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Govt. To Revamp Insolvency And Bankruptcy Code

Relevance of ”Insolvency And Bankruptcy Code” for UPSC


Insolvency And Bankruptcy Code:  Insolvency And Bankruptcy Code covers GS 2: Government Policies & Interventions and GS 3: Banking Sector & NBFCs, Growth & Development under UPSC CSE Mains Syllabus.

Keeping an eye on the Proposed overhaul in IBC will be a must for preparing Civil Services Prelims Examination as well.


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Insolvency and Bankruptcy Code: Shrinking Recoveries a Cause of Concern


Why ”Insolvency And Bankruptcy Code” in News?


  • The government is planning an overhaul of the Insolvency and Bankruptcy Code(IBC) during the winter session of parliament 2023.
  • The government is doing this for faster rescue of distressed companies and to fix the weaknesses in bankruptcy proceedings including the functioning of professionals.


Why government is planning to Revamp Insolvency And Bankruptcy Code?


  • The proposed move may further improve domestic insolvency regime as well as provisions to introduce a cross-border insolvency regime.
  • In the process, government wants to come out with the best version of the Insolvency and Bankruptcy Code, 2016, incorporating diverse views, needs and dimensions. Consulting all stakeholders including judges, lenders and resolution professionals on improving the outcomes of the proceedings.


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Background of ”Insolvency And Bankruptcy Code”


  • Against the backdrop of mounting non-performing loans, ”Insolvency And Bankruptcy Code”(IBC) was brought on Insolvency and Bankruptcy Code, 2016 (IBC) enacted on May 28, 2016, to tackle the NPA problem in two ways.
  • First – by encouraging behavioral change in debtors to ensure sound business decision-making; and second – by envisaging a solid process through which financially ailing companies are put through a rehabilitation process and then bringing them back on their feet.


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What is IBC?


  • The Insolvency and Bankruptcy Code, 2016 (IBC) enacted on May 28, 2016, against the backdrop of mounting non-performing loans, with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner.
  • IBC seeks to tackle the non-performing asset (NPA) problem in two ways.
    1. Firstly, behavioural change on part of the debtors to ensure sound business decision-making and prevent business failures is encouraged.
    2. Secondly, it envisages a process through which financially ailing corporate entities are put through a rehabilitation process and brought back up on their feet.
  • Under the IBC, the Indian insolvency regime shifted from ‘debtor-in-possession’ to ‘creditor-in-control’.
  • The IBC sets out three classes of persons who can trigger the corporate insolvency resolution process (CIRP) – financial creditors, operational creditors and corporate debtors.

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How IBC become a game-changer for economic reform for India?


  • IBC is rightly termed by many as a game changer economic reform for India.
  • Since its enactment, India’s rank in ‘Resolving Insolvency’ indicator in World Bank’s ease of doing business report has seen sharp improvement, a rise of 84 places.
  • Moreover, the estimates of Insolvency and Bankruptcy Board of India suggest that more than 23,000 applications for initiation of bankruptcy resolution with underlying default of Rs. 7.3 lakh crore, have been resolved before their admission.
  • It indicates that the bankruptcy code has really bringing about a behavioural change among corporate debtors.
  • If the entire process is taken into consideration, IBC has brought about a marked shift in attitudes of both lenders and borrowers.
  • This is because it acts as an effective deterrent against unscrupulous borrowers as it offers banks the tool to follow due diligence and assess recovery rate with greater degree of confidence.
  • In this way, it helps entrepreneurship, saves businesses, revives companies and creates new job opportunities in financial sector, thus also protecting jobs of thousands of youth.


What Amendment made in IBC in June 2022?


  • Earlier, the Insolvency and Bankruptcy Board of India had notified second amendment on 14th June, 2022, which provides the operational creditors some other options also.
  • In order to improve information availability, the amendment also places a duty on corporate debtor, its promoters or any other person associated with the management of the corporate debtor to provide the information sought by the resolution professional.
  • The amendment also puts a duty on the creditors to share information regarding the assets and liabilities of the corporate debtor, the financial statements and other relevant financial information to help the resolution professional.
  • It along with several other provisions, also addresses the issue of treatment of avoidance applications filed with the adjudicating authority after closure of the corporate insolvency resolution process.


Why IBC needs a revamp?


  • Without doubt, there are still some amends needed, some entities including individual debtors to be incorporated into the process.
  • Moreover, many cases take a long time to get admitted in tribunals.
  • Out of around 5,800 cases admitted in the National Company Law Tribunal for bankruptcy resolution, around 1,900 cases are still pending.
  • However, reducing the time taken in bankruptcy resolution is going to make it much more effective and will improve confidence and outcomes.
  • If things continue taking the intended shape, it will eventually pave the way for banks to bring down the ‘Cost of Credit’ also.


Also Read:

Insolvency and Bankruptcy Code (Amendment) Bill 2021


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