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CRITICAL ANALYSIS OF THE IMPACT OF INSOLVENCY AND BANKRUPTCY CODE ON INDIAN ECONOMY
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CRITICAL ANALYSIS OF THE IMPACT OF
INSOLVENCY AND BANKRUPTCY CODE ON INDIAN ECONOMY
AUTHORED BY - VARUN VARMA1
& DR. MEENU GUPTA2
1,2 Law, Amity University Noida
Abstract - My
research analyzes implication and outcome of our country’s
main legislation on finance
ie. Insolvency and Bankruptcy Code (IBC) on
Indian Economy by looking at debt recovery from borrowers
and successful liquidation / restructuring / revival of Borrowers.
IBC was introduced to simplify and
make uniform India’s laws related to
banking and financial sector. IBC
objective was to timely deal with first resolve and revive insolvent
debtors. Liquidate if insolvency is not resolved.
It also protect
creditor by giving a democratic setup in the form of committee
of creditors where voting can be done.It gives
a mechanism to recover debt which not only protects
banks but also provides a framework for ethical corporate practice in the country.
India's
long-standing problems with its bankruptcy and insolvency laws were addressed
with the introduction of the Insolvency and Bankruptcy Code (IBC). The main goals of the IBC were to increase
creditor recovery, foster a positive business climate, and establish a more effective and timely resolution procedure for bankrupt
enterprises.
I
NEED OF IBC
1. Consolidation and Streamlining: Prior to the IBC, India's insolvency rules and forums were divided
among many overlapping statutes, including the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) and the SickIndustrial Companies
(Special Provisions) Act, 1985
(SICA). The goal of the IBC was to combine and simplify various
regulations into a single, all-inclusive piece of legislation.
2. Time-bound and Efficient Resolution: Delays,
inefficiencies, and the absence
of a time-bound resolution procedure were hallmarks of India's previous
insolvency regime. To ensure a faster settlement of bankruptcy cases, the IBC incorporated time-bound resolution methods including Liquidation and the Corporate bankruptcy settlement Process (CIRP).
3.
Creditor Rights and Protection: By giving creditors
a precise and organized procedure for
recovery, the IBC aimed to strengthen their operational and financial rights.
It sought to strike a balance between
the interests of investors, borrowers, and creditors.
4.
Encouraging Investment and Entrepreneurship: Encouraging investment and entrepreneurship requires a strong insolvency framework. By boosting trust among lenders
and investors, the IBC sought
to improve the business climate.
5.
Company Rescue and rebirth:
The IBC placed more emphasis
on company rescue and rebirth than on the quick liquidation of viable enterprises in trouble.The purpose
of the Corporate Insolvency
Resolution Process (CIRP) is to
assist bankrupt enterprises with their reorganization and turnaround.
6.
International Best
Practices: The United Nations Commission on International Trade Law (UNCITRAL) guidelines and other international best practices in insolvency and bankruptcy legislation had an impact on the IBC. The objective was to harmonize India's bankruptcy system with international norms, so increasing its appeal for international investments and transactions.
7.
Stimulating the Economy: The general
health of the economy depends on an efficient insolvency
system.
The IBC attempted
to enhance credit flow, promote
economic growth, and lessen the burden of non-performing assets (NPAs) on banks.
8.
Legal Predictability and Certainty: The IBC sought to give all parties
participating in insolvency procedures a legal framework that is predictable and certain.
It aimed to reduce the
amount of latitude and
capriciousness in the settlement procedure.
9.
Debtor-in-Possession to Creditor-in- Control: The IBC signified a change in paradigm
from the debtor-in-possession to the creditor-in-control framework.
In
the insolvency process, creditors were granted
greater authority and influence, with
the Committee of Creditors (CoC) serving as a key player.
10. Reduction of Non-Performing Assets
and Bad Loans: Non-performing assets (NPAs) and bad loans
were a major issue for the banking
sector in India.
By offering a systematic process
for resolving stressed assets and lessening
the load on banks, the IBC sought to solve
this problem.
Impact of the IBC: Since its implementation, India's
insolvency situation has significantly improved.
It has made it easier to resolve bankruptcy cases more quickly,
increased creditor recovery
rates, and encouraged responsible lending and borrowing.
Global investors
have also shown interest
in the IBC because they believe India has a more effective and predictable insolvency
system.
In conclusion, the Insolvency and Bankruptcy Code (IBC) was implemented in India in order to improve creditor
rights and protection,
encourage investment and entrepreneurship, harmonize
with international best practices, boost the country's
economy, and lessen non-performing assets (NPAs) and bad loans in the banking industry.
Its influence on enhancing
the general business climate and promoting
a culture of fiscal responsibility has been substantial.
II
COMPARISON WITH OTHER COUNTRIES
While understanding Insolvency and Bankruptcy Code ,it crucial
and imperative to compare it with similar
laws of other countries.
I chose 3 countries as they are financial capitals. They are U S A , Singapore and The U K.
A
lot of aspects are common between Indian
Insolvency and Bankruptcy Code and
main system of laws in the United Kingdom. British
System also allows borrowers and lenders to start the process
of insolvency resolution . Just like Indian Insolvency and Bankruptcy Code , the British laws also have a time bound procedure to deal with insolvent and bankrupt debtors. Indian system and British
system have a regulator that deals
with various aspects . In India , the regulator is the Insolvency and Bankruptcy Board of India (IBBI). British
system has regulators like ICAEW which
makes sure the laws is implemented correctly
without any violation.
Just
like the Indian system focuses on revival and not liquidation of the company,
there was a pivotal change after the Corona virus pandemic. Initially
the British system favored creditors/ lenders/ financial
institutions. However in 2020 Corona Virus Pandemic
started. The approach
changed
from favoring creditors
to favoring borrowers. In 2020 British
had Corporate Insolvency and Governance Act. The new regime allows debtors to be in control of the business even after filing
for bankruptcy.
This is somewhat similar
to the system of United
States of America. This helps the
debtors time to change their business plan
and prepare a strategy to come out of
bankruptcy. However a professional who
is expert in the field is appointed to oversee
the working and management of the debt ridden company.
The British system also has a system of moratorium in which no legal proceedings an be made against the debtors.
This again gives time to debtors
to prepare a new strategy
to deal with insolvency and bankruptcy.
Indian Insolvency and Bankruptcy Regime has a committee of creditors that vote on resolution plan. Similarly , British
Regime has provisions that a restructuring plan has to be approved by all the classes of creditors .Additionally the court can enforce a restructuring plan even if some creditors don’t agree on the plan.This can be done to ensure there is equity an justice
in the insolvency proceedings. Similar
provisions also exist in India.In
India there are two types of creditors
- financial and operational creditors. If financial creditors
vote with a two - third majority on
any resolution plan , then the operational creditors have to abide by the plan. This is subject to the condition
that equity\ and justice prevails.
Insolvency and Bankruptcy in the United
States of America-
The
main principle is debtor has right of possession rule.
In
the Indian system focus is on revival and not liquidation of the company.
American
system also allows the debtors to be in control of the business even
after filing for bankruptcy. This is somewhat similar to the system of British Regime
. This helps the debtors
time to change
their business plan and prepare
a strategy to come out of bankruptcy. However a professional who is
expert in the field is appointed to oversee the working and management of the debt ridden company.
The British system
also has a system of moratorium in which no legal proceedings an be made
against the debtors.
This again gives
time to debtors to prepare
a new strategy to deal with insolvency and bankruptcy.
This
is based on Chapter 7 and Chapter 11 of Bankruptcy Code of the United Stats of
America. Another
interesting aspect is the priority
of creditor’s rule just like Indian Insolvency
and
Bankruptcy Code. The priority rule gives
preference to the secured creditors above the unsecured creditors.Another similar concept is moratarium. The Ameican system also has a system of moratorium in which no legal proceedings an be made against the debtors.
This again gives time to debtors to prepare
a new strategy to deal
with insolvency and bankruptcy.Moratorium comes into effect
when an application is
filed / intiated for insolvency or bankruptcy.
One major
difference is there between the Indian Regime of Insolvency and Bankruptcy Code and the United States
of American regime.
The difference is that Indian regime of Insolvency and Bankruptcy Code gives priority
and importance to creditors. United States of America’s regime give priority to borrowers.In the United States of America’s regime the focus is on restructuring of the ailing corporation under Chapter 11 of the Bankruptcy Code.
If due to a lot of excessive
debt/
bad performance of the company,
the restructuring of the debt ridden corporate
fails Chapter 7 and Chapter 11 of the Bankruptcy Code comes into
effect.The management of the debt ridden
company falls into the hand of the Trustee. The trustee is appointed by the creditors or the government. The borrower remains
in possession of the properties .
In Indian Regime of Insolvency and Bankruptcy Code, the Interim Professional or the Resolution Professional has the right to enter into contract / transfer / only after consent of committee of creditors.In the United States
of America’s regime
the debtor has the right over the contracts/ suits/
property just like before initiation of
insolvency or bankruptcy proceedings.
III
Impact
on economy
A country’s
laws impact its economic an financial growth. Having a sound legal system and judicial
mechanism plays a pivotal
role in its economic development. It also helps the citizens and helps in improving investor confidence. One example
is the recent case of cross border insolvency of Jet Airways.It helped in including
a foreign creditor
in the committee of creditors while
resolving insolvency of Jet Airways.
The
Indian Insolvency and Bankruptcy Code can be called as a landmark legislation after Goods and Services Tax. It not only helped in improving
stability of India's economy and
financial system but also helped in improving investor
confidence in Indian Economy.
India has improved its ease of doing business
ranking from 143 in 2014 to 62
in 2023.
It
has also improved India’s FDI from
45 billion to over 70 billion. India has also become a manufacturing hub with
new businesses investing and setting up plants in India.
Not only businesses and investors but the
financial institutions and borrowers are more confident. The Indian Insolvency and Bankruptcy Code has provisions for timely resolution of insolvency , voting of committee of creditors , transparent sharing
data on Information Utilities etc.
This
improved confidence has improved lending
and also decreased NPAs. The NPAs
which were above 14% in 2017 have now reduced to less
than 4%.
The main focus of Insolvency and Bankruptcy Code is on revival and making
sure the borrower is again able to work financially and economically. That is why first priority
is given to revive
and not to sell off the company vide liquidation.Only if Committee
of
creditors is not able to approve the resolution
plan or the National Company Law
Tribunal decide not to implement the resolution plan , the liquidator is appointed.
The Liquidator is responsible for
selling off the company’s assets and pay the creditors.
The
creditors are paid off in the order mentioned
in Section 53. The priority is as follows
- workman's dues then secured
creditor then wages of employees working in the corporate then unsecured creditors then dues to the Government(this
includes both
central
and state government) then those who
are preference shareholders and in the end partners or normal equity shareholders.
If
we look at the data and do a statistical analysis
, we may find that Insolvency and
Bankruptcy Code is successful.The Indian
Insolvency and Bankruptcy Code has
successfully helped in ending 72% cases initiated
. After its inception in 2016 the Indian Insolvency and Bankruptcy Code majority of the cases
were resolved by giving a revival resolution plan or by liquidation. Interestingly majority or more than half of them
had to result in liquidation of the
debt ridden corporate debtor. said the Financial Stability
Report by the Reserve Bank of India.
Reserve Bank of India came out with Financial Stability Report . It highlighted important data on liquidation / restructuring / revival of companies. Recent
data is of
2023. Till 2023 more than 6500 insolvency proceedings have been initiated either by debtors themselves or creditors. Around 4500 have been resolved.
Looking
at closely at more details, 800 cases
or 20% were resolved after appeal. This shows appeal is not used in majority
of cases. 900 cases were resolved through
simply approval of resolution plan by the committee of creditors.
on 750 cases were withdrawn as the
parties did not feel the need to continue due to
payment of dues by
the borrowers. Close
to 2500 cases
resulted in Liquidation of the company as the resolution plan failed to revive the company
or was not approved by the committee of creditors. In liquidation the assets of the company are sold and proceeds are given to the creditors in the order
specified in section 53.
Although the time prescribed by Indian Insolvency and Bankruptcy Code is 180 days and an extension of 90 days the data says it took very long to resolve
the insolvency of debt ridden
debtors.
The time taken to resolve
insolvency in entire Corporate Insolvency Resolution Process
was more than 500 days.Close to 2500 cases resulted in Liquidation of the company
as the resolution plan failed
to revive the company or was not approved by the committee
of creditors. In such cases it took more than 450 days on an average to
liquidate the company.
Similarly, Voluntary liquidation under Section 59
provisions took around 400 days for
liquidation.Voluntaryliquidation
enables the company itself to go
for liquidation. Although the time
prescribed by Indian Insolvency and
Bankruptcy Code is 180 days and an extension
of 90 days the data says it took very long to resolve
the insolvency of debt ridden
debtors. This just proves there are
long delays even with specialized Insolvency Professionals /liquidators and a specialized tribunal.
Another major problem is that investors
are not confident if there are serious
problems with the debt ridden corporate. If there is a long history of defaults /
non performing asset/ wilful default , investors wont buy the corporate debtor
facing liquidation. This makes the whole
implementation of the Indian Insolvency and Bankruptcy Code complex and unpredictable.
We review the information carefully. We look at returns
and collections data
from 2019 to 2013. The return rate goes from 45% to 30%. At the same time, the resolution time in days increased from 300 days to 650 days. This comes from CRISIL's report on Indian Insolvency and Bankruptcy Law after seven years of investigation.
The power of the
judiciary is limited and recognition
of crimes is suspended. Also there was a significant delay in the IBC pre-approval phase (from 450 days for FY2019 to 650 days for FY2022)
limited the rate of return.
This
led to a decline in assets and good returns
in the insolvency and bankruptcy code .Some amendments have been made made to Insolvency and bankruptcy
code over the last 12 months to improve
performance. Three main changes are approving separate
asset sale/resolution,
increasing the number of seats in the National
Company Law
Tribunal to 16 and extending
the deadline for filing
nominations.
Additionally, sector-specific amendments, provision
for audit of corporate debtor,
and modifications in Form-G2
will also improve the process. These amendments and their effective
implementation can reduce resolution times and backlog of cases over the near to medium term, it
said.
In addition, regional
reforms, credit bureau audit rules and reform of the G2 form will also improve the process. He said these reforms
and their effective
implementation can reduce resolution times and operational delays in the short to medium term.
Improving infrastructure, including expanding
the ability of judges to obtain more information, digitizing the IBC platform
to connect all stakeholders to reliably eliminate
unnecessary information, and expanding solutions
before to condition the activities of large companies in order to avoid price erosion
over time
Actions using this method will help eliminate the backlog of 13,000 patients stuck at different
stages of the IBC solution.
CRISIL said that since its inception in 2016, IBC has improved the lending culture
in India by addressing major non-performing
assets with better rates of return compared
to earlier standards such as the Court of Appeal, SARFAESI Act and Lok Adalat. What is important, is that relevant
features have been installed to ensure that large bad loans are tested before they reach the IBC portal.
In terms of value, IBC has helped settle
?3.16
lakh crore of outstanding debts in 808 cases over the last seven
years.
On average, lenders experience 30% of applicant approvals and 170% of referral fees.
The average
rate of return for other methods ranges upto 20%, indicating
that IBC is the method providing the highest rate of return for borrowers.
The insolvency and bankruptcy code most important
law in the finance industry
in India and has brought
changes in the lending industry. The fear of losing the business
led to the settlement of over ?9 crore of debts before the matter reached
the IBC’s doorstep.
The
NPA has profound and worldwide concerns
for all nations. However, it is highly dubious
to what extent this concern
is relevant for a developing nation like India.
Without the prosperity and modernization
of the Indian banking and financial sector,
the financial reforms
that the Indian government has embarked upon in response
to the difficulties posed by the global economy cannot be realized.
The NPA's concern
for all countries is very deep and
global. However, for a developing country like India, the extent
of this concern is very doubtful. The financial reforms undertaken by the Indian
government to respond
to the challenges of the global
economy cannot be achieved
without the success
and modernization of the Indian banking and financial sector.
Business
loans past due for more than 90 days and consumer loans past due for more than 180 days are the two categories of non-performing assets (NPAs).
The
NPA problem continues to worsen, threatening the survival of banks, reducing profits and affecting
the economy as a whole. Non-performing assets refer to the inability to generate income and
interest.
Business
loans past due for more than 90 days and consumer loans past due for more than 180 days are the two
categories of non-performing assets (NPAs).
The following
categories apply to the bank's
non-performing assets (NPAs):
The sum of all the NPAs that are shown
on a given day is known as the gross NPA.
The gross non-performing assets comprise all potentially inferior,
questionable, or lost assets.
Net
NPA: The entire amount of assets that the bank has set aside, or non- performing
assets (NPAs). It is the true burden
of a bank. What separates Gross NPA from Net
NPA is covered by the bank's provisions.
According to Section
5(b) of the Banking Act,
1949, a “bank” means an institution
accepting deposits
from the public,
repayable on demand and drawn by check, for the purpose of lending or investment. , letter, order
or other.
IV
Analysis
of Recoveries by banks
IBC
yields continued to decline. Banks have received
60% reductions in 348 cases resolved so far.
Between January
and March 2021, 29 pending
cases were resolved
with borrowers recovering Rs
4,600 crore out of a total claim of
Rs 17,389 crore from bankers.
Banks are now
facing a total reduction of 60% in all Insolvency and Bankruptcy Code (IBC) resolutions from March 31, 2021.
Banks and other financial
institutions have recovered a total of Rs 2 billion from 348 bankruptcies as of March 31, 2021, according to data released by the Insolvency and Bankruptcy Board of India (IBBI). The total amount claimed by the bank in this case is Rs 5.16 lakh crore.
Experts continued
to express concerns
about liquidity and declining returns
during the insolvency process. Prior to the implementation of IBC, the average rate of return for investors in previous financial
solutions was 26%, and the average
time taken for the deal to close is four years.
Between January
and March 2021, 29 pending
cases were resolved
with borrowers recovering Rs
4,600 crore out of a total claim of
Rs 17,389 crore from bankers. The rate of return for the quarter
was only 26.41%.
During the same quarter, 149 companies
were ordered into liquidation for non-
compliance with the resolution plan. Of
the 4,376 companies currently in bankruptcy proceedings, 1,277 have been
closed.
This year marks the fifth anniversary of the founding of
IBC. Despite all the amendments and landmark judgments passed by various courts to resolve the contentious issues, delays and poor recoveries continue
to blight the entire IBC regime. The average time needed to resolve a case is 459 days, much longer
than the stipulated 330 days.
However,
one of the advantages of IBC
is that the fear of losing control of the company forces many promoters to sort out their issues with creditors
even before filing
an application with the NCLT. For example, 17,305 petitions
for initiation of criminal cases against illegal
companies with a default value of Rs 533 lakh crore were disposed of even before
they were approved.
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Article Information
CRITICAL ANALYSIS OF THE IMPACT OF INSOLVENCY AND BANKRUPTCY CODE ON INDIAN ECONOMY
Authors: VARUN VARMA, DR. MEENU GUPTA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/26
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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