Insolvency & Bankruptcy Code 2015 – Fighting Financial Distress

Posted in Group Discussion (GD) Topics with Answers, Total Reads: 545
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5 people are having a discussion on the given topic (Priyatham, Nishanth, Rahul, Keerthi and Priyanka)


Category: Social, Economy


Group Discussion Starts

Priyatham: Hello all, the topic given to us is “Insolvency and Bankruptcy Code 2015: A step towards fighting financial distress”. To Start with, Insolvency and bankruptcy are the terms that deal with inability to meet financial payments or obligations to the creditors owed by a person or a company.  India’s rank in resolving insolvencies as per World Bank is 130 which is very bad. In India, so far, the insolvency and bankruptcy issues of companies are handled by High courts. Cases that are related with business individuals are dealt by “Presidency Towns Insolvency Act, 1909 and Provincial insolvency Act, 1920.


Rahul: That’s right. These acts are not helping in solving the insolvency problems in India and on average, these cases take more than 4 years to resolve. This is creating financial slowdown in the domestic economy and going against the ease of doing business in India. So new “Insolvency and Bankruptcy Code” is introduced in 2015 in parliament by the finance minister to address these concerns and to provide a structured resolution on handling the insolvency problems.


Keerthi: Absolutely. The bill envisages to set up a new regulator board named “The Insolvency and Bankruptcy Board of India” and create a formal “Insolvency Resolution Process (IRP) which attempts to come up with a viable survival mechanism or to ensure that the speedy liquidation process is taken care of. As per the new act, these cases are to be resolved in a period of 180 days, which can be extended by 90 days given the complexity of the case and approval of the creditors.


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Priyanka: Yes. The new regulator board will have 10 members in it. It is represented by the representatives from central government and “Reserve Bank of India”. It will also contain Licensed Information professionals and their agencies to deal with the assets of the debtor in the Insolvency resolution process (IRP). Information Utilities are created to collect all the information related to the debtor, his agreements and his stand on previous financial obligations.


Nishanth: That’s right. Along with the above plans, the code also creates “The Insolvency and Bankruptcy Fund” which includes deposits from Central government grants to fight financial slowdown, Funds collected by processing and resolving the cases, Interest earned by the deposits in the fund. It can also accept funds from individuals who wants to safeguard the insolvency problems in the future.


Keerthi: Absolutely. Now to talk about who can initiate this Insolvency resolution process, It can be done from either side which means the debtor or the company can admit that it would run into bankruptcy shortly and require a resolution on that, Or it can be initiated by the creditors who feels the assets credited to the debtor are Non-Performing Assets (NPAs) and doesn’t seem like the debtor would be able to payback.


Priyatham: Yes. Now the claims of the creditors are frozen for 180 days and the creditors will hear the proposals for revival action plan from the company. Then, the revival action plan should be approved by 75% of the creditors to go ahead with the reorganization process. If the proposals are complex, the creditors and the board can extend the process by 90 days. If the 75% approval is not met, The Company would be liquidated as per the regulations set up.


Rahul: I agree. I think the new code brought in, is very effective in managing the insolvency and bankruptcy cases in India. Earlier it was involved with multiple bodies which made it very complex, given that the decision given by one body doesn’t align with the other bodies. It also protected debtors to cover their financial situation and delay the order of liquidation of his/her assets which was detrimental to the progress of the economy.


Nishanth: That’s right. The new code is more effective as it sets provision for two tribunals by setting up Adjudicators to address the grievances faced by the debtors/creditors during the insolvency resolution process. They include the “The national company law tribunal” to handle jurisdiction over “Companies and Limited Liability Partnerships”, “The Debt Recovery Tribunal” to handle jurisdiction over “Individuals and Partnership firms”.


Priyanka: Yes. This way it is covering all types of entities in an organized manner. We can also discuss the penalties for the offenses committed by the debtors. The penalties include imprisonment up to 5 years, with a fine of up to 1 crore rupees if the insolvency involves concealing property, defrauding investors etc. It will be up to 1 lakh rupees if it is committed by an individual on the grounds of false information.


Keerthi: I agree. I think we should talk about the impact of this new change on the Indian economy and the banking system. If this code is implemented, capital flow into the bad investments will be reduced and will pave way for new ventures and entrepreneurship thoughts. Investors and creditors can recover their investments and then reinvest in more safer and trusting businesses. This bill also helps in early exit by investors or debtors from businesses and maximizes the recovery amounts.


Priyatham: Yes. This code if implemented, can provide a resolution to the bad loans, NPAs problem that is being faced by PSU banks. RBI is trying many schemes like “Rainbow” and others. But, they have not shown any results. The Gross NPAs with the PSUs has become worse in 2015 with a total of 3.14lakh Crores worth.


Rahul: I think, this bill should be promoted and enacted in order to solve these problems. During the winter sessions it was stalled as there were many questions on its applicability. It is also not clear about the management control during the reorganization process. But, those points need to be addressed and the bill should be successfully enacted to make the system more efficient. This also helps in improving the “ease of doing business in India” which is really needed as there is a huge scope for investment from foreign countries.


Nishanth: Yes. I think the bill was welcomed well by the parties and both the parties had a view that there should be change in the way insolvency resolution is currently done. Let’s see how they would improve and enact it so that a stable banking and business system can be developed.


Conclusion

The Insolvency and bankruptcy system in India was very complex with too many bodies involved in resolving the cases. It created delays and inefficiencies as the decisions given by one body doesn’t necessarily align with the decision given by other bodies. This also increased the financial slowdown and bankruptcy losses. The new code that was introduced in Loksabha seems to be very effective with clear emphasis on resolving the insolvency issues quickly and increasing the scrutiny of the debt obligations records of the debtors. It is also streamlining the process by setting up a board, collective fund, and penalty rules. There are few improvements needed in terms of clarity on management control during the insolvency resolution process, etc. The bill seems to be solving the purpose so it should be enacted in the upcoming parliament sessions and help India have a stable and encouraging business environment in the coming years.


Facts related to the Topic

1. The new “Insolvency and Bankruptcy code 2015” is introduced in the LokSabha by Finance minister in December 2015.

2. The new code will create a regulator body name “The Insolvency and Bankruptcy Board of India” and will contain 10 members as representatives.

3. Before the new code, on average these insolvency cases took nearly 4 years to get resolved.

4. The new code tries to resolve the case in 180 days with 75% creditor’s approval on revival plan.

5. The penalties include imprisonment up to 5 years, with a fine of up to 1 crore rupees if the insolvency involves concealing property, defrauding investors etc. It will be up to 1 lakh rupees if it is committed by an individual on the grounds of false information.



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