Transforming Business and the Insolvency System

Context: There is a need to streamline the Insolvency and Bankruptcy Code (IBC) to instill more con?dence in foreign and local investors. 

The Significance of IBC

• A key legislative reform: that would help aid India’s path to self-reliance on a high growth trajectory – as mentioned by the Prime Minister.

• Ease of Doing Business: enabling India to emerge as a ‘Make for World’ platform.

• The Ministry of Corporate Affairs (MCA) has highlighted the IBC’s important role in India’s rapid rise in the Ease of Doing Business rankings.
• According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018, a leap of 56 places. 
• The recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019. 
• The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019. 

• Increased Foreign Direct Investments (FDIs): by 20% to $74.5 billion in 2019-2020.

• Transformed Insolvency Resolution: It replaced a rather inefficient bankruptcy law regime with a time-bound resolution process rather than liquidation.
• Instilled confidence among the investors: Its core implication has been to allow credit to ?ow more freely to and within India while promoting investor and investee con?dence. 
• Established the Insolvency and Bankruptcy Board of India (IBBI): as an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities. 

Issues with the IBC

• Rising backlog of cases (to the tune of nearly four crores): The novel coronavirus pandemic will exacerbate this. 

• Challenge in enforcements: On an average, it takes as many as 1,445 days for a contract to be enforced, and that too at the cost of nearly 31% of the claim value. 
• Criminal penalties acting as deterrent to investors: The Government’s challenge is to help di?erentiate between ‘Good-faith mistakes’ and ‘Intentional bad faith actions’;  to penalize the former, and criminalise the latter. 
• Delay in the resolution process: due to inability to make significant decisions without full clarity of ownership and control.
• The delays result in low-value liquidation due to a high economic rate of depreciation. Higher value stems from the ?rm being acquired as a going concern. 

Positive measures by the Government:

• Decriminalize minor offences: NITI Aayog is planning to signi?cantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala ?de intent. 

• Legislative Measures: Rolled out commercial courts, commercial divisions, and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts, and removed over 1,500 obsolete and archaic laws.

• Help to the Micro, Small and Medium Enterprises (MSMEs): The MCA along with IBBI is working diligently on putting in place an MSME and non-MSME framework to help expedite this process. 

Way Forward: 

• Reduce delays: The report of the Bankruptcy Law Reforms Committee speaks of the critical need for speed in the working of the bankruptcy code. 

• Institutionalising the introduction of a prepacked insolvency resolution process, the need for which is highlighted by the recent necessary suspension of the IBC proceedings.

• This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality. 

• Bringing in technology: to ensure social distancing and enhance the efficiency of proceeding & hearings.

• It would help ease of access to justice and greatly help ease of doing business from a process and e?ciency standpoint as well.