsecured creditors.
The IBC will be triggered quickly when a real estate company gets into trouble and problems of buyers will be addressed.
Defaulters – Earlier the information about defaulters was keep secret and their trading continued in the stock markets.
IBC has made, default by a company as a mandatory information which must be disclosed immediately.
What are the practical constrains in IBC framework?
Open and transparent process results in the promoter regaining control of the firm, who is likely responsible for running the company aground.
Recovery rates for10 or 15 year old cases are abysmal even after the procedural problems of the IBC are fixed.
In one recent case, a bid was accepted to give lenders 6 per cent of the value of their debt of a defaulted firm.
There is much concern about some developments in bankruptcy reform as the lenders gets low recovery rate.
Home buyers who have paid large advances to real estate companies are worried about their losses.
What measures can be taken in IBC?
An amendment is required to fix the mistakes in the 2016 IBC law.
The Insolvency and Bankruptcy Board of India (IBBI) has to achieve the scale required for a high-performance regulator.
An array of well-drafted regulations has to be issued by the IBBI, for a robust regulation-making process.
A competitive industries of private Information Utilities (IUs), Insolvency Professional Agencies (IPAs), and Insolvency Professionals (IPs) has to arise.
The bankruptcy process must commence immediately after the first default, and the new arrangement must be quickly put in place.
To ensure an optimal restructuring plan, collectively financial firms need to build capacity on insolvency resolution process.
