UPSC Exam Preparation: Topic of the Day – Insolvency and Bankruptcy Code UPSC/Insolvency and Bankruptcy Code IAS
The Insolvency and Bankruptcy Code, 2016 is a major economic reform next only to the adoption of Goods and Services Tax in India. The act came into force from December 2016. This move is aimed at consolidating the existing laws related to the insolvency of partnerships with unlimited liability, entities with limited liabilities (including limited liability partnerships), and individuals into a single legislation in order to rule out the ambiguity in the insolvency resolution process. The law also contains cross border insolvency provisions.
Procedure for Insolvency resolution under the Insolvency and Bankruptcy Code:
The creditors (financial/operational) are required to submit a plea for insolvency to the adjudicating authority (National Company Law Tribunal in case of corporate). The plea has to be accepted/rejected within 14 days from the filing of the plea. In case of acceptance of the plea, an Insolvency Resolution Professional (IRP) is appointed. The IRP has to draft an insolvency resolution plan within 180 days (can be extended by 90 days in exceptional cases) while the board of directors of the company remain suspended and the promoters do not have a say in the management. However, the IRP is allowed to seek help from the board of directors in carrying on the day to day activities of the business. If the resolution plan is accepted by 75% of the creditors, it will be put into action. In case of rejection of the insolvency resolution plan, the company will be liquidated.
Insolvency and Bankruptcy Code is a systematic and comprehensive reform, the benefits of which are manifold.
- The implementation of this huge economic reform is going to help India increase its Ease of doing business quotient.
- It would help the country shift from one among relatively weak insolvency regimes to one of the world’s best insolvency regimes.
- It would help in the development of bond markets which are the source of finance to many future infrastructure development projects.
- It would encourage innovation and entrepreneurship due to the ease of doing business.
- It would make India a favourable destination for investment, thereby giving boost to the FDI inflow.
- Since it is a single legislation, there would be a greater clarity in application of coherent and clear provisions to various stakeholders.
- One of the solutions to reduce the increasing Non Performing Assets (NPAs) plaguing the banks’ Balance Sheets.
- It would enable a better flow of capital in the economy.
- The law would ensure easy and hassle free exit of sick companies.
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