Recasting insolvency resolution

Context: The Insolvency and Bankruptcy Code, 2016 (IBC) is one of India’s most significant
economic reforms, introduced to address the challenges of insolvency resolution
in a structured and time-bound manner. At the time of its introduction, the IBC
was seen as an important tool that would help India’s standing in the business
world and bring bad borrowers and big defaulters to book. Yet, as the law
matured, certain issues have cropped up that demand attention, particularly
regarding institutional capacity and procedural efficiency.

Key points

·       Overview: The recent
Supreme Court of India judgment in Jet Airways (State Bank of India & Ors.
vs The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr.)
has laid bare the many structural infirmities that are plaguing India’s
insolvency regime.

·       Insolvency
and Bankruptcy Code 2016 (IBC 2016): Insolvency and Bankruptcy
Code is a legislation enacted in 2016 based on the ‘T.K Vishwanathan Committee
Report’. It consolidates various laws pertaining to the resolution of
insolvency of businesses and firms. It establishes streamlined and expedited
insolvency procedures to assist creditors, such as banks, in recovering dues
and mitigating bad loans, which are a significant burden on the economy. It is
also known as the exit law of India.

Ø  Insolvency - Insolvency
refers to a situation where individuals or companies cannot repay back their
outstanding debt obligations.

Ø  Bankruptcy - Bankruptcy
refers to a legal status declared by a court of competent jurisdiction for a
person or entity that is insolvent i.e. unable to pay off debts.

·       Insolvency
and Bankruptcy (Amendment) Act, 2021: The Insolvency and
Bankruptcy (Amendment) Act, 2021 introduced an alternate insolvency resolution
process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to ₹1
crore called the Pre-packaged Insolvency Resolution Process (PIRP).

·       Some
achievements of Insolvency and Bankruptcy Code: Improved Legal Provision
- Insolvency and Bankruptcy Code (IBC Code) is a vast improvement on the
two earlier laws for recovering bad loans.

Ease of Doing
Business (EoDB) - Post introduction of the Insolvency and Bankruptcy
Code (IBC Code), many business entities can be seen paying up front before
being declared insolvent. Moreover, many cases have been resolved even before
it was referred to NCLT.

·       Challenges: Lack of
operational NCLT benches - Most of the single and division benches of NCLT
remain non-operational or partly operational on account of a lack of adequate
support staff and proper infrastructure.

Low approval
rate of resolution plans - As per the Insolvency and Bankruptcy Board of
India’s data, only 60% of the cases have been closed, and most of the cases
have been closed through liquidation, only a few cases have been closed due to
resolution.

·       Conclusion: The Insolvency
and Bankruptcy Code (IBC) has led to significance improvements in India’s
insolvency landscape, providing a robust framework for the resolution of
distressed assets. By fostering a culture of credit discipline, promoting
entrepreneurial ventures, and ensuring the efficient use of resources, it has
set the stage for a more resilient and dynamic economy. Ongoing efforts to
refine and strengthen the code will be crucial for managing the complexities of
insolvency and bankruptcy in the future.