The World Bank conducts an annual examination to gauge the ‘Ease of Doing Business’ in nearly 200 economies and ranks them on ten sets of parameters, which include ‘Resolving Insolvency’. India ranked 142nd in ‘Ease of Doing Business’ for 2015.
In terms of resolving insolvency, the country ranked 137th. The government set an ambitious target of breaking into the top 50 on this index, and initiated a plethora of institutional reforms, including an overhaul of the insolvency framework. After four years, India ranks 77th, up by 65 places, in the aggregate rankings, and 108th on ‘Resolving insolvency’.
Features of IBC –
- Its primary focus is revival of an ailing firm, while recovery by creditors is an incidental outcome. Secured creditors have absolute priority over other claims in insolvency (liquidation) proceedings.
- The recovery rate is a function of time, cost and outcome of insolvency proceedings. In addition to reviving ailing firms, the insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (Code) have returned 210 per cent of liquidation value for creditors. They are realising on an average 48 per cent of their claims through reorganisation, as compared to the erstwhile regime which recovered 26 per cent.
- The Code provides a timeline of 180 days to conclude a corporate insolvency resolution process (CIRP), extendable by a one-time extension up to 90 days. Probably, no other regime in the world mandates a time-bound resolution. This push has meant that proceedings under the Code take on average about 300 days, including time spent on litigation, in contrast with the previous regime where processes took about 4.3 years.
- The insolvency resolution process cost, which includes fee of insolvency practitioner and other professionals, and expenses related to meetings of committee of creditors (CoC), public announcements, filings and litigations, etc., have been 0.5 per cent of the realisation by the creditors in contrast with a cost of 9 per cent under the previous insolvency framework.
- With realisation of 48 per cent of claims through reorganisations coupled with pre-admission and post-admission settlements, the Code has proved to be an efficacious remedy even for loan recovery.
- The strength of an insolvency framework is a function of four indices relating to commencement of proceedings, management of a firm’s assets, reorganisation proceedings, and creditor participation. The Code does not envisage separate applications or processes for reorganisation and liquidation.
Transparency in proceedings –
- The Code envisages a resolution plan for reorganisation of a defaulting firm. Irrespective of the composition of the CoC, other stakeholders have a right to receive the agenda and participate in the meetings of the CoC.
- The CoC takes major decisions on behalf of the firm under CIRP. It appoints the insolvency practitioner to run the operations of the firm as a going concern and run the process as well.
- Any creditor may seek any information about the firm’s business and financial affairs from the insolvency practitioner. Any creditor may contest the decision of the insolvency practitioner accepting or rejecting its own claims or claims of other creditors.
It is a matter of satisfaction that within two years of the enactment of the Code, the Indian insolvency regime has all the essential elements and practices that any mature insolvency regime ought to have. Not surprisingly, it bagged the award for the ‘Most Improved Jurisdiction’ for 2018 from the Global Restructuring Review. Hopefully, it will also pass with flying colours in the ongoing examination of the World Bank.
Source – The Hindu Business Line
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