Insolvency and Bankruptcy Code (Amendment) Bill 2017

Why in news?

The Insolvency and Bankruptcy Code (Amendment) Bill 2017 was introduced in the Lok Sabha to replace an earlier ordinance.

What was IBC, 2016?

• The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to facilitate a time-bound resolution for ailing and sick firms.
• It could either be through closure or revival, while protecting the interests of creditors.
• Under IBC, either the creditor (banks) or the loaner (defaulter) can initiate insolvency proceedings.
• It is done by submitting a plea to the adjudicating authority, in this case, the National Companies Law Tribunal (NCLT).
• The resolution process was expected to aid in reducing the rising bad loans in the banking system.

What is the need for changes?

• There was a concern that the resolution process could leave scope for the defaulters to take advantage of the situation.
• Notably, the provisions allowed them to come back into the management by paying a fraction of the defaulted amount.
• Addressing this, an ordinance was brought in later, which prevented unscrupulous promoters from misusing the provisions of the IBC.
• It thus barred from participating in the resolution process, the following:

1. wilful defaulters
2. defaulters whose dues had been classified as NPAs for more than a year
3. all related entities of these firms

• Consequently, many entities that acquired distressed assets were disqualified from the bidding process, as these were classified as NPAs.
• Similarly, banks opting to convert their debt into equity under the RBI's restructuring scheme would have become promoters of these insolvent companies.
• And hence these have also been barred from the resolution process.
• These anomalies called for changes to make the debt resolution process easier and more efficient.

What are the highlight provisions of the bill?

• The amendment bill will replace the earlier ordinance on the Insolvency and Bankruptcy Code.
• It has addressed concerns about some of the stringent provisions in the ordinance and seeks to streamline the law and plug loopholes.
• Accordingly, now, wilful defaulters and existing promoters can become eligible to submit a resolution plan if they repay their dues and make their bad loans operational.
• Also, defaulters who had participated in the insolvency proceedings before the enactment of the ordinance can also bid for stressed assets provided they clear their dues in a month.
• Notably, these promoters were earlier barred from taking part in the resolution process of the companies.
• It also allows guarantors of insolvent firms to bid for other firms under the insolvency process.
• Further, asset reconstruction companies, alternative investment funds (AIFs) such as private equity funds and banks can now participate in the bidding process.
• The bill thus seeks to strike a balance in the trade-off between punishing wilful defaulters and ensuring a more effective insolvency process.
• The bill also seeks to bring any individual who was in control of the NPA under the ambit of the insolvency code.
• It lays out that the individual insolvency law will be implemented in phases.

What are the concerns?

• All bad loans may not be the result of wilful default, diversion or misappropriation of funds.
• In a market driven economy, failure can be for various reasons.
• These may include change in market conditions, severe competition, change in technology, change in government policies, etc.
• The law thus does not recognize promoters facing genuine operational or financial difficulties because of external factors.
• These factors for defaulting should also be recognised and resolutions provided for, to help bring the economy back on track.

Source: The Hindu, Livemint