Insolvency and Bankruptcy Code (“Code”) in India has gained importance these days to protect the rights and interest of different parties involved with a business setup. However, with each passing day government has received multiple suggestions for making amendments in the already existing Code to fit in the dynamic needs of the business environment. Consequently, the Code has experienced innumerable alterations every now and then.
Previously, we laid emphasis on the meaning, vision and facilitators of the Code. It also highlighted how the Code affects our economy in general. For information on any of the above mentioned, kindly visit Discerning Insolvency and Bankruptcy Code, 2016
Procedure for resolving insolvency
Following steps are proposed for resolving insolvency:
In case of default, debtor or creditor might initiate resolution process which is administered by professionals. Debtor’s financial information is provided by the professional to the creditor from the information utilities and manages the property of debtors. This process is undertaken for 180 days and no legal action can be taken against the debtor during this period.
- Decision to resolve insolvency
Insolvency professionals take charge and constitute a committee of financial creditors who lend money to the debtors. This committee will be responsible for taking the decision regarding the future of the outstanding debt owed to them. It is on the option of the committee to revive the debt owed to them by transforming repayment schedule or liquidating the property of the debtor te repay the debts owed to them. If the committee does not reach to a viable conclusion within 180 days then the property of debtors is sold or liquidated.
- Liquidation procedure
Insolvency professional is empowered to administer the process of liquidation in case debtor willing goes into liquidation. Proceeds from the sale of property are dispensed in the following arrangement:
- Insolvency resolution cost inclusive of insolvency professional’s remuneration
- Secured creditors whose loans are backed by collateral or any dues to other employees
- Unsecured creditors
- Any outstanding amount to government
- Priority shareholders
- Equity shareholders
Concerns explicitly mentioned in the Code requiring consideration
Following concerns are clearly stated in the Code and are required to be focused for efficient and effective functioning of the Code.
- Situation of competition and conflict
Insolvency professionals (“IPs”) are regulated by insolvency professional agencies (“IPAs”), which are further administered by the Bankruptcy Board (“Board”). IPs are members of multiple IPAs who monitor their functioning, instead of a single regulator which is an unsettled situation. This might stir a situation of competition in this domain and may also pose a reason of conflict between the IPAs and regulators. Such a framework is distinct from today’s practice where the regulator directly regulates its registered IPs.
- Ambiguous distribution hierarchy
The Code lays down a specific order for distributing property during liquidation which is misty in nature as:
- Secured creditors will receive their entire outstanding amount rather than upto their collateral value
- Unsecured creditors have priority over trade creditors
- Government dues will be repaid after unsecured creditors
- Undefined roles
Functioning of IPs, IPAs and information utilities is responsible for the smooth functioning of the Code. Modifications and alterations are required from time and on for proper functioning of the network. Additionally, National Company Law Tribunal (NCLT) who is responsible for adjudicating corporate insolvency issues has not been constituted yet as a result of which Debt Recovery Tribunal (DRT) is overloaded with pending cases.
To conclude situation of the Code, it seems to be in the elementary stage, backed by a strong structure and framework. The government is working on constantly modifying the provisions of the Code. Supreme Court has also amended it from time and on. This changes if introduced successfully, will enable banks to take early legal actions. The focus of IBC lies on instituting a proper insolvency resolution process, which focusses on efficient resolution mechanism and not a recovery system. Currently, it is an initiative in process with improving future anticipations only if it conquers its present day obstacles, plugs gaps and tackles crucial concerns.
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