Is Insolvency Act a Game Changer? : an Opinions.
Table of Contents
Is Insolvency Act a Game Changer? : an Opinions.
- The IBC 2016, has been in effect for almost a year. It appears to be one of the most important reforms adopted by the government.
- The power balance between borrowers and creditors has shifted dramatically as a result of the The Insolvency and Bankruptcy Code (IBC).
- According to the World Bank’s directory, India presently ranks 136th out of 189 nations in terms of ease of resolving economic problems.
- The Insolvency and Bankruptcy Code was introduced in the Lok Sabha in December 2015 to enhance the active structure and frame by developing a rule for liquidation and economic failure. Finally on May 5, 2016, the Lok Sabha passed it, & Indian President approved it on May 28, 2016,.
- The bankruptcy code is currently a one-stop solution for resolving economic difficulties. It reduces costs and saves time, and the code will be able to protect the interests of small-scale investors. In 2017, the Code was revised.
- Insolvency resolution used to take years, but now, thanks to the new structure of the Insolvency Act, it is a time-limited process. According to the The Insolvency and Bankruptcy Code (IBC), the matter must be concluded within 270 days, otherwise, the company will be put into liquidation.
- Best of all, the entire resolution procedure is under the management control of a resolution professional not the promoters.
Insolvency Act & its impact
We think about Indian financial consultancy views on the Insolvency Act and what we think will be its impact? Here’s what we have to say:
- One of the amazing acts that the current government has undertaken is the Insolvency and Bankruptcy Code, 2016 (IBC). As a long-term stock investor, I’ve noticed that any firm that has performed poorly for investors is mostly due to debt.
- Some businesses could not have predicted the awful economic climate, but the majority of them took on so much debt since there was little the bank could do to retrieve it. Management might now lose control of the company if they do not repay the loan, thanks to the IBC.
- The best aspect is that the government has ensured that owners of such businesses are not permitted to participate in the bidding process for their assets. If it were permitted, it would open up new ways for people to declare bankruptcy, take out loans and then acquire their own assets at lower prices.
- It is now vital for businesses to repay their loans. We’ve already seen positive signs of such legislation, with Reliance Communication shutting down its operations to pay back as much as it could in order to preserve the ADA Group or simply the Reliance Group brand’s worth. Suzlon Energy takes the necessary steps to restructure the company. There will be many problems, with firms looking for the problematic region, but the government is actively working on the loopholes which are not utilized.
- The Insolvency Act is one of India’s most strong laws. It has the potential to fix banks’ problems in a dramatic manner, as numerous corporations entered NCLT as a result of this act, and many are now in the last stages of resolution.
- To speed up the process, the insolvency legislation should be changed to a time slot bidding process, in which interested bidders submit bids one at a time and the problem is resolved more quickly.
- It will make the procedure easier for everyone, and the government will be able to keep track of the financial health of the companies bidding, as bad debts can accumulate after five years. If properly implemented, it has the potential to alleviate many of India’s banking and government problems which assist the economy.
- The code summarises several separate bankruptcy resolution advancements for entities, partnership firms, and businesses. The procedure can be started by either the nonpayer or the creditors.
- For firms, the procedure must be completed in 180 days, with the possibility of a 90-day extension if a majority of creditors agree.
- The code establishes the ‘Insolvency and Bankruptcy Board of India’ to oversee the country’s liquidation proceedings. The Board will have ten members, including representatives from the Ministries of Finance & Law, as well as the RBI.
- Only authorizes member of IBBI members specialists in IBC will be in charge of the insolvency process, as well as the debtor’s benefits.
History of Code proposes :
The Code proposes two different committees to manage the course of insolvency decisions for individuals and businesses:
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- The NCLT hears cases involving corporations and limited liability partnerships.
- DRT hears cases involving people and partnerships.
- The IBC act intends to classify monetary breakdown early on and maximize the benefits worth of bankrupt companies. This includes provisions for cross-border liquidation via collaborative agreements. It would not only increase the ease of doing business in India, but it will also aid in the development of faster debt-reduction strategy. It will also be beneficial to international investors or creditors.
- IBC 2016 is a great attempt by the government to ensure that incidents like Kingfisher do not occur again.
- This will have a significant +ve impact because the number of frauds involving public funds will decrease. Rather than waiting for the firm owner to declare themselves bankruptcy (which rarely happens), creditors can now sue defaulting companies in court if they do not pay their debts. The Court takes the case seriously and appoints an Insolvency Professional to try to uplift the company or sell it to someone who is capable of doing so.
- This is an Excellent Law that allows any corporation that defaults on loan payments to be quickly prosecuted and money recovered by selling some or all of the company’s assets.
- The IBC Act was enacted with the goal of combining and modifying the laws governing the insolvency of incorporated and unincorporated organisations, as well as natural individuals. The purpose of the Insolvency Act is to govern liquidation or bankruptcy in order to allow firms’ affairs to be managed for the benefit of creditors.
- IBC Act, unlike earlier rules, spells out a schedule for recovering from defaulters, imposing a restriction on bank loans to conglomerates, and enhancing realisation to reduce asset-liability mismatch, all of which are promoting a new environment for India’s banking industry.
- Now, corporate families must do all possible to defend their reputations. You won’t be able to get money if your name is tainted. Surprisingly, the law also allows suppliers to initiate insolvency procedures. If a resolution isn’t reached within 180 to 270 days, assets will have to be auctioned off to recoup debts.
IBC seeks to rehabilitate insolvent businesses
Unlike previous legislation, the Insolvency Act seeks to rehabilitate insolvent businesses through administration rather than liquidation. The new law focuses on supporting insolvent bodies that have a redeemable position and can continue to operate as going concerns in order to meet their financial obligations and satisfy their creditors.
- The debt recovery regime in India was missing links due to inconsistencies in the insolvency and bankruptcy laws. The proposed law would promote a balance of rights between creditors & borrowers while also strengthening the creditors’ position.
- Basic idea of making a one law of insolvency & bankruptcy by unifying all current system under one umbrella had been long overdue and was urgently needed For Indian firms, large, small, and startups,
- The most significant benefit of insolvency and bankruptcy code 2016 is that it is “for existing units on the verge of death.” Rather than the degeneration of previous large investments, like in the example of King-Fisher: Assets are put to better, long-term, and sustainable use.
- IBC 2016 is an attempt to codify outdated and confusing ways of recovery in the event of a debt default by setting a maximum resolution period of 180 days. If no resolution is reached within the time limit, the assets are liquidated to sale off to recover the dues.
- As per the Economic Survey 2017, total 20% of loans are bad& system is now clearer, it does not promise that banks will not make any more problematic loans in the future. Another issue that has yet to be resolved is the calculation of the Assets’ true value/ actual worth.
- However, the IBC 2016 was unquestionably necessary. Recovery of tens or thousands of crores in loans to nonperforming assets (NPAs) is critical for the survival of our banking sector and the Indian economy. And, thankfully, the IBC was able to have the desired impact.
- When things aren’t done correctly from the start, it leads to confusion & distractions. For example, we have seen how a few jewelers mislead banks by requesting loans of the thousands of crores and then disappearing overnight. This could have been avoided from the start if the officers in charge had done their homework before granting the loans. We’re now hearing that “Know Your Employee” should take prior over “Know Your Customers.”
The insolvency and bankruptcy law aims
- Insolvency has not to voice in this though it does regrettably become involved at the end when the so-called business tycoon declares himself “Insolvent.”
- Because insolvency revolves around money & means “no money,” this condition emerges as a result of NPAs (Non-Performing Assets), which are exclusively found to be seen in the banking sector.
The immediate impact will be felt on various levels, since the insolvency and bankruptcy law aims to reduce the time to less than a year.
- Improved debt recovery, providing much-needed revenue to banks and creditors.
- The easy of doing business has enhanced.
- Increased confidence level among creditors & investors (foreign investors & domestic), resulting in increased investment in India.
- Genuine firms or promoters with weak balance sheets are given a 2nd chance to fix their problems & turn their businesses around.
- Most defaulting enterprises submitted to the NCLT under the IBC Act, appear to be in the cement, electricity, infrastructure, and steel industries. If these companies are sold at a reasonable price (based on offers from interested parties), the banks, who are the principal debtors, will be flooded with cash worth thousands of crores.
- At a time when all PSU Sector banks are experiencing credibility and financial issues, this might be a major relief, prohibit further profit declines.
Conclusion
- Given the favorable outcome for India’s economy, the government’s efforts to move problematic debts totaling thousands of crores to IBC should be commended or appreciated. Secondly, despite pressure from promoters of specific companies, the bankruptcy courts should be applauded for not delaying the settlements of referred enterprises.
- Finally, several government-proposed reforms to the insolvency and bankruptcy laws, such as creditors (lenders) having a 66 percent vote instead of the present 75 percent majority to decide whether a company needs turnaround or asset liquidation, will speed up the decision-making process. Second, classifying property buyers as creditors, allowing them to sue builders in bankruptcy court if they default on their flats/homes, is a much-welcomed measure.
- In general, I believe that crony capitalism, which is one of the key reasons why India is not fulfilling its actual economic and business potential, is being addressed head-on by insolvency and bankruptcy law, the good effects of which India will soon experience.
Services in the field of Insolvency Laws
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- Drafting of Insolvency Petition Under IBC
- Filing of your matter with National Company Law Tribunal Delhi
- Appearances by the Advocates & pleadings for the same
- Action for National Company Law Tribunal Final Order
- Recovery of Financial and Operational debt from the Debtors
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