Insolvency & Bankruptcy Code: Ominous or Opportune?

(Originally published on June 14, 2017 on LinkedIn)

The Insolvency and Bankruptcy Code, 2016 (“IBC”) came into force late last year. No matter how ominous the name may sound, the IBC has the potential of being a game changer in whole scheme of business. The IBC is not the first statute dealing with recovery of financial and business dues, but it is certainly unique in terms of the approach that has been adopted on the matters relating to solvency of a venture, and balancing the aspects of continuity of business, and the need of honoring business debts.

The debt recovery rate in India is among the lowest in the world and crores of crores of tax payers money is lost on account of default (and willful default) on the part of borrowers and business debtors. Since ages, the creditors have been at the mercy of the borrowers when faced with a default. Given the multiplicity of laws, judicial forums, and judicial proceedings, in most cases precious time is lost in obtaining relief under one or more statues and in one or more forums. The provisions for appeal only complicate the matter and add to the misery of business creditors.
The IBC is a great step in the right direction. IBC consolidates and codifies, at one place, all the provisions relating to insolvency resolution and winding up of corporate entities and bankruptcy of individual and other unincorporated entities. The IBC, not only envisages traditional concepts of winding up and bankruptcy, but also introduces several international practices and concepts like insolvency resolution and fresh start process. The IBC recognizes the importance of ‘time’ in the whole scheme of things and therefore contemplates time-bound process and proceedings.

The IBC has neatly and clearly laid down provisions on various aspects of a default situation depending upon the relevant factors like: (i) the nature of creditor (financial creditor or operational creditor), (ii) nature of borrower (incorporated entities, unincorporated entities and individuals), and (iii) measures required (insolvency resolution process, liquidation proceedings, fresh start, bankruptcy proceeding etc.). The IBC appears to be a balanced legislation which not only attempts to address and guard the interests of the creditors, but also contains provisions required to protect interest of businesses in distress by contemplating a window and opportunity for revival and resolution.

One of the important concepts that IBC envisages is the provision relating to recovery of dues by the operational creditors (i.e., non-financial creditors who have provided goods or services to an incorporated business entity during the course of business). Any person has who has provided any goods or services to an incorporated business entity and is faced with a default / non-payment of more than Rupees One Lakh can proceed against the recipient entity in the manner provided in the IBC. The IBC has laid out straight process to be followed in such a case. The beauty of the concept is that it gives a decent window and opportunity of correction to the defaulting entity and also ensures that interest of the creditor entity stay protected. On the aspect of default on financial dues (of banks, financial institutions and other lenders), the provisions of IBC are equally organised, clear and stringent.

The IBC appears to be based upon the following three principles:
• The promoters of a business which has defaulted on its dues need not remain in control unless they demonstrate the required intent and ability;
• Maximizing the realization value of the defaulting business, whether through sale as a ‘going concern’ basis or pursuant to winding up in a time-bound manner is of utmost importance; and
• Ensuring symmetry of information available with all stakeholders.

The IBC, in my view, is opportune, not only in terms of the requirement but also in terms of timing and shall go a long way in addressing the objectives for which it has been enacted.