ANALYSING IMPORTANCE OF THE IBC FOR THE INDIAN ECONOMY
Author: Pranav Prasoon, III year of B.A.LL.B (Hons.) from Jamia Millia Islamia, New Delhi
Background
It is better to deal with the single law than the multiple legislation which causes inadequacy. In the pre-IBC era i.e. before 2016 there were numerous legislations and scattered laws to deal with insolvency and bankruptcy which used to be the reason for inadequacy and confusion. E.g. SARFAESI, RDDBFI, Companies Act for liquidation and winding up of the company.
With the number of laws, the proper implementation became difficult, time-consuming, and hurt the Indian economy. This factor leads to the reform and upbringing of The Insolvency and Bankruptcy Code, 2016.[1]
The Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code was established in December 2016 and was brought to consolidate the insolvency process for Limited Liability Partnerships (LLPs), companies, individuals, and partnerships. This code particularly seeks to consolidate the existing framework creating a single law for insolvency and bankruptcy. This code aims to amend and establish the law for reorganizing and resolving the insolvency matter. With the coming of this code, several legislations were repealed and few were overridden as Section-238 of IBC has an overriding effect of all other existing laws on this subject.[2] The most important feature of this code is that it follows a time limit, wherein a case filed must be resolved within a maximum period of 270 days.[3]
The term ‘Insolvency’ means a situation when a debtor cannot meet its financial obligation i.e. when he cannot pay back the money to the lender, whereas, Bankruptcy is a legal declaration of insolvency when a debtor applies insolvent. Hence, it is the last stage of insolvency.
The question of Insolvency and Bankruptcy arises in two situations. Firstly, in the case when assets of the company are less than liabilities. Second is the situation when insolvency happens before one file for bankruptcy.
This code consolidates two bodies.
Those are:
1. Insolvency and Bankruptcy Board of India (IBBI): This board has regulatory oversight over the insolvency professionals, agencies, or entities. The main function of this board is to make and enforce rules for processes like Corporate Insolvency Resolution (CIR), Corporate Liquidation, etc. This board has been designated as ‘Authority’ under Companies (Registered Valuers and valuation Rules), 2017. Section 458 of the Companies Act, 2013[4] gives the central government such power to designate it as Authority.
2. Adjudicating Authority: National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT): The adjudication of LLPs and other companies are left with the National Company Law Tribunal, whereas, the adjudication of partnership and individuals are vested with Debt Recovery Tribunal (DRT).
Impact on Indian Economy
According to the report of the Economic Survey released on January 31, 2020, the Insolvency and Bankruptcy Code has recovered 42.5% of total bad loan filed with NCLAT (National Company Law Appellate Tribunal). This code has recovered much higher as compared to 14.5% under SARFAESI Act, 2002. As per the same report, the average time taken for resolution is around 340 days as compared to 4.3 years or 52 months earlier. It has been seen that the Manufacturing sector has filed the maximum number of cases under IBC. Around Rs 1.58 lakh crore were recovered in the case under the Corporate Insolvency Resolution (CIR) process. The money lenders have recovered around 50% of the defaulting advances of Rs 1.43 lakh crore which was stuck in 82 cases that have been resolved so far in the past two years after the codification of IBC.[5]
The Public sector banks (PSBs) have recovered around 1.2 lakh crore from stressed assets till March 2019, primarily helped by resolution under IBC.[6] The above-mentioned data shows that the framing of IBC has become increasingly affecting the recovery of funds from bad assets. So, we can claim that IBC was successful in dealing with cases of big default and puts a larger impact on boosting the economy of our country.
Case study
Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta &Ors:[7] - This judgment given by the Supreme Court is one of the landmark judgments on the subject matter related to insolvency and Bankruptcy and has clarified many issues related to Corporate Insolvency Resolution Process (CIRP). This verdict brings an about Rs 50,000 crore boost to Banks. Banks are expected to recover90% of their exposure to the Essar Steel account. SBI is recovering nearly Rs 12000 crore out of its Rs 13,220 crore exposure. Canara Bank and Punjab National Bank also have large exposure of Rs 3798 crore and2936 crore, respectively to Essar Steel. Union Bank of India, Bank of India also have exposures of 2122 crore, 1985 crore, and 1566 crore respectively and they will gain from recoveries depending upon the provisioning they have one against their exposure. Rs 2500 crore has been marked as the working capital.
So, all these recoveries will help banks to their profits and will surely have a greater impact on the Indian economy.
Conclusion
Insolvency and Bankruptcy Code has brought a major change in the business scenario and has a major impact on the ease of doing business. As per the report of the economic survey, this code has recovered much higher in less time compared to the earlier resolution processes. With the faster insolvency resolution, this code has played a vital role in the deepening of the bond market and increasing confidence in getting the money back. Faster resolution not only reduces NPAs but also preserves the value of assets that used to be diminished due to pending litigation. Therefore, with the strong institutional framework, this code is moving forward to being the new era of the Indian economy.
[1] The Insolvency and Bankruptcy Code, 2016 (Act no. 31 Of 2016)
[2] Ibid., s.238
[3] Ibid., s.12(3)
[4] The Companies Act, 2013 (Act no. 18 Of 2013), s.458
[5] Economic Survey,2019-20
[6] Public Sector Bank recovers Rs. 1.2 lakh crore from the bad loan in India in 2019-19, Economic Times, May 24, 2019, available at, https://m.economictimes.com/industry/banking/finance/banking/public-sector-banks-recover-rs-1-2-lakh-cr-from-bad-loans-in-2018-19/articleshow/69486315.cms
[7] Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta &Ors, Judgement dated 15.11.19 in Civil Appeal No. 8766-67 Of 2019