Govt forms panel to review insolvency and bankruptcy code

Context:

The government has set up a 14-member committee to review and improve the implementation of the insolvency and bankruptcy code (IBC) a year after it came into being.

Composition of Committee:

  • The committee, led by the secretary at the ministry of corporate affairs -currently I. Srinivas.
  • Insolvency & Bankruptcy Board of India chairman (IBBI) M.S. Sahoo
  • Representatives from the Reserve Bank of India and the department of financial services and other experts

Significance:

The committee will look into issues that impact the efficiency of the corporate insolvency resolution and the liquidation framework and also prescribe recommendations to improve the functioning of the code.

The committee will look at some of the key issues that threaten to slowdown the implementation of the code

About insolvency and bankruptcy code:

Basic terms

  • Insolvencyrefers to a situation where any person or a body corporate is unable to fulfill its financial obligations (often occurring due to several factors such as a decrease in cash flow, losses and other related issues).
  • Bankruptcyon the other hand is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.

What is the Objective of this code?

  • To make the process of shutting down and exiting a business easier and less time-consuming.
  • The code aims at reducing the time period of resolve the bankruptcy from four years (as stated by World Bank) to within one year.

What are the salient features of the code?

  • Insolvency and bankruptcy board of India: It will be the overall regulator for insolvency and bankruptcy.
  • Insolvency professionals: Insolvency professionals would handle the commercial aspects of the resolution process. They would be trained and regulated by insolvency professional agencies.
  • Adjudicating authorities: Debt recovery tribunal: it will act as adjudicating authority for individuals and unlimited partnership firms. National company law tribunal: it will act as adjudicating authority for companies and limited liability entities.
  • Committee of creditors: If a firm defaults on its debt then its control will be shifted to a committee of creditors.
  • In the next 180 days, this committee will evaluate proposals from various parties on enabling liquidation or resuscitating the company.

 What is the significance of this code? The code if implemented properly as various benefits:

  • Firstly it will help the companies in exiting a business.
  • Secondly, it will improve India’s ranking on ease of doing business index, which is currently ranked at 130 out of 189 countries. India is also ranked at 136thon the parameter of ‘resolving insolvency’.

What is the progress report on implementation of this code?

  • Insolvency and bankruptcy board has been created. Public sector has also taken steps to implement the code. But, the progress on other aspects like creating insolvency professionals and insolvency professional agencies have been minimal.
  • Also the private sector is yet to participate in it. It is because many private companies are plagued by non-performing assets issues. They can be wound up only after their assets are rationalized through the NPA-linked initiatives taken by the reserve bank of India.

Critics of New Code

  • Time-bound insolvency resolution will require establishment of several new institutional mechanisms. The current capacity of debt recovery tribunals may be inadequate to take the additional role.
  • IPAs, regulated by the Board, will be created for regulating the functioning of IPs. This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating professionals.
  • The Code creates an Insolvency and Bankruptcy Fund. However, it does not specify the manner of usage of the fund. The priority being given to secured creditors relinquishing security needs specific attention, especially on account of the same having the potential to be misused, especially if the debtor and the secured creditor can collide and impair the collateral.
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