Insolvency and Bankruptcy Code: Then and Now
When the "Code" or more properly, the Insolvency and Bankruptcy Code was first introduced, there were many errors with it. However, with time and quite a few amendments, this code has evolved into something more acceptable and more accessible by the people.
Monday February 18, 2019,
5 min Read
Insolvency and Bankruptcy code (IBC) first came into the economic picture of India back in 2016. It was introduced for two mains reasons: to consolidate and de-fragment the insolvency and bankruptcy laws of the country and to provide a fast way to resolve the issues of company insolvency. To achieve these objectives, the code came with some radical changes that had a huge impact on the Indian economy. Till now, courtesy of the IBC, our banks have been able to recover debts of more than Rs 3 Lakh Crores. However, this recovery couldn’t have happened if no changes were made to the Code’s original rules. How was the code, when it was introduced and what has changed in that since then? These are the questions that need proper answers. Why? It is because only through proper answers you are going to gain the proper understanding of the code itself.
The initial version of IBC
Back in 2016, the government finally found the courage to finally give life to a financial plan that it was working on since 1992. The Insolvency and Bankruptcy Code (or IBC to be precise) was the need of the hour. The issues that needed this code to tackle are as follows:
1. There were too many unpaid corporate debtors
2. There were some decades-old debts to the banks that weren’t resolved.
3. If a company failed, the banks were engineered to ensure that the businesses did not go bankrupt.
4. The creditors (money lenders) didn’t have much say in the matters of the insolvency resolution process.
5. India was not a place attractive to foreign investors.
6. It was not easy to do business in India.
The code introduced certain laws to tackle every one of these issues. However, like everything, the code is not perfect by any stretch of the word. The following are the glitches or issues that code actually (Ironically) introduced to the Insolvency resolution proceedings:
- Denying operational Creditors: The Operational Creditors: a section of creditors that the debtors owed an operational debt to, were not taken care for much.
- Bias towards Financial Creditors: The code is creditor-centric. However, when it comes down to it, only the financial creditors are provided with rights to be the part of the committee of creditors.
- Exclusion of Homeowners: The code did not include home-owners as financial creditors to the real estate projects.
- Cheap way to bid on own assets: The insolvent company’s promoters actually had a way to buy back their own businesses on cheap during the liquidation process.
- A disorganized approval percentage: The approval percentages of Committee of Creditors towards the insolvency resolution procedure were not defined very well.
- Uniform law and no exceptions: No exceptions were made; even for the failing MSMEs.
- Deadlines exceeded: In most cases, the 270-days deadline for resolving the insolvency is exceeded.
- Against natural Justice: The principle of natural justice is not the foundation of the code.
The laws that the Code presented to the corporate sector were all uniform. While the sentiment behind all of these laws is worthy of respect, the truth of the matter is: the code’s strict nature did not make it a fan favorite.
However, the government understands these weaknesses well. Therefore, over the course of 4 years since the introduction, some significant changes have arrived.
The Present Version of IBC
The weaknesses that we discussed in the previous section associated with Insolvency and Bankruptcy Code caught the eye of the government. Therefore, to this day, they have introduced a lot of changes to make the code more inclusive and accepting. Since the Insolvency code’s introduction, the Supreme Court has made the following declarations:
- The Code should be more inclusive towards Operational Creditors.
- Operational Creditors should have a seat at the table with Committee of Creditors.
- IBC code of conduct should follow the principles that are aligned with natural justice.
Declarations aside, it was actual actions that the companies and the public were looking for. As a result, the following changes have happened since the inception of the code.
- The first Amendment: It was the first amendment that happened came in 2017 and it introduced the following changes. These changes provided certain restrictions to the IBC code to protect it from being misused:
- Section 29A was introduced to stop defaulters from bidding on their own company’s assets.
- People controlling Non Performing Assets for more than 12 months were barred from bidding
- 75% of committee of Creditors were required to approve to the insolvency resolution plan.
- The second Amendment: The second amendment came in June 2018 and provided even more changes. These changes provided more flexibility and inclusion to the code:
- Section 12A was introduced to allow the creditors to withdraw insolvency petition within 30 days of filing it.
- MSMEs are now allowed to bid upon their own company assets.
- Home-buyers are now the part of financial creditors and have a seat at the COC table.
- 66% of committee of creditors (COC) are now required to approve to the insolvency resolution plan.
- Financial entities that are related to the defaulter but have not invested in the defaulter’s company are now allowed to bid.
These new changes, although are not completely able to tackle the glaring issues of the IBC code, have provided a ray of hope to many companies. As a result, companies have started to favor the code. You can see the evidence to this favor towards the code with the recent insolvency case of RCom, where the telecommunication company has applied to fast track the insolvency resolution proceedings to the NCLT (National Company Law Tribunal).
Insolvency and bankruptcy code has changed to some extent from when it was introduced through amendments. These changes are brought on with the need to make the code more inclusive, more flexible, more accessible and more understandable by the companies. While the code has still a long way to go to acquire a universal appeal, we can still hope for the best that more changes will come.