Trending: Call for Papers Volume 4 | Issue 4: International Journal of Advanced Legal Research [ISSN: 2582-7340]



Anation’s economy grows with the increase in the business. Business is the key regulator of the economic development of a nation as it generates various economic activities without which the economy would be small and weak. Banks also play a pivotal role in the development of the economy byproviding loans to the business enterprises for their investment in various projects. Non Performing Assets (NPAs) pose threat to the investment and are recorded on the Balance sheet of the bank or any other financial institution after a prolonged period of non repayment of the loan by the borrower over a period of 90 days and hence, they place financial burden on the lenders. This affects the lender’s cash flow by creating problem of scarcity of funds with the banks. Eventually banks are not in a position to provide credit or they provide credit at an escalated rate by increasing interest rates and this contracts money circulation in the economy. Also the deposit interest rates by the banks are decreased to recover the losses from the depositors. The confidence of borrowers lowers down and hence poses impediment in investment. Ultimately this results in slowdown of national economy. From the year 2008 the NPAs of Banks grew at an alarmingly steep rate. Hence, it became very important to resolve and prevent NPAs.

Businesses are driven by the entrepreneurs and they need conducive business environment of free entry and exit. The Indian economy allowed free entry and free competition but it did not allow free exit and so, there existed several zombie entities in the economic system. The creditors are providers of credit to the entrepreneurs for establishing and running a business. The cases from the forums yielded hardly 10-20% of the value of assets and the position of unsecured creditors was dismal. The unsecured creditors could not get anything out of the earlier processes. The position of the creditors was pathetic as they had no surety of getting back their dues and also were not heard in the liquidation and winding up process. The defaulting companies and their erring promoters continued to be the owners and retained control over the assets and management of the company in the liquidation and winding up proceedings. Even after defaulting the erring promoters used to regain control over the company at an exceptionally discounted price through back door entry. The rest of the stakeholders were the worst sufferers (such as, the employees and the workmen, etc) because they got nothing in these processes.

There were multiple over lapping laws in India dealing with Insolvency1and Bankruptcy 2 of Companies. Eventually, District Courts, High Courts, Board for Industrial and Financial Reconstruction (BIFR) and Debt Recovery Tribunals (DRTs) had jurisdiction at various stages and this gave rise to complexity and undue delay in the process. This Legal and ` framework did not aid lenders and investors in timely and effective recovery of their defaulted Assets and Investment and caused undue strain in the Indian Credit and Economic System. The value of the assets got eroded and nothing could be fetched due to the pending cases in these forums such as, BIFR, DRTs, District Courts, Lok Adalats, High Courts, AAIFR, DRATs, etc. In some cases it is also experienced that thevalue of the assets was NIL because the cases ran over a decade.

The myriad and overlapping insolvency and liquidation laws, different foras, rising rate of NPAs, dismal condition of debtors, exit barriers for entrepreneurs[1], poor EoDB index ranking of India, erosion of the value of assets, poor circulation of money in the economy, etc were the main reasons which proved that there was a pressing need of a single consolidated piece of effective and efficient legislation for the insolvency and bankruptcy matters. Many committees such as- Tandon Committee (1974), Tiwari Committee (1981), First Narasimham Committee (1991), Narasimham Committee II (1998), Eradi Committee (1999), N.L. Mitra Committee (2001) and J J Irani Committee

(2004) were formed time to time by the Government and the[2] Reserve Bank of India to study and tackle the issue of sick and insolvent companies, swelling NPAs, bring about reforms in insolvency laws etc.  Throughout the world, insolvency procedures have aided entrepreneurs inclosing down unviable businesses and starting up new ones or rethinking of re-engineering/restructuring of the existing distressed businesses. Therefore, it is unambiguously clear that there was a dire need of an effective economic and legislative reform for the financial progress of India. As per the report of World Bank, 2016

Insolvency Resolution process in India took 4.3 years on an average, while comparatively it took 1 year in United Kingdom, 1.5 years in United States of America, 2 years in South Africa, 2.7 years in Pakistan and 4 years in Brazil. India’s overall ranking in 2016 was 130th in the World Bank’s Index on the Ease of Doing Business (EoDB) and 136th on the Ease of Resolving Insolvencies.

Therefore, the much awaited landmark legislation Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016, hereinafter referred to as “IBC” or “Code”) received the Presidential Assent on 28th May 2016 with creditor in saddle approach to provide a unified framework for the resolution of insolvency and bankruptcy matters in a time bound manner, for promoting entrepreneurship and availability of credit and for improving the ease of doing business and facilitating more investments which will lead to higher economic growth. The Bill regarding the Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha on 21st Dec, 2015. The Bill was then referred to a Joint Parliamentary Committee (consisting of 30 members) of both the houses for examination. This new code proposes to undertake a better procedure of restructuring and reorganizing the debts of the firms, to speed up the liquidation procedure of a failing business, efficient recovery of creditor’s investment, to balance the interests of all the stakeholders including changes in the order of priority of payment of Government dues and to establish Insolvency and Bankruptcy Fund.

It has been fully implemented from 1st Dec, 2016 since,[3] most of the provisions governing Corporate Insolvency Resolution Process (CIRP), Insolvency Professionals (IPs), Insolvency Professional Agencies and Liquidation processes came into force. It has been enacted when the Indian economy was in the midst of soaring NPAs, falling GDP, credit perspective in the country, when the domestic banking industry was struggling to cope with a welter of bad loans and last but not the least the Mallya Saga. This law has reconceptualized the Insolvency Resolution framework in the country.

Consequently in 2018 India’s rank jumped 30 places to 100th out of 190 economies on the ease of doing business index and 103rd in the index on the ease of resolving Insolvencies.4This historical leap is credited to the Code as the time, cost, outcome and recovery rate for the Corporate Insolvency and the legal framework of the Insolvency has strengthened. IBC has made the international economic front of India emphaticallypowerful. The International Monetary Fund (IMF) states that the Real GDP Growth of India (in its 2020 Datamapper) has grown by 1.9% and classified India as an Emerging Market and Developing Economy. In the World Bank’s Report 2020, India stands at 52nd position in the ease of resolving insolvency index and 63rd position in the EoDB ranking.It has proven to be a major economic reform next to a uniform taxation system called Goods and Service Tax (GST).

This insolvency code is a one stop solution in terms of a single codified legislation that has brought multiple laws dealing with insolvency in India under single umbrella. IBC is an exhaustive and comprehensive legislation which[4] provides a single authority[5], i.e. National Company Law Tribunal (NCLT), having jurisdiction over corporate insolvency and bankruptcy proceedings, establishes a new institutional framework consisting of insolvency professionals, and information utilities. There are four institutions set up under the Code, 2016 and are Insolvency and Bankruptcy Board of India (IBBI)Insolvency Professional Agents (IPAs)8, Information Utilities and Adjudicating Authorities

The Code is a work in progress, it has teething troubles and hence, requires constant attention and amendments. As the cases are coming up before the adjudicating authorities, the deficiencies in the Code, 2016 are coming into light and amendments have been triggered to remove those deficiencies. Some of the important amendments brought are debarring defaulting promoters from submitting resolution plan, introduction of pre-packaged insolvency resolution process, etc. The Government of India, the adjudicating authorities and the Supreme Court are incessantly working on it.

[1]Bankruptcy is a situation when the court of law declares the entity as Insolvent and passes orders for resolution.

[2]Insolvency is a financial condition wherein any entity is unable to pay its debt obligations.

[3]World Bank group Flagship Report, “Doing Business 2016 – Measuring Regulatory Quality and Efficiency” World Bank.

[4]World Bank group Flagship Report, Doing Business 2020 – Comparing Business Regulation in 190 Economies”.

[5]World Bank Group Flagship Report, “Doing Business 2018 – Equal opportunity for all” 4 and 23.