INSOLVENCY AND BANKRUPTCY CODE: BOON OR BANE

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By Prabhjot Singh

Introduction

The Insolvency and Bankruptcy Code 2016 is an act which is targeted to deal with the insolvency of the companies in the corporate sector. Previously there were many laws to deal with the cases pertaining to the procedure of insolvency but now the government has taken a bold step by introducing a single law to deal with the cases of insolvency. The code was introduced in the Lok Sabha in the year 2015 and was passed on May 5, 2016. This particular article aims to highlight the loopholes of the act and the strong areas where the act has been proved to be successful for the people dealing in corporate sector such as banks, private entities etc.

Key Features

  1. The code has been instituted to oversee the insolvency proceedings in the country.
  2. Secondly, the code establishes a long duration of time to finish the procedure.
  3. The code contains a clear and unambiguous procedure to be followed which is indeed a plus point if we see it through the eyes of partnership firms or entities filing for insolvency.

Procedure

Under IRP, an interim resolution professional is appointed with the power to take charge of the company which has defaulted. The Insolvency Resolution Process (IRP) is a one under the Insolvency and Bankruptcy Code, 2016 where the National Company Law Tribunal (NCLT) initiates a corporate insolvency resolution process when in a case company defaults on making payment to creditors.[1]

How IBC has helped?

The Insolvency and Bankruptcy Code 2016, has so far helped in many ways. The mounting NPA’s (non-performing assets) in banking sector and other financial institutions has crippled lending activities of financial institutions.[2] Banks have been proved to be a beneficiary because of the Insolvency and Bankruptcy Code 2016 as they will take advantage to clean up their balance sheet all over and would be able to improve performance on a sustained basis to remain competitive in the corporate sector. Due to the institution of IBC, we have seen that many business entities are paying up front before being declared insolvent, it was also seen that 4452 cases were dismissed straight away at the pre-admission stage which is in itself a huge number to show the effectiveness and competitiveness of IBC[3].

Recent Amendments to IBC

The Insolvency and Bankruptcy Code has been in highlight since it came into existence and as a matter of concern, the central government has tried to experiment no. Of amendments to make it up to the expectations of the people.  The recent amendments in the Insolvency and Bankruptcy Code, 2016 seeks to protect homebuyers, the requirement of minimum number of  home buyers in the IBC has also been included to avoid ‘frivolous litigations’[4].

Some recent amendments which have been made in lieu to protect the homebuyers are none the less a module to remove the bottlenecks, it also aims to provide a system of protection to new owners of a loan defaulter company against prosecution for the misdeeds done by the previous owners.

Nirmala Sitharaman in a press conference said that ‘the amendments are useful and was very much definite and needed to set up a tuning with the previous laws’, she further assured that these amendments are not going to harm or manipulate in any way the rights of small investors as well as the people so far engaged in MSME’s [5] .

Loopholes of IBC

Like every other Act, ordinance or bill, the IBC also came up with many loopholes of which the first one was that it is a costly procedure due to which the people faced several difficulties while filing for the insolvency procedure hoping that it wouldn’t require a long and complex procedure like courts and tribunals. It was also alleged that the code is subsequent and was sufficient in providing a reasonable opportunity to the corporate debtor but it was later found that no such measures were taken by the government to satisfy and fulfill the needs of the people so far demanding it. Another area where the code is lacking is that it leaves too much discretion in the hands of IP which can result in improper functioning as history has been a strong evidence that whenever we hand too much power at one place there is 100% probability that the authority or the person will use it in a way that can be harmful or in a totally disguised way. One big loophole that the government has been failed to fill is to restrict the information memorandum so that the information relating to the business activities or the procedure related to insolvency doesn’t get shared with the outside world.

Conclusion

The main areas where the code is lacking is particularly in the administration of Debt Recovery Tribunals and the confidentiality pertaining to information memorandum as there was violation of the “Right to Business” law which says that the secrecy and the confidentiality must be a concern for all the people working in the corporate sector or engaged in business activities. Certain allegations were also being made by the professionals that the act is somehow costly and has failed to curb the decentralised structuring policies of the government.

As a conclusion, the code must be of a robust nature and should be decentralised, the code must be competent enough to meet the dire needs of the professional debtors.

Although the code is a federated legislation that dispenses a structured and time bound mechanism thereby promising a reform in the arena of insolvency and Bankruptcy laws in the history of our country.

It is definitely a boon for our country as we all are aware of India’s position as a developing country would particularly pass in adapting this law and it would certainly result in the upliftment of the country.

References

[1] ASHWANI KUMAR SHARMA-“How does the Insolvency resolution works”, www.livemint.com  Accessed 08th June 2020 ,|3:15 pm|

[2] “How Insolvency and Bankruptcy Code could benefit Banks”- www.BankingSchool.co.im

[3] “In Depth – Insolvency and Bankruptcy Code Act”, www.drishtiias.com Accessed 08th June 2020, |5:44 pm|

[4] “Parliament Passes Amendments to IBC”- www.economictimes.in updated 12th March 2020, |01:45 pm| accessed 08th June 2020, |6:20 Pm|

[5] “Parliament Passes Amendments to Insolvency and Bankruptcy Code Bill,2020”- The Hindu ,By PTI updated 12th March 2020, Accessed 08th June 2020,|6:11 Pm|

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