Why India is rewriting its bankruptcy code

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The Insolvency and Bankruptcy Code (IBC), which has improved the credit culture in the country and boosted the rescue of businesses, will be given a facelift. Mint takes a look at what the law has in store.

What impact has the IBC had so far?

The IBC came into being in May 2016, when the previous legal system of the Board for Industrial and Financial Reconstruction (BIFR) was widely abused by shareholders of missing businesses to prevent lenders from taking collection action. He showed that defaulters will not only lose control of businesses, but will also be prevented from recovering them unless contributions are paid. The operation of the IBC has been marked by intense litigation involving developers, lenders and investors, spectacular successes and, in several cases, company liquidations. The code is set for another makeover.

What necessitated the last makeover?

A large number of inherited cases could not be saved. In many cases, the delays have proven to be excessive as stakeholders have fought long legal battles. About three-quarters of the 1,682 open cases had been pending for more than 270 days at the end of June. The parliamentary standing finance committee headed by Jayant Sinha reported in August the steep haircut taken by lenders in many resolved cases and recommended a review of the IBC to see if it had met its target. In addition, 47% of the 2,859 cases that were concluded were liquidated, although the 14% that were saved represented three-quarters of the value of the assets in those cases.

What stage is the IBC exam currently at?

The Indian Insolvency and Wisconsin Bankruptcy Board (IBBI), the Ministry of Corporate Affairs and two advisory committees on corporate law and insolvency issues are working on amendments to the IBC. A bill amending the code will be tabled during the next budgetary session of Parliament. The IBBI has already made some changes to the tendering process for distressed assets.

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Marked by delays

What can we expect from the makeover?

The most important issue is the large haircut in resolving insolvency, which can be attributed to either lack of regulatory certainty on certain assets, lack of appetite for assets in the market, or lack of marketing, said Anoop Rawat, partner at law firm Shardul Amarchand Mangaldas & Co. Delays in court admissions also need to be addressed. Experts are basing their hopes on the automatic admission of bankruptcy claims on the basis of the default record.

What is the future direction of the IBC?

The IBC has been regularly modified to rebalance the rights of stakeholders with competing interests, according to the needs of the moment. This trend is set to continue. In 2018 homebuyers were defined as financial creditors and later the default threshold to trigger bankruptcy action was raised by ??1 lakh to ??1 crore. The IBC is still in development and will need to be revised periodically over the next few years to fill in the gaps, said Yogendra Aldak, partner at Lakshmikumaran and Sridharan law firm.

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