0.1694
900 319 0030
x

Flaws in IBC

iasparliament Logo
August 12, 2017

What is the issue?

  • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted with the intention of improving the ease of doing business in India
  • The code is however said to have certain loopholes that goes against this principle.

What is IBC?

  • It aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals.
  • It attempts to ease the process of recovery of money by operational and financial creditors in a timely manner.
  • It places the onus on professionals to put forth the resolution plans.

How does it operate?

  • When a firm defaults on its debt, its control will shift to a committee of creditors.
  • The committee will have 180 days to evaluate the proposals from various interested parties on how to either revive the company or enable liquidation.
  • The code has provisions for the creation of ‘Insolvency Professionals’ who would handle the commercial aspects of the resolution process.
  • Insolvency professional agencies will train and regulate these professionals.
  • The Debt Recovery Tribunal act as adjudicating authorities for individuals and unlimited partnership firms, and National Company Law Tribunal would deal with companies and limited liability entities.
  • Insolvency and Bankruptcy Board of India will be the overall regulator.

What are the shortcomings?

  • The code fails to provide adequate safeguards to protect the rights of the company before handing over the management to the resolution professional.
  • The Code rides substantially on the unquestionable word of the creditors.
  • The Code fails to provide any opportunity to the corporate debtor to make a representation at any stage of the resolution process.
  • The Code is also deficient in providing criteria for the qualification of the interim and of the final insolvency resolution professionals.
  • It also leaves too much discretion in the hands of the IP.
  • It allows for any person to access the information memorandum put together by the insolvency professional without restricting competitors or imposing any confidentiality obligations.
  • This goes against the right to business.
  • The Code fails to define a resolution applicant. All such resolution plans are placed before the financial creditors and is implemented by way of an order by the NCLT.
  • If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.
  • The Code prohibits withdrawal of the application once it has been admitted. This means that there is no scope for settlement.

What could be done?

  • The code must be robust, decentralized, less costly, inclusive and speedy.
  • This would help businesses exit sooner and capital to be redeployed faster to productive firms, thereby improving economic output and employment.
  • The code should encourage decentralization, reduce the role of courts or insolvency professionals and allow for a greater role for a market-friendly approach.

 

Source: The Hindu

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme