Before IBC, there used to be feudalism with debtor in control: CEA K Subramanian

Krishnamurthy Subramanian.

Before the Insolvency and Bankruptcy Code (IBC) was implemented, there used to be feudalism, Chief Economic Advisor Krishnamurthy Subramanian said during a virtual event organised by the Confederation of Indian Industry (CII).

"Before IBC, there used to be this feudalism, where the corporate debtor took it to be his or her divine right to be in control," said CEA Subramanian. 

"But I think the very good thing that I've actually observed now is that there is a very clear recognition that those days are gone, that you know, that feudalism actually is something that ain't coming back," he added.

Commenting on his early research of the bankruptcy laws in the US, Subramanian noted that the move away from feudalism is a hard-fought battle as the earlier system enabled those in the status quo to continue benefitting from it.

"And therefore that ground had to be slowly but surely taken away," Subramanian remarked.

Commenting on sub-optimal equilibrium in the context of IBC mechanism, Subramanian said, "Systems, whether it's IBC or other systems can be caught in inefficient equilibria when each agent justifies his or her suboptimal actions, by saying that other entities are actually behaving sub optimally, and therefore, I am behaving sub optimally." 

The  Insolvency and Bankruptcy Code, 2016 was introduced in May 2016 to resolve claims involving insolvent companies.

It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must take decisions to resolve insolvency. Under IBC debtor and creditor both can start 'recovery' proceedings against each other.

IBC applies to companies, partnerships and individuals wherein the entity has to complete the entire insolvency exercise within 180 days.

Recently during the monsoon session of Parliament, Insolvency and Bankruptcy Code (Amendment) Bill 2021 was passed.

On April 4 this year, the government amended the insolvency law (Insolvency and Bankruptcy Code 2016) by bringing in an ordinance that provides for a pre-packaged resolution process for micro, small and medium enterprises when Parliament is not in session.

The pre-pack is an informal way of providing a corporate rescue plan for which a seal of approval from a tribunal (National Company Law Tribunal NCLT) will be sought after a resolution plan is arrived at.