IBC:The Bankruptcy Solution?

CA Saksham Agarwal
CA Saksham Agarwal

IBC and recent amendments in the code

IBC is a code, code is a compilation of all the existing laws while an act is a decision passed into law.

IBC is in the evolving state and still needs lots of modifications to become a flawless procedure. Let’s consider the recent example of Essar Steel, Essar Steel Asia Holdings Limited (ESAHL) proposed to repay the entire debt of Essar Steel India limited but the IBC (Amendment) Act, 2017 prevented it from doing so via section 29A which was introduced to prevent a person connected with the defaulting company to bid under insolvency proceedings.

Also, NCLAT rejected the resolution plan approved by the COC and placed the financial and operational creditor on the same footing which created debate among the stakeholders. SBI led consortium filed an appeal in the apex court that it should be allowed to exercise its wisdom to distribute the proceeds from the bidder. The apex court favoured financial creditors setting aside the NCLAT order and decided to go with the resolution plan.

This concludes that the code still needs several modifications to make a common understanding among all the authorities and stakeholders. The recently passed amendment bill has made major modifications in the code considering the current scenario and making IBC a win-win deal for all the stakeholders.

Earlier the bidders were restricting themselves from bidding due to lack of immunity to be granted from the attachment of the assets due to the sins of previous promoters which now has been amended.

Also, earlier IBC empowered even a single home buyer to initiate insolvency proceedings against the whole real estate company which has now been amended and now at least 100 allottees or 10% of the total allottees of a particular real estate project whichever is less can initiate the insolvency proceedings.

Attainments of IBC till date

IBC has been successful in creating fear among the promoters of losing their control over the company as a sword of COC (Committee of creditors) hangs over their heads, this will not only reduce the number of defaults in the country but will also create a healthy environment in the credit market.

 IBC has been a catalyst, directly or indirectly lakhs of crores of recovery have been done so far. Although the average recovery time period under IBC is much higher than what is mentioned in the code but it is still much below the average recovery time under the previous laws. Therefore the impact of IBC can be seen more from outside of IBC rather than in IBC.

Weakness in IBC

IBC aims at an early resolution to the creditors and value maximisation but the existing infrastructure has slowed the process.

 India has a total of 14 NCLTs which is quite less considering the number of cases being admitted each year. The less threshold of INR 1 lakh for initiating insolvency has given an upper hand to the creditors but a default of this much amount cannot conclude a debtor to be insolvent. This also clogs the entire system and authorities become less efficient in solving bigger and relevant cases.

Also as per the code, the application for insolvency has to be rejected or accepted within 14 days and it was held by the court that this is directory not mandatory, this has led to the applications being pending for almost a year because of the never ending legal arguments regarding submission of the application.

 Also, there have been cases where the resolution applicant failed to infuse money and the whole resolution process has to be started all over again. All these facts raise a doubt of IBC meeting the same fate as DRT and SARFAESI and at the end banks may lose confidence in the code.

IBC & Corporate bonds

Successful implementation of IBC will create a huge corporate debt market in the coming years. Currently, the maximum portion of the debt market is concentrated in AAA-rated bonds which will soon change once the IBC starts providing resolution to the distressed asset in a time-bound manner as this will boost confidence among the domestic as well as international buyers for the lower-rated bonds.

Faster and effective resolution of the stressed asset will further boost the ARC industry as this will churn the capital faster and enhance the value of the assets. 

Insolvency & Bankruptcy Code 2016

Interactive session with CA Saksham Agarwal covering below mentioned topics :-

1. IBC and recent amendments in the code.

2. Attainments of IBC till date.

3.Weakness in IBC.

4.IBC & Corporate Bond.

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