Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) is a noble law since it attempts to address the stress of a company when it is unable to repay the debt in time. This implies that it has assets less than the claims of creditors. In this regard, IBC provides for the organisation to rescue such a company if its business is viable or close it if found unviable through a market process. In case of rescue, the company is reorganised as a going concern and the claims of creditors are restructured, which may be paid to them immediately and/or over time.

Similarly, in case of closure, the assets of the company are sold, and the proceeds are distributed to creditors immediately, as per the priority rule.    The IBC entrusts the responsibility of reorganisation of a stressed company to financial creditors (FCs) to rescue a company having a going concern surplus.

The Code is based on its six foundational objectives, which include: the resolution of stress in a time-bound manner, maximisation of the value of assets, promoting entrepreneurship, enhancing the availability of credit, balancing the interests of all stakeholders and establishing an insolvency ecosystem. Recently, IBC completed a period of 5 years which calls for assessing performance in its initial phase to identify issues, if any, and offer suggestions.

Origin of IBC

Before the introduction of IBC in India in 2016, Public Sector Banks (PSBs) were facing a crisis due to poor asset quality, which was posing a challenge to their profitability and survival. As of March end, 2016, gross Non Performing Assets (GNPAs) in relation to gross assets of PSBs were as high as 11 percent (1).

These banks experienced a multi-fold rise in NPAs, despite initiating several regulatory recovery measures such as under the Sick Industrial Companies Act (SICA), Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

In addition, non-regulatory measures were undertaken, including a One Time Settlement, recovery in LokAdalats and loan restructuring under the Corporate Debt Restructuring (CDR) scheme of the Reserve Bank of India (RBI). But all these recovery measures did little to curb the rising trend in NPAs. For instance, CDR cell reports, since its inception, just 291 cases with a value of INR 172,463 crores successfully exited CDR as of September 2017 due to the failure of the restructuring scheme (2). Further, banks used the CDR scheme more as a means to delay the recognition of NPAs in their books rather than a mechanism to resolve default situations.
 
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