Insolvency and Bankruptcy Code: Bane or Boon?

The Insolvency and Bankruptcy Code, 2016 is an Act that is targeted to deal with the insolvency process of companies in the corporate sector. Previously, there existed many laws to deal with cases pertaining to the process of Insolvency but now the government has taken a bold step by introducing a single law to deal with them. The code was introduced in the Lok Sabha in the year 2015 and was passed on 5th May 2016. This article aims to highlight the loopholes of the Act and the strong areas where the Act has been proved to be successful for people dealing in the corporate sector such as banks, private entities, etc.

Key Features

  1. The Code has been instituted to oversee the insolvency proceedings in the country.
  2. The Code establishes a long duration of time to finish the procedure.
  3. The Code contains a clear and unambiguous procedure to be followed which is indeed a plus point if we see it through the eyes of partnership firms or entities filing for insolvency.

The Process

Under IRP, an interim resolution professional is appointed with the power to take charge of the company which has defaulted. The Insolvency Resolution Process (IRP) is a one under the Insolvency and Bankruptcy Code, 2016 where the National Company Law Tribunal (NCLT) initiates a corporate insolvency resolution process when a company defaults on making payment to creditors.[1]

How has the IBC helped?

The Insolvency and Bankruptcy Code of 2016 has, so far, helped in many ways. The mounting NPAs in the banking sector and other financial institutions have crippled lending activities of financial institutions.[2] Banks have been proved to be a beneficiary because of the Insolvency and Bankruptcy Code, 2016 as they will take the opportunity to clean up their balance sheet all over and would be able to improve performance on a sustained basis to remain competitive in the corporate sector. Due to the institution of IBC, many business entities are paying upfront before being declared insolvent. It was also seen that 4452 cases were dismissed straight away at the pre-admission stage which is, in itself, a huge number to show the effectiveness and competitiveness of IBC[3].

Recent Amendments to the IBC

The Insolvency and Bankruptcy Code has been in the highlight since it came into existence with the central government trying to experiment with a number of amendments to bring it up to the expectations of the citizens.  The recent amendments in the Insolvency and Bankruptcy Code, 2016 seek to protect homebuyers as the minimum requirement of homebuyers in the IBC has been included to avoid “frivolous litigations”.[4]

Some recent amendments which have been made in lieu of protecting homebuyers are nothing less than a module to remove bottlenecks. It also aims to provide a system of protection to new owners of a loan defaulter company against prosecution for the misdeeds done by the previous owners.

Nirmala Sitharaman in a press conference said that “the amendments are useful and was very much definite and needed to set up a tuning with the previous laws.” She further assured, “these amendments are not going to harm or manipulate in any way the rights of small investors, as well as the people so far engaged in MSME’s” [5] .

Loopholes in the Code

Like any other Act, ordinance, or bill, the IBC also came with many loopholes of which the first one was that it is a costly procedure. Due to this, people faced several difficulties while filing for insolvency hoping that it wouldn’t require a long and complex process like courts and tribunals. It was also alleged that the Code is subsequent and was sufficient in providing a reasonable opportunity to the corporate debtor but it was later found that no such measures were taken by the government to satisfy and fulfill the needs of the people so far demanding it.

Another area where the code is lacking is that it leaves too much discretion in the hands of IP which can result in improper functioning. History has been strong evidence that whenever we hand too much power at one place there is 100% probability that the authority or the person will use it in a way that can be harmful in a completely disguised manner. One big loophole that the government has failed to rectify is to restrict the information memorandum so that the information relating to the business activities or the process related to insolvency does not get shared with the outside world.

Conclusion

The main areas where the code is lacking is particularly in the administration of Debt Recovery Tribunals and the confidentiality pertaining to information memorandum as there was a violation of the “Right to Business” law which says that the secrecy and the confidentiality must be a concern for all the people working in the corporate sector or engaged in business activities. Certain allegations were also being made by the professionals that the Act is costly and has failed to curb the decentralised policies of the government.

The Code must be of a robust nature and should be decentralised, it must be competent enough to meet the dire needs of professional debtors.

The Code is a piece of federated legislation that dispenses a structured and time-bound mechanism thereby promising reform in the arena of Insolvency and Bankruptcy laws in the history of our country. It is definitely a boon for our country as India, being a developing nation, would particularly benefit by adapting to this law as it would certainly result in the upliftment of the country.


[1] ASHWANI KUMAR SHARMA-“How does the Insolvency resolution work”, www.livemint.com  Accessed 08th June 2020,|3:15 pm|

[2] “How Insolvency and Bankruptcy Code could benefit Banks”- www.BankingSchool.co.im

[3] “In-Depth – Insolvency and Bankruptcy Code Act”, www.drishtiias.com Accessed 08th June 2020, |5:44 pm|

[4] “Parliament Passes Amendments to IBC”- www.economictimes.in updated 12th March 2020, |01:45 pm| accessed 08th June 2020, |6:20 Pm|

[5] “Parliament, Passes Amendments to Insolvency and Bankruptcy Code Bill,2020”- The Hindu, By PTI updated 12th March 2020, Accessed 08th June 2020,|6:11 Pm|

Prabhjot Singh from Fairfield Institute of Management and Technology

Editor: Sanskriti Sood

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: