Companies, partnership entities, and individuals (“Corporate”) in financial difficulties may seek reorganization and insolvency resolution under the provisions of the Insolvency and Bankruptcy Code, 2016 (the “Code”).
The new Code consolidated previous debt recovery regulations into a unified process for dealing with insolvency and bankruptcy in a business context. The Code gave creditors the authority to check debtors’ financial stability before making any deals.
The delays caused by conflicts were also addressed by developing a time-bound procedure for settlements, which aided in the expansion of business activity and the accessibility of credit. The aim of the new Code is to strike a healthy balance between the interests of all parties involved and to restore the Corporate as a going concern via prompt remedies.
The Code established a brand-new mechanism called the Corporate Bankruptcy Resolution Process (“CIRP”), which provides a temporary reprieve for corporate debtors while the insolvency of the debtor is settled via financial restructuring and creditor management.
The Code also established a strong institutional structure that includes Insolvency Professionals, Insolvency Professional Agencies, Information utilities, Adjudicating Authorities, and an Insolvency and Bankruptcy Board to aid in the formal and time-bound CIRP.
Current standing and assessment
After more than five years of the new Code, the system has changed from having the debtor in charge to having the creditor in charge. By giving the creditors control of the corporate debtor, the second model gets rid of the unfair advantage that the debtors had over the creditors during the recovery process.
The creditor chooses managers to run the company until it is fully resurrected and able to work well again. This idea was important to keep the business going and get the most value out of the company through resolution.
The deciding body and the highest court have made it clear over and over again that the goal of the new Code is to help the corporate debtor get back on its feet and keep running its business as a going concern. In a country where pre-colonial laws are still in place, the new code has already been the subject of a number of court rulings, even though it is still in its early stages.
After the new Code was passed, there were big changes to the Indian laws on bankruptcy. At the moment, corporations have been borrowing money in a responsible way, and more investors are interested because they know they will get their money back.
Also, the business owners are taking extra precautions because they are afraid of losing control of their business to the creditors if they don’t pay. The effective adjudication of the matter has led to an increase in the number of insolvency resolutions that have happened within 330 days.
In the last five years, the main problems with the Code have been low recovery rates, huge haircuts, long delays, the digitalization of the insolvency ecosystem, and a lack of resources.
Intended vision (2025)
Since the beginning of the Code, there has been a significant amount of progress made in the laws that govern insolvency and bankruptcy. Nevertheless, it is important to keep in mind that there are some criteria that still need to be addressed and will likely be completed by the year 2025. The following are examples of some of them:
Decreased levels of liquidation:
However, despite the fact that the legislation’s intention was to enable the efficient settlement of the corporate debtor’s situation, it has been seen that more than half of the enterprises end up going out of business after the CIRP was put into action.
The fact that corporate debtors covered by CIRP neither have any assets nor any profitable business out of which debts may be recovered by the resolution applicant may be the primary reason why there has been an increase in the number of cases involving liquidation.
It is important to keep in mind that the resolution applicant will only submit their resolution plan if they have unsold merchandise, a land bank, or receivables from customers. The resolution plan that was provided by the Committee of Creditors may not be determined to be economically viable, and the resolution applicant could find the proposed haircut or form of commissioning to be undesirable.
This is another possibility. As a consequence of this, it is anticipated that during the next three years there will be a reduction in the number of lawsuits involving corporations that are participating in CIRP.
The Code’s focus on a time-limited system of bankruptcy resolution is central to its purpose, yet several cases have experienced delays in excess of the 330 days allowed by law. Because of the lengthy insolvency procedure, the value of the debtors’ assets decreases over time.
Infrastructure, digitalization, and professional development opportunities for bankruptcy resolution practitioners are all areas where the government is tasked with investing more resources. In addition, adjudicating authorities are tasked with addressing the protracted wait at the admission stage.
The Economic Value of a Successful Resolution vs Liquidation:
While it is of paramount importance to remember that the value of a firm as determined by resolution should always exceed that as determined by liquidation, it has been observed that the difference between these two values has been decreasing over time.
It is preferable to avoid liquidation as a last resort and instead try to rescue successful enterprises via settlement and restructuring. Since liquidation would result at the end of the corporate debtor’s business, the purpose of the Code is to increase the likelihood that the firm may be saved.
When a resolution plan is not feasible, when the Committee of Creditors recommends liquidation, or when the adjudicating body rejects the resolution plan, the next best option is often a liquidation. In the next years, a powerful mechanism is predicted to lengthen the time between resolution and liquidation.
A creditor takes a haircut when he agrees to forgive some of his debt. It seems that in the last five years, haircuts have reached 95% in certain situations, having a negative impact on creditors’ capacity to do business and make a profit.
Because the value of the money lent is reduced relative to the money recovered later, large haircuts discourage prospective investors from lending money. In the next years, we should see a standard for the size of a haircut, and we need to find a methodical way to deal with huge, unnecessary trims.
Borrowing costs may be reduced by prioritizing creditor rights protections in order to mitigate any potential loss. The goal should be to get as much money back from the business that owes it as possible while still taking reasonable haircuts.
The Pre-Pack Insolvency Resolution Process:
A swift resolution method in which secured creditors and investors reach an agreement rather than relying on a public bidding process. Pre-pack insolvency is distinguished by a short resolution timeframe of up to 120 days for financially troubled businesses. Pre-pack insolvency is preferred by corporations over CIRP because it allows the corporate debtor to retain management control and does not need judicial permission.
In any case, the decision will be final and binding on all parties involved. Important to remember is that pre-pack insolvency only applies to SMEs at this time. Consequently, in the next years, pre-pack insolvency resolution is likely to be relevant to additional business arrangements.
Though bankruptcy legislation has undergone significant change in recent years, the regulations pertaining to Cross-Border insolvency have remained largely unchanged. There are no established norms by which enterprises operating in many legal systems may reorganize their operations.
To be clear, international creditors may file claims against an Indian corporation, but the Code lacks common mechanisms for the automatic recognition of insolvency proceedings in a foreign jurisdiction.
In order to improve the efficiency of the insolvency resolution process and to better accommodate cross-border insolvency, it is anticipated that appropriate changes will be made to the code related to Cross-border insolvency in the future years.
Companies and assets across many sectors have been impacted by the Code, which has made the investment landscape more secure for everyone. To encourage investment and guarantee efficient recovery of troubled assets, it is crucial that the legal framework be unambiguous and easy to implement.
While its efficacy has been generally acknowledged over the last five years, certain questions remain unanswered that might have real-world consequences for potential investors and resolution applicants. Therefore, in the next three years, it should be a priority to develop a foolproof method that addresses the difficulties now encountered by India’s insolvency rules.Although the Code is still in its infancy, it has already had a profound impact on the insolvency system.
Over the last five years, it has greatly decreased the amount of NPAs. It has ensured the safety of the creditors as well as the continued success of the enterprises. Certainly, there is still much to do before the Code can match the standards of advanced countries; but significant progress is yet to come in the years ahead.
This article has been authored by Ananta Kashyap, a law graduate from Lloyd Law College.
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