Insolvency and Bankruptcy Code (Amendment) Bill, 2020: RSTV- Big Picture

Rajya Sabha TV programs like ‘The Big Picture’, ‘In Depth’ and ‘India’s World’ are informative programs that are important for UPSC preparation. In this article, you can read about the discussions held in the ‘Big Picture’ episode on “Insolvency and Bankruptcy Code (Amendment) Bill, 2020” for the IAS exam.

Insolvency and Bankruptcy Code (Amendment) Bill, 2020: RSTV – Big Picture:- Download PDF Here

Anchor: Frank Rausan Pereira

Guests: Chakshu Roy, Head of Outreach, PRS Legislative Research; AK Bhattacharya, Editorial Director, Business Standard; Dr. Subhash Chandra Pandey,  Financial Adviser, Ministry of Commerce and Industry.

What’s in the News?

• Parliament had passed amendments to the insolvency law that will help safeguard successful bidders of insolvent companies from the risk of criminal proceedings for offenses committed by previous promoters. 
• The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by voice vote in Rajya Sabha. It was approved by Lok Sabha on March 6. 
• The Bill replaces an ordinance. 
  • Replying to a short debate on the bill, Finance Minister Nirmala Sitharaman said amendments are in sync with the time and also adhere to a Supreme Court order in “letter and spirit”. 
• The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process. 
  • It aims to provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. The latest changes pertain to various sections of the IBC as well as the introduction of a new section.
• The adjudicating authority is the National Company Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunal (DRT) for individuals and partnership firms.

What are the new amendments to the IBC?

• It establishes a threshold on the basis of which a creditor could initiate an insolvency resolution process against a company if a company defaults on its payments.
  • It introduces an additional threshold for certain classes of financial creditors, including allottees of real estate projects, for initiating the resolution process.
• Earlier, homebuyers were also recognized as financial creditors under the IBC, individual homebuyers could initiate insolvency against a real estate company for delays in possession.
  • However, the new amendment requires a minimum of 10 percent of allottees or 100 individual allottees in a real estate project to initiate insolvency proceedings for real estate projects.
• The second amendment empowers the resolution professional to require suppliers to continue providing goods and services.
• In order to balance the rights of the suppliers, it provides that MSME suppliers have to continue supplying only if their current dues are paid.
• The Bill also amends the Code the effect that a license, permit, registration, quota, concession, clearances or a similar grant or right will now not be terminated or suspended during the Moratorium period.
• The amendments also provide that the company will not be liable for any offense committed prior to the insolvency resolution process if there is a change in the management of the company.
• The Bill further clarifies that a corporate debtor should not be prevented from filing an application for the initiation of corporate insolvency resolution process against other corporate debtors.

How are the new amendments going to be beneficial?

• There is a liquidity problem across the system and the new amendments seem to create a balance between the creditors and the corporate debtor.
• In the case of defaults by real estate developers, the insolvency resolution application should be filed jointly by at least 100 homebuyers or 10% of their total number. This has been included to avoid frivolous litigations.
• Immunity is provided to the new promoter of the company against all legal complications committed by the previous promoter.
  • However, this does not apply to the new promoters of the company who are related to the old promoters.
• The interest of all parties- lenders, borrowers, and even operational creditors is now addressed under a unified law under the IBC. This would address the concerns of many stressed assets.
• The new amendments have also introduced a provision that would allow the resolution process to take effect only when a resolution professional has been appointed, thereby reducing the weeks of uncertainty.

How has the IBC evolved over the past few years?

• The evidence for the benefits reaped due to the evolution of IBC is evident from the RBI report which indicated that the gross NPA of all scheduled commercial banks has come down from 11.2% to 9.2% from 2017-18 to 2018-19.
• IBC has also been responsible for the resolution of more than 4452 cases, which were dismissed at the pre-admission stage. This indicates the efficiency of the IBC. 
• The banks have recovered Rs 5.28 lakh crore in 2017-18, which is significantly higher than that of 2016-17.
• IBC has also played a pivotal role in paving a path for the struggling companies to ‘exit’ easily allowing creditors to take the company to the NCLT for winding up.
• This law also makes an important addition to the IBC in paving the way and providing resolution for financial service providers.
  • The NBFCs of asset size (over 500 crores rupees only) were brought under the ambit of IBC a few months back. 

Assets, Banking sector, and the IBC

• The IBC has helped normalize the trend of insolvency in assets and other sectors of the economy by keeping a strict check on it.
• There are a large number of cases that do not even undergo the insolvency process, as the creditors and debtors manage to chalk out a plan amongst themselves the moment there is a possibility of those cases being referred to the IBC.
• The IBC has given more teeth to lenders and has changed the credit behavior of borrowers. Now, there is a heartening trend of defaulters paying up dues before the case is admitted for insolvency under IBC.

Issues:

• In other countries, additional safeguards are available which include the right to seek a payment guarantee, and court-granted permission to terminate the contract in cases where the supplier demonstrates that continuation will cause hardship. However, this is not included in the amended bill.
• Lack of transparency for the individual homebuyers which proves tricky as their rights will also be restricted with the law. Thus converting an individual right into a cross-section.
• Cross border insolvency framework has not been included in the amendment.

Way Forward:

• The interests of the individual creditors should be balanced along with that of the corporate debtors.
• A constant monitoring system of how the resolution field is, and then providing evidence-based feedback to the legislative system would enhance the efficiency of the entire system. 
• In cases of large corporate debtors, the case would be assigned to a competent board of directors whose powers superseded that of the management. This, however, does not occur in the cases of manufacturing companies. Hence, a similar strategy should be followed. The insolvency resolution professional should supersede the existing board of management without necessarily having an equally competent board of directors.
• The judgment of the efficacy of law must be done generously during a time of economic slowdown, due to the current events, as a law of this nature would also go through a period of turmoil.

Conclusion:

It is the amendments that aid IBC in its objective of bringing about a balance between the interests of the creditors and the debtors while protecting the rights of individuals too. It is an ongoing and continuously evolving process that would have to be implemented stringently to make it more robust. The current amendments address the weaknesses and flaws which re-surfaced when the law was under implementation.

Insolvency and Bankruptcy Code (Amendment) Bill, 2020: RSTV – Big Picture:- Download PDF Here

Read previous RSTV articles here.