Context: Supreme Court has upheld the Insolvency & Bankruptcy Code’s constitutional validity in its ‘entirety’, and rejected petitions challenging the bankruptcy laws, in a major setback to defaulting promoters hoping for a chance to remain in control of their firms.

Know about the IBC:

The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses.

• The code applies to companies and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period.
• The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The Code creates various institutions to facilitate resolution of insolvency. These are as follows:

Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.

Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.

Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.  The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

Salient features of the Insolvency and Bankruptcy Code- how it work?

1. The Insolvency and Bankruptcy Code 2016 is a comprehensive law and covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
2. The adjudicating authority is National Company Law Tribunal (NCLT) for companies and LLPs and Debt Recovery Tribunal (DRT) for individuals and partnership firms.
3. The insolvency resolution process can be initiated by any of the stakeholders of the firm: firm/ debtors/ creditors/ employees.
4. If the adjudicating authority accepts, an Insolvency resolution professional or IP is appointed.
5. The power of the management and the board of the firm is transferred to the committee of creditors (CoC). They act through the IP.
6. The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
7. If they decide to revive, they have to find someone willing to buy the firm.
8. The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
9. They invite open bids from the interested parties to buy the firm.
10. They choose the party with the best resolution plan, that is acceptable to the majority of the creditors (75 % in CoC), to take over the management of the firm.

Significance of the SC’s latest judgment:

The endorsement of the law and its provisions by the Supreme Court would come as a boost to the government which pushed for a modern bankruptcy law in the first half of its term and managed to get an exit mechanism which would help the reallocation of capital and ease the huge debt burden of banks in India.

In the working of the code, the flow of resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid, the Supreme Court said.

Crucially, the judgement upheld Section 29A of the code. The section specifies a broad range of criteria that would disqualify potential bidders from bidding for assets undergoing the corporate insolvency resolution process and, among other things, bars promoters of a company facing insolvency proceedings from bidding to regain its control.

Performance of IBC:

It has been an effective tool for creditors, with a threat to refer a case under the insolvency law helping force many debtors to come to the negotiating table and reinforcing what former RBI Governor, Raghuram Rajan, had famously said about promoters having no divine right. A measure of the success of this law will be a rising graph of cases of corporate debtors being resolved.

Challenges present and measures to address them:

The major worry of the law now is the failure in many cases to stick to the prescribed timeline of 180 to 270 days to firm up a resolution plan with elaborate hearings at NCLT benches. Such delay goes against the very raison d’étre of the law which is to ensure a swift resolution or closure and thus lower the risk for banks and the government arising from a rising pile of bad debts and the subsequent need to recapitalise state-owned lenders.

It is important that these timelines are adhered to. Over time, the NCLT may be better tuned to these kind of summary proceedings with capacity building and training of professionals.

Way ahead:

With the Supreme Court now upholding the law barring promoters of defaulting companies from buying back the stressed assets, we can perhaps look to quicker resolutions of bad debts. This is no small matter given that Indian banks have among the world’s lost ratios when it comes to non-performing assets or bad loans, and the twin balance sheet problem— where there is stress on both the lenders’ and borrowers’ books—is one of the biggest elephants in the room.

The Supreme Court’s ruling, then, is a welcome one that should circumvent efforts by vested interests to try and stymie the revival of debt-laden companies, and will go a long way in enhancing India’s stature as a good place to do business in.