Trade Analytics

Case study; Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016

Theme: Ease of Doing Business

Launch: May 2016

Location: Pan-India


Key impact areas: Insolvency resolution and reorganisation of corporate entities, partnership firms and individual debtors



solar-energyThe Insolvency and Bankruptcy Code, 2016 is considered a landmark reform among various ‘Ease of doing Business’ initiatives undertaken by the Government of India. It consolidated all past provisions to institutionalise a common legislation for insolvency resolution and reorganisation of corporate entities, partnership firms and individuals in a time bound manner. For the purpose, the Code provides for a ‘corporate insolvency resolution process’ that seeks to balance the interests of all stakeholders.


The Government of India has set up the Insolvency & Bankruptcy Board of India as the regulator under the Code. This Board also regulates three types of insolvency resolution professionals/ agencies - Interim Resolution Professional, Final Resolution Professional and Liquidator. The Adjudicating Authority is the Debt Recovery Tribunal (DRT) in the case of individuals and partnership firms other than Limited Liability Partnerships (LLPs). For companies and LLPs, the Adjudicating Authority is the National Company Law Tribunal (NCLT).


This process may be initiated by financial or operational creditor or the corporate debtor himself in the event of a default in terms of financial debt owed. On acceptance by the Adjudicating Authority in case of process initiated by the creditor, the corporate debtor is given ten days to appropriately respond either with a proof of payment of the debt owed or inform of “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute”. If neither is furnished, the creditor can file an application with the Adjudicating Authority for initiation of the corporate insolvency resolution process. Once the application is admitted, all stakeholders are informed, and the resolution process has to be completed within a time frame of 180 days (the period is 90 days for smaller companies with turnover upto Rs 1 crore, extendable by 45 days). It can be further extended if a meeting of the Committee of Creditors passes the resolution for extension by a vote of over 75%. The Adjudicating Authority can also put a moratorium on the proceedings on recommendation of the Resolution Professional if it deems fit. Liquidation can be initiated by the Adjudicating Authority under defined circumstances which include non-receipt/rejection of the resolution plan by the authority, vote by a majority of the creditors to initiate liquidation, contravention of the resolution plan by the corporate debtor, etc. The Liquidator will then distribute the assets held by the debtor among the claimants in accordance with the order of priority laid out under the act.



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Source: Grant Thornton Deal Tracker


A major ordinance was introduced in the case of real estate developers in June 2018, wherein the homebuyers were accorded the status of financial creditors, which gives them due representation in the Committee of Creditors and also allows them to invoke Section 7 of the code if developers default on their obligations. Another significant amendment pertains to Micro, Small and Medium Enterprises (MSMEs), for whom the Government is empowered to provide a special dispensation.


Under the ordinance in June 2018, a promoter of an MSME can bid for his firm under the resolution process provided he is not a wilful defaulter and is not disqualified for any other factors.


Status of CIRPs* as of June 2018
Admitted  977
Closed on Appeal/Review  91
Closed by Resolution  34
Closed by Liquidation  136
Ongoing CIRP  716

 

Source: Insolvency & Bankruptcy Board of India, Newsletter for April-June, 2018, *Corporate Insolvency Resolution Process


Impact:


  • The introduction of the Insolvency & Bankruptcy Code, 2016 (IBC) has reduced the time taken for winding up companies in India from over four years to less than a year.
  • Through faster resolution, the Code had one major objective – to address around Rs 10 trillion of non-performing assets (NPAs) in India’s banking system. As the asset quality of banks gets better, it will promote new investments and consequent economic growth.
  • IBC was one of the major factors in India’s jump on the World Bank’s Ease of Doing Business Ranking to 100 in 2017 from 130 the previous year.
  • The Code is expected to be a major driver in a spurt of M&A deals in India, as bidders are eagerly looking to acquire stressed assets that are now available at lucrative prices and a number of such entities are close to conclusion of their resolution processes. During the first half of 2018, 638 deals worth US$ 74.8 billion (including M&A and PE deals), growing by 90% in terms of value and 15% in terms of volume over the previous year. M&A deals alone accounted for a value of US$ 65.45 billion, growing by 112% over the previous year. Key sectors that could drive deal activity pertaining to stressed assets include steel, infrastructure and power. Tata Steel’s acquisition of Bhushan Steel for US$ 5.5 billion was the largest such acquisition in the first half of 2018 (Source: Grant Thornton).

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Last updated: October, 2018