What is the issue?
- The Insolvency and Bankruptcy Code (IBC), 2016 was enacted with the intention of improving the ease of doing business in India
- The code is however said to have certain loopholes that goes against this principle.
What is IBC?
- It aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals.
- It attempts to ease the process of recovery of money by operational and financial creditors in a timely manner.
- It places the onus on professionals to put forth the resolution plans.
How does it operate?
- When a firm defaults on its debt, its control will shift to a committee of creditors.
- The committee will have 180 days to evaluate the proposals from various interested parties on how to either revive the company or enable liquidation.
- The code has provisions for the creation of ‘Insolvency Professionals’ who would handle the commercial aspects of the resolution process.
- Insolvency professional agencies will train and regulate these professionals.
- The Debt Recovery Tribunal act as adjudicating authorities for individuals and unlimited partnership firms, and National Company Law Tribunal would deal with companies and limited liability entities.
- Insolvency and Bankruptcy Board of India will be the overall regulator.
What are the shortcomings?
- The code fails to provide adequate safeguards to protect the rights of the company before handing over the management to the resolution professional.
- The Code rides substantially on the unquestionable word of the creditors.
- The Code fails to provide any opportunity to the corporate debtor to make a representation at any stage of the resolution process.
- The Code is also deficient in providing criteria for the qualification of the interim and of the final insolvency resolution professionals.
- It also leaves too much discretion in the hands of the IP.
- It allows for any person to access the information memorandum put together by the insolvency professional without restricting competitors or imposing any confidentiality obligations.
- This goes against the right to business.
- The Code fails to define a resolution applicant. All such resolution plans are placed before the financial creditors and is implemented by way of an order by the NCLT.
- If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.
- The Code prohibits withdrawal of the application once it has been admitted. This means that there is no scope for settlement.
What could be done?
- The code must be robust, decentralized, less costly, inclusive and speedy.
- This would help businesses exit sooner and capital to be redeployed faster to productive firms, thereby improving economic output and employment.
- The code should encourage decentralization, reduce the role of courts or insolvency professionals and allow for a greater role for a market-friendly approach.
Source: The Hindu
