How Insolvency and Bankruptcy Code (IBC) could benefit banks?

The Insolvency and Bankruptcy Code (IBC) 2016 is the bankruptcy law of India, amended as Insolvency and bankruptcy code (amendment) Bill 2017. The new law seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The mounting NPAs in the banking sector and other financial institutions have crippled lending activities of financial institutions in India, more so by public sector banks. The bankruptcy Code is therefore created to overcome this worst situation faced by the Indian economy. The newly created Code envisages a formal insolvency resolution process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring speedy liquidation. Thus, the new Code could curb substantially the number of long-pending cases and also ensure quicker resolution of NPA problems of banks.

At present, there are four different legal forums viz. High Courts, Company Law Boards, Board for Industrial and Financial Reconstruction (BIFR), and Debt Recovery Tribunal (DRT) which have overlapping jurisdictions resulting in delays and complexities in the process of recovery of bad debts. In this context, the insolvency resolution process under bankruptcy law seeks to consolidate the existing framework by creating a single law that will ensure the time-bound settlement of insolvency.

The introduction of the Bankruptcy Code (IBC) shall give greater relief to lenders in India as secured and unsecured creditors. The Code provides an order of priority while distributing assets/proceeds during liquidation.  The assets will be distributed in the following order (i) secured creditors* will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.

[*The secured creditors are the creditors who have a security interest on the assets of the borrower. security interest means right, title or interest or a claim to the property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment, and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person].

Section 14 of the code provides that the Adjudicating Authority shall by order declare a moratorium on all pending proceedings for a period of 180 days from the date of admission of the application to initiate insolvency resolution proceedings. The stay on pending cases includes execution of judgment and decrees, transferring, encumbering, alienating, or disposing of corporate debtor’s assets except for the liquidation process. However, the act shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. This section of the act also does not apply to the supply of essential goods or services to the corporate debtor as may be specified and that shall not be terminated or suspended or interrupted during the moratorium period.

Adjudication of insolvency resolution:

The National Company Law Tribunal (NCLT) will be the adjudicating authority that will adjudicate insolvency resolution for limited companies and LLPs.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals and unincorporated entities. The resolution processes will be conducted by licensed insolvency professionals (IPs) who are members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Liquidation:

The bill bars the sale of property of a defaulter to such persons who is ineligible to be a resolution applicant during liquidation.

Penalties:

The Bill inserts a provision to specify that person contravening any provisions of IBC, for which no penalty has been specified, will be punishable with a fine ranging between Rs. 1 lakh to Rs. 2 crore.

Information utilities (IUs):

 Information utilities (IUs) will be established to collect, collate, and disseminate financial information to facilitate insolvency resolution.

Insolvency and Bankruptcy Board of India:

The Insolvency and Bankruptcy Board of India which will be set up shortly would regulate the functioning of IPs, IPAs, and IUs.

Insolvency and Bankruptcy Fund

The Code creates Insolvency and Bankruptcy Fund. However, the utilization of funds is yet to be specified.

Related article:

1.Salient features of IBC (amendment) ordinance 2018

2. What’s new in Insolvency and bankruptcy code (amendment) Bill 2017?

3.Timelines for large accounts under insolvency and Bankruptcy code

4. Proceedings against large Corporates under IBC