The Code, which has undergone several amendments, creates time-bound processes for insolvency resolution of companies/individuals
Galvanised by criticism over mounting bad loans and high default rates by large companies, India brought the Insolvency and Bankruptcy Code (IBC) in 2016, a modern and contemporary bankruptcy law.
The Code, which has undergone several amendments, creates time-bound processes for insolvency resolution of companies and individuals.
These processes are completed within 180 days, extendable up to 270 days. If insolvency cannot be resolved, the assets of the borrowers are allowed to be sold to repay creditors.
The resolution processes are conducted by licensed insolvency professionals (IPs). These IPs are members of insolvency professional agencies (IPAs), who also furnish performance bonds equal to the assets of a company under insolvency resolution.
Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
The National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies. The Insolvency and Bankruptcy Board of India has also been set up to regulate functioning of IPs, IPAs and IUs.
The code has undergone many changes, including the challenge to the validity of Section 29A of the IBC Act, which bars promoters from bidding for their own stressed assets.
Among the top 12 defaulters, banks have managed to recover only Rs 43,270 crore from the sale of four assets against their overall dues of Rs 80,950 crore.
The government has also amended the Banking Regulation Act, empowering the Reserve Bank of India (RBI) and banks to initiate bankruptcy proceedings against chronic defaulters.
The amended Section 35 A of the Banking Regulation Act allows RBI, “from time to time”, to issue directions to the banking companies for resolution of stressed assets.
India’s banks have been beset with non-performing assets (NPAs), loans that have turned bad. Total NPAs at the end of December 31, 2018 estimated to have crossed Rs 11 lakh crore.
The RBI and the government had also asked banks to impose a strict ban on any new loans to willful defaulters. Such borrowers are also now barred from being appointed as directors on boards of companies.
The IBC has also been amended to empower home buyers, who are now treated on par with banks and institutional lenders.
It enables them to bring defaulting builders to the bankruptcy court as a participant in the resolution process, raising prospects of speedier claims settlement for homebuyers.
Until the IBC amended, homebuyers of delayed realty projects could only file a claim in a bankruptcy court. The IBC rules earlier did not classify homebuyers of under-construction projects as creditors under any category.
In case a bankrupt company was sold out, home buyers’ priority came after employee wages, banks and resolution costs. The changes in the law is aimed at giving primacy to home buyers’ interests.The amendments will also ensure that builders will not be able to ignore home buyers’ interests, as they get a seat at the Committee of Creditors and co-drive the process of resolution of the real estate firm.