Insolvency and Bankruptcy Code | Significance
The Code, which was passed by Parliament six months ago, attempts to address the failures that plagued previous mechanisms dealing with insolvency.
A recent survey report by global consultancy Alvarez and Marsal found that the average duration for insolvency resolution in India is 4.3 years, which is significantly higher than the prevailing norm of 2.6 years in South Asia and 1.7 years in the OECD high-income countries. The World Bank’s Ease of Doing Business Report also confirms the long duration of insolvency resolution in India. This Act aims to reduce the duration for resolution and also enhance the ease of doing business in the country.
About the Code
- The Act aims for a complete renovation of the current insolvency and bankruptcy system in India, which will help streamline the procedure of revival of companies facing financial distress.
- The Act proposes adherence to strict deadlines to decide whether to liquidate a sick company or not, wherein the decision to liquidate a company will have to be reached within 180 days.
- The Act proposes the setting up of a Board to regulate insolvency professionals and agencies. It also proposes the setting up of a fund dubbed the ‘Insolvency and Bankruptcy Fund of India’.
- A number of provisions spread across various statutes have rendered the insolvency and bankruptcy-related process a legal quagmire significantly hindering the ease of doing business in the country. The new Act seeks to consolidate all of this into a single Code.
Structure of the Board
- IBBI is putting in place a new architecture that involves consolidation of existing laws and amending them for a time-bound resolution of insolvency.
- Within two months of Chairman being appointed, the IBBI has, reportedly, already registered 18 insolvency professionals and three professional agencies.
- It has also notified four sets of regulations pertaining to the resolution process for companies, professionals, model bye-laws and the governing board of insolvency professional agencies.
- Under the emerging architecture, the professional agencies will be the first level regulators and they will play a role akin to the stock exchanges in the securities market i.e. they will register and regulate insolvency professionals, who will be the key service providers in the new process.
- In addition to their regulatory role, the professional agencies will also have the duties of educating professionals, conducting examinations and administering the prescribed code of conduct.
- The professionals will work as managing directors of companies that have been declared insolvent and their pay-off will be linked to recovering the most value in the given time.
Shortcomings of the Board
- There is a shortage of registered professionals, despite thousands of professionals such as chartered accountants, company secretaries, lawyers and cost accountants.
- There is a dearth of domain knowledge and a general lack of awareness about the code which could further slow-down the insolvency process under the new regime.
- IBBI has not yet laid out the framework governing individuals, i.e., related to bankruptcies as against insolvencies.