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The Insolvency and Bankruptcy Code 2016 was a brilliant success but it had one drawback. IBC 2.0 will change that

TFI Desk by TFI Desk
30 July 2021
in Trending
ibc insolvency and bankruptcy code

(PC: ipleaders)

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The Insolvency and Bankruptcy Code, 2016 was a huge success in solving corporate insolvency in India. The promoters who were exploiting the loopholes of the legal system and did not pay back deliberately started running after creditors to pay back to ensure that they do not lose control of the company.

However, the IBC was not a big success in the case of resolution of Medium and Small Enterprises because many cases were taking too much time and National Company Law Tribunal was burdened with too many proceedings.

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Moreover, in the case of corporates, the intention of IBC was to ensure that the defaulters lose control of the company while in the case of SMEs, the intention is that the unit is revised and run more efficiently because these entities have very few borrowers in the open market.

Therefore, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which aims to provide a window for a pre-packaged insolvency resolution mechanism, an alternative method of providing a corporate rescue plan for MSMEs.

Under the pre-packaged insolvency resolution mechanism, MSMEs (the debtor) can request the creditor to start insolvency proceedings, unlike the corporate insolvency resolution process in which only the creditor can ask for a resolution process. Any MSME with more than 10 lakh rupees of debt obligation can request the resolution process and if the creditor and debtor agree to the plan, they can send it to NCLT which will approve or reject the plan within a month.

The pre-packaged resolution plan would have two major benefits. NCLT would not be burdened with proceedings of the case between the creditor and debtor because it is a pre-packaged solution with both parties agreed and the second on the part of MSMEs whose resolution proceedings would take only 120 days (90 days to submit the resolution and 30 days for NCLT to approve or reject it) as compared to more than 270 days in the earlier framework.

The amendment would make the resolution of MSMEs more speedy and attractive. “Ordinarily where haircuts are involved, forensic/transaction audits become imperative, and a negative report becomes a roadblock in resolution involving the same management,” Anoop Rawat, Partner, Insolvency & Bankruptcy at Shardul Amarchand Mangaldas & Co., said.

“In order to motivate resolution under the PIRP, the RBI guidelines on account status may be aligned with the objective of IBC and the lenders may be given the benefit of account upgradation upon resolution. There is a need for the IBBI and RBI to find middle ground on these regulations to make the PIRP more attractive,” he added.

The Insolvency and Bankruptcy Code is one of the most important reforms introduced to date in India’s corporate history. It has inculcated a corporate culture of paying back loans to banks and Financial Institutions. Borrowers know that the costs of defaulting and undergoing the IBC process are rather exorbitant. This is what explains the Modi government’s exploits when it comes to reducing the NPAs and mammoth recovery of dues by Banks and Financial Institutions. The new amendment will make the law very attractive for the MSMEs also.

Tags: Insolvency and bankruptcy CodeMSMEMSME sectorMSMEs
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