Bankruptcy Laws Suspended For Six Months

Indian Bankruptcy Code suspended for 6 months

Amidst severe impact on small businesses and start-ups due to the lockdown, the Indian government has suspended particular sections of the Indian Bankruptcy Code to aid industries in getting back to feet.
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Crux of the Matter

Suspension To Save
The Indian government recently cleared the proposal to suspend Section 7, 9, and 10 of the Insolvency and Bankruptcy Code (IBC). Consequently, proceedings regarding bankruptcy would be suspended for 6 months, which could be extended to 1 year. The modifications would be applicable to Non-Performing Assets (NPAs) – assets unable to bring income, after 25 March. The insolvency initiation limit has also been increased to a default of ₹1cr. The mentioned sections enabled initiation of insolvency by the following:

  • Section 7: By Financial creditors
  • Section 9: By Operational Creditors
  • Section 10: By the company itself


What Is IBC?
IBC was passed by the Indian government in 2016. The code was designed to ease the process of bankruptcy and to aid small and medium businesses while increasing liquidation efficiency. Its impact is witnessed in its recovery of NPA; in 2018-19, ₹70,607 or 56% of total recovery of NPA by Scheduled Commercial Banks (SCB) of India was done under IBC.

How Insolvency Works?
Insolvency is the condition when a company is unable to fulfill debts and financial obligations. It is initiated by the creditor or company itself. The Resolution Professional (RP) takes charge of the company and its assets and designs a resolution paradigm. The time limit for resolution is 270 days, after which the company is put into liquidation.


Impact
Experts have welcomed the step amidst Coronavirus pandemic which has severely affected Micro Small and Medium Enterprises as revenues fell.

Some experts have pointed to the negative impact of the step on banks. As the Insolvency process already took 270+ days, further addition of 6 months will delay the recovery process. ICRA has predicted a decrease of 30-40% in the realization (recovery) for creditors in Financial Year 2020-21. Moreover, as resolution and liquidation both require 3rd party funds, lack of funds in the hands of investors due to lockdown might increase the NPA.

Curiopedia
  • Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States. The filing for bankruptcy by Lehman Brothers remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets.
  • The word ‘bankruptcy’ is derived from Italian banca rotta, literally meaning “broken bench” but more idiomatically “broken bank,” since bankers traditionally dealt from wooden benches. A folk etymology alleges that Italian bankers’ benches were smashed if they defaulted on payment, but this is often dismissed as a legend.
  • Anil Dhirubhai Ambani, son of the founder of Reliance Group Dhirubhai Ambani, is the chairman of Reliance Group, which was created in July 2006 following a demerger from Reliance Industries Limited. Ambani, once the sixth richest person in the world, declared before a UK court in February 2020 that his net worth is zero and he is bankrupt.

IBC Amendments Passed in the Backdrop of Yes Bank Crisis

To streamline the corporate insolvency resolution process, the parliament on March 12 passed amendments to The Insolvency and Bankruptcy Code (Amendment) Bill (IBC), 2020. This comes in the backdrop of the crisis that India’s fourth-largest private sector lender, Yes Bank is going through.

Crux of the Matter

IBC Amendment Bill was passed in Rajya Sabha on March 12 and by Lok Sabha on March 6. The new law will provide protection to new owners of a loan defaulter company against prosecution for wrongdoings of past owners. The amendment makes compulsory a minimum threshold for homebuyers to initiate insolvency and provide immunity to a corporate debtor from past liabilities once it’s acquired.

The government had brought in an ordinance in December 2019 to make necessary changes. In January 2020, the Supreme Court had ordered status quo on the provisions that restricted power. The Bill amends the Code the effect that a licence, permit, registration, quota, concession, clearances or a similar grant or right will now not be terminated during the moratorium period.

The government is both responsive and is committed to delivering its promises in tune with changing times.

– Nirmala Sitharaman, Finance Minister

Congress MP Jairam Ramesh suggested the government to revisit the Insolvency and Bankruptcy Code w.r.t MSME sector to protect their interests. He also highlighted that under the present law, the recovery rate is only 10%. Answering doubts over MSME, the Finance Minister said, “the banks have been asked to pay dues to stakeholders in order to maintain the liquidity.”

Trinamool Congress MP Manas Ranjan Bhunia said, since the passing of the bill in 2016, the government has introduced three ordinances and four amendments for rectification, which shows a lack of knowledge and confusion of the government.”

The statistics suggest that as of 1st January 2020, nearly 15 thousand cases were resolved based on Insolvency and Bankruptcy Code out of around 43 thousand cases.

Curiopedia

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The bankruptcy code is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. More Info

UCO Bank Recovers Rs.800-900 Crore to Revamp Fraud-Hit Balance Sheet

State-owned lender UCO Bank has recovered Rs. 800-900 crores from its four stressed accounts during December quarter of Fiscal Year 2019-20, said UCO BANK MD and CEO, Mr. A K Goel. The Bank is switching to recovery mode after its former MD Arun Kaul was booked for siphoning loans worth Rs. 6.21 billion.

Crux of the Matter
  • The fraud-hit bank recovered stressed loans from RattanIndia Power Ltd., Essar steel, Ruchi Soya Industries Ltd. and Prayagraj Power.
  • With the help of the Corporate Insolvency Resolution Process (CIRP) UCO Bank manages will recover money from Essar Steel and Ruchi Soya.
  • The resolution process of the remaining two companies, RattanIndia Power and Prayagraj Power Generation has been executed under RBI’s Prudential Framework for Resolution of Stressed Assets. A lump-sum payment of Rs 6,574 crore from RattanIndia will help the bank to reduce its bad loans further.
  • Bank MD and CEO, Mr. A K Goel stated that to rebalance the current loan portfolio, UCO Bank has announced ‘Loan Carnival‘ from January 6.
  • As a part of that, it will disburse Rs. 2700 crore retail loans, and Rs. 1300 crore MSME loans.
Curiopedia

National Company Law Tribunal(NCLT) is established by the Supreme Court to order to handle the laws regarding the companies. National company law tribunal is a quasi-judicial body in India. More Info

Insolvency and Bankruptcy Code (IBC) has been a big sigh of relief for MSMEs. It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. It would ensure faster debt recovery or liquidation process. The IBC Law was brought about with the objective to ensure that ease of doing business greatly improves in India. More Info