Insolvency and Bankruptcy: Several measures have been implemented by the government/RBI to address the economy’s ‘twin balance sheet’ (TBS) crisis, but they have yet to yield effective results. Finally, the government is taking steps to make the insolvency procedure more effective in addressing the problem. The country’s complex and time-consuming insolvency and bankruptcy process has cost both lenders (banks) and borrowers (private corporate sector) a high financial cost. In November 2017, the government amended and implemented the new Insolvency and Bankruptcy Code, 2016 (IBC).
The entire mechanism for the Corporate Insolvency Resolution Process (CIRP) has been put in place, which represents significant progress. A number of rules and regulations have been issued in order to establish the institutions and professionals required to carry out the process. A large number of cases have been filed for bankruptcy.
The Judiciary’s adjudication, which prescribes strict time limits for various procedures under the new Code, has been a major factor in its effectiveness. Despite the large number of cases filed at NCLT benches across India, these benches have been able to admit or reject CIRP admission applications with little delay. In addition, appellate courts such as the NCLAT, High Courts, and the Supreme Court have quickly and decisively resolved appeals.
A substantial body of case law has emerged as a result of this process, reducing future legal uncertainty. The Committee of Creditors (CoC) of the CIRP invites resolution plans from resolution applicants and may choose one of them. Although the Code declares that some persons are ineligible to submit resolution plans, it does not specify who these resolution applicants may be:
- an undischarged insolvent;
- a wilful defaulter;
- a borrower whose account has been identified as a non-performing asset for over a year and who has not repaid the amount before submitting a plan;
- a person convicted of an offense punishable with two or more years of imprisonment;
- a person disqualified as a director under the Companies Act, 2013;
- a person prohibited from trading in securities;
- a person who is the promoter or in the management of a company that has indulged in undervalued, preferential, or fraudulent transactions;
- a person who has given a guarantee on the liability of the defaulting company undergoing resolution or liquidation, and has not honored the guarantee;
- a person who is subject to any of the above disabilities in any jurisdiction outside India; or
- a person who has a connected person disqualified in any manner above.
Amendments in Code
The government has been proactive in addressing issues that have arisen as a result of the implementation of the IBC, in 2016. To ensure proper implementation, the government has made three significant changes to it until 2019-20.
- The first amendment added Section 29A, which addresses the provision prohibiting promoters from bidding for their own businesses. It made it impossible for defaulters to reclaim control of their businesses at a lower cost.
- The second amendment added Section 12A, which allows creditors to withdraw an insolvency petition within 30 days of filing it. Homebuyers will also be treated as financial creditors, according to the amendment. This move was primarily intended to address two issues: first, giving home buyers a voice in insolvency proceedings because they provide funding for projects by making advance payments, and second, discouraging real estate developers from defaulting on commitments not only to banks but also to their customers.
- The third amendment focuses on bringing a CD (Corporate Debtor) back to life by ensuring timely admission and completion of the resolution process. The amendment ensures that the NCLT’s 14-day deadline for admitting or rejecting a resolution application is strictly adhered to. The amendment also establishes a mandatory 330-day deadline for completing the Corporate Insolvency Resolution Process (CIRP) without exception, in order to instill discipline among stakeholders and avoid inordinate delays in the insolvency resolution process.
In the third amendment, the government reaffirms its role as a facilitator by making a resolution plan binding on the Central Government, State Governments, or a local government to whom debt in respect of payment of dues is owed.
Performance of the Code
After three years of operation, the IBC regime boasts a strong ecosystem that is performing much better than previous regimes—both debtors and creditors are initiating processes under the Code-
- Up until September 2019, 743 of them had completed the process, which resulted in resolution or liquidation, and 498 had begun the voluntary liquidation process.
- 132 of the 562 Corporate Insolvency Resolution Processes (CIRPs) started in October-December 2019 were in the process of being liquidated, and 14 had already been settled. By the end of December, 1.58 lakh crore in cases had been resolved.
By December 2019, the IBC ecosystem included the Adjudicating Authority, the IBBI (Insolvency and Bankruptcy Board of India), three insolvency professional agencies, 11 registered valuer organizations, and 2,374 registered valuers, and 2,911 insolvency professionals (IPs) (Graduate Insolvency Programme).
In comparison to other processes, IBC has a much higher resolution. In 2017-18 and 2018-19, the amount recovered as a percentage of the amount involved was significantly higher than Lok Adalat, DRTs, and other methods. A CIRP must be completed within 330 days, according to the Code. This push has resulted in proceedings under the Code taking on average about 340 days, including time spent on litigation, compared to 4.3 years under the previous regime.
SARFAESI Act, 2002
With the passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the Government of India finally took action against willful defaulters. The Act gives banks/FIs broad powers over nonperforming assets:
- In the event that the account becomes NPA, banks/FIs with 75% of the borrower’s dues can collectively take the following steps:
(i) Issue notice of default to borrowers asking to clear dues within 60 days.
(ii) On the borrower’s failure to repay:
- take possession of security and/or
- take over the management of the borrowing concern and/or
- appoint a person to manage the concern.
(iii) If the case is already before the BIFR, the proceedings can be halted if the banks/FIs that own 75% of the debt have taken any steps to recover the debt under the ordinance’s provisions.
- The security can also be sold to a securitization or Asset Reconstruction Company (ARC) established under the Ordinance’s provisions. [The ARC is sought to be set up on the lines similar to the USA, a few years ago.]
Many people and businesses borrow money from lending institutions but do not pay it back. Not all of them, however, are considered wilful defaulters. A wilful defaulter is someone who willfully fails to repay a loan or liability, but there are other characteristics that define a wilful defaulter. A wilful defaulter, according to the RBI, is someone who intentionally misses payments-
- is financially capable to repay and yet does not do so;
- or one who diverts the funds for purposes other than what the fund was availed for;
- or with whom funds are not available in the form of assets as funds have been siphoned off;
- or who has sold or disposed of the property that was used as a security to obtain the loan.
Using short-term working capital for long-term purposes, acquiring assets for which the loan was not intended, and transferring funds to other entities are all examples of fund diversion. Siphoning of funds occurs when funds are used for purposes unrelated to the borrower and have the potential to harm the entity’s financial health.
However, a lending institution cannot label an entity or an individual a wilful defaulter based on a single default and must consider the repayment history. The default should be determined to be intentional, and the defaulter should be notified. The defaulter should be given an opportunity to clarify his position on the matter. To be included in the category of wilful defaults, the default amount must also be at least 25 lakh.
If the name of an entity or individual appears on the list of wilful defaulters, the following restrictions apply to them:
(i) Barred from participating in the capital market.
- Barred from availing any further banking facilities and accessing financial institutions for five years for the purpose of starting a new venture.
- The lenders can initiate the process of recovery with full vigor and can even initiate criminal proceedings if required.
- The lending institutions may not allow any person related to the defaulting company to become a board member of any other company as well.