INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016

07.11.2023

INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016 , Daily Current Affairs , RACE IAS : Best IAS Coaching in Lucknow 

Why in the news?

Recently, the Union government exempted aircraft leases from the IBC moratorium that prohibits the repossession of any leased assets of a company undergoing insolvency process.

Key facts

• In June 2023, the government exempted licences and leases relating to oilfields from the purview of the moratorium.
• Now, the exemption of leased aircraft .
• This was a discharge of an obligation under the Cape Town Convention (CTC), which India acceded to in March 2008.
• Reportedly, this move would reduce leasing costs for Indian carriers by about $1.3 billion.

ABOUT IBC:

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• The bankruptcy legislation seeks to address the issues faced currently in the context of insolvency and winding up.
• The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).
• The legislation will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism.

Insolvency and Bankruptcy Code - Objectives

• All existing insolvency laws in India should be consolidated and amended.
• Insolvency and bankruptcy proceedings in India should be made simpler and faster.
• To safeguard the interests of creditors, including firm stakeholders.
• To resurrect the business in a timely manner.
• To encourage people to start businesses.
• To provide creditors with the required relief and, as a result, enhance the credit supply in the economy.
• To devise a new and timely recovery technique that banks, financial institutions, and individuals can use.
• To establish an Indian Insolvency and Bankruptcy Board.
• Maximization of the value of a corporation's assets.

Insolvency and Bankruptcy Code (Amendment Bill), 2021

• The Insolvency and Bankruptcy Code (Amendment Bill), 2021 introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
• The Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
• A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
• CIRP is a time taking resolution and one of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.
• The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.
• Distressed Corporate Debtors (CDs) [a corporate person who owes debt to any other person] are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.

Insolvency and Bankruptcy Code - Benefits

Faster Resolution: As of December 2020, over 86 percent of current bankruptcy resolution processes had passed the 270-day mark.

The PPIR procedure, on the other hand, is limited to a maximum of 120 days. Furthermore, the stakeholders have only 90 days to submit a settlement plan before the NCLT.

Greater Debtor Autonomy: In the event of pre-packs, the present management retains authority. A resolution professional, on the other hand, assumes control of the debtor as a representative of financial creditors. For the debtor, this leads to a cost-effective and value-maximizing solution.

Prevents errant promoters from abusing the system: The PPIR offers financial creditors strong consent rights. For example, before submitting a resolution plan, it must have approval from at least 66 percent of financial creditors. This prohibits financial creditors from abusing the system.

A fair resolution: The amendment ensures that both debtors and creditors have a role in the resolution process. This is a departure from the previous strategy. Because the IBC 2016 places an overabundance of emphasis on creditors in the settlement.

Prevents job losses: PPIR reduces the likelihood of liquidation. As a result, company continuity is ensured, and worker layoffs are reduced.