Government proposes key changes to IBC law, seeks public comments

The Government on January 18 proposed a slew of changes to the existing insolvency law aiming to enhance the efficiency of the bankruptcy process and expanding the scope of the framework. The centre has sought public comments for proposed changes in the Insolvency and Bankruptcy Code (IBC). The suggestions can be submitted by February 7.

According to the release from the Ministry of Corporate Affairs, changes to the Code pertaining to streamlining the insolvency resolution process, and recasting the liquidation process among others.

“To strengthen the functioning of the IBC, changes to the Code are being considered in relation to the admission of corporate insolvency resolution process applications, streamlining the insolvency resolution process, recasting the liquidation process, and the role of service providers under the Code,” the government said.

The proposed changes include redesigning the fast-track corporate insolvency resolution process to permit financial creditors to drive the
the insolvency resolution process for a corporate debtor outside of the judicial process, the government said.

This will be done while retaining some involvement of the adjudicating authority to improve the legal certainty of the final outcome, the Government said. "Insolvency resolution through this procedure will be available for corporate debtors with such asset size as notified by the Central Government," said the government.

IBC was introduced in 2016 to fast-track the resolution of banks' non-performing assets (NPAs). In December 2016, the provisions on the corporate insolvency resolution process under IBC came into effect. The idea was to expedite and simplify the process of bankruptcy proceedings, ensuring fair negotiations between the borrower and creditors.

Other proposed amendments

Also, it is proposed to create a state-of-the-art electronic platform to provide for a case management system, automated processes to file applications, delivery of notices, and enabling interaction of insolvency professionals with stakeholders among others, the government said.

“ It may also allow regulators and the AAs to exercise better oversight over their respective domains of functioning through the consolidated information available on the e-platform,” the ministry said.

Besides, the government also proposed to amend section 10 to delete the right of the corporate debtor to propose an insolvency professional. In such instances, the insolvency professional should be appointed by the adjudicating authority on the recommendation of the insolvency and bankruptcy board of India (IBBI), the government said.

The IBC is the nation’s first comprehensive law to address the insolvency of corporate persons and individuals. The provisions of the Code were brought into force for the insolvency resolution and liquidation of corporate persons in December 2016.

Already, the government has made a slew of amendments and introduction of new frameworks for various entities in the last few years. In addition, a separate customised framework was also notified under the Code for the financial service providers in November 2019.

Further, a separate framework for micro small, and medium enterprises was introduced in April 2021. “In November-December, 2021, the Ministry of Corporate Affairs invited public comments on issues related to the corporate insolvency resolution and liquidation frameworks, and the introduction of a cross-border insolvency framework,” the release said.

Also, the government considers a change in IBC law that will mean when an application is filed to initiate the bankruptcy process in respect of  the  promoter of a defaulted real estate project the bankruptcy process provisions will apply to only with respect to the defaulted projects.

This will serve a dual purpose, the government said.

First, the stressed projects, which caused the corporate debtors' insolvency, can be resolved separately and the debtor can continue to focus on other projects where it has not defaulted.

Secondly, a suitably tailored resolution can be achieved based on the status of the real estate project and the objectives of the relevant stakeholders, which will primarily include the allottees of that project, the government said.

IBC recovery still a concern

While IBC is seen as a critical reform in Indian banking sector, the recovery to lenders through the mechanism is still a matter of concern. In many cases, banks are forced to take huge haircuts.

According to data released by the IBBI, distressed companies liquidated under the bankruptcy code have far outnumbered those rescued as of March-end.

To put in perspective, beginning December 2016 till March 2022, 47 percent of corporate insolvency processes went into liquidation, compared with 14 percent that ended in a resolution plan, showed the IBBI data.

To quantify, out of a total of 5,258 corporate insolvency proceedings initiated under the code till March, only 3,406 have been closed. Among those closed, as many as 1,609 proceedings have ordered liquidation, while 480 have ended in approval of resolution plans. Further, till December 2021, only 457 cases had yielded resolution plans.