A Balanced Approach Under IBC Amendment Ordinance 2021

Synopsis: The new Insolvency and Bankruptcy Code amendment ordinance 2021 shows a shift from a creditor-centric approach towards a more balanced approach. Under the new approach, both promoters and creditors are incentivized to reach a more acceptable solution.  

Background:

• The President has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021.
• It marks a shift from earlier approaches against the promoter and focussed on the creditor. Under this, the creditor was given the main control over the insolvency process while the promoter hardly had any say.

About the amendment:

• It tries to address the structural weakness in IBC by allowing a pre-packaged insolvency resolution process (PPIR).
  • PPIR is a form of restructuring that allows creditors and debtors (or promoters) to work on an informal plan within the IBC structure. 
  • It is done before the commencement of insolvency proceedings.
  • Once accepted by creditors, the plan must be presented to the National Company Law Tribunal (NCLT) for approval.
• The process is available only for MSMEs (Micro, small and medium enterprises).

Difference from earlier approach:

• The amendment has made the process less promoter averse. Now PPIR will ensure promoters are able to retain their control over their business.
  • Earlier, the control was given to a resolution professional. He/she was appointed to manage the affairs of the company during the insolvency process.
  • The promoters did not have control due to cases of corruption, crony capitalism, and other fraudulent activities tagged with them. This undermined the creditor’s interest and sanctity of the resolution process. 
• Further, the new process doesn’t give the scope of open bidding that was available earlier. This might hinder price discovery and value maximization for creditors.

Benefits of the new amendment:

• More powers to Promoters: They get to hold on to their firms, and exit the process with more manageable obligations.
• Prevents Closure of Genuine Firm: With greater promoter control, the genuine firms will not get closed, like the ones who are not performing due to pandemic stress or other genuine barriers.
  • Further, the IBC process suffers from a liquidation bias. Around 46.5 % of all cases under IBC have ended up in liquidation. While only 13.1% witnessed a resolution.
• Creditor Incentivisation: As past data shows that liquidation value is only a fraction of the creditor’s claims and the majority of IBC cases end up in liquidation. 
  • The new process can help the creditors get better value for their debt. Especially economic distress when there are limited buyers of stressed assets.
• Better Coverage: The PPIR process doesn’t fall under the central bank’s restructuring framework. It covers all financial creditors as opposed to RBI’s restructuring schemes which deal only with banks.
• Prevents future scrutiny: PPIR involves approval by a judicial seal that prohibits any future questioning by investigative agencies.

Way Forward:

• The PPIR process gradually should made available to all corporate debtors.
• The government can also relax the terms of Section 29A of IBC in order to widen the list of possible buyers.
  • The section disqualifies those who had contributed to the downfall of the corporate debtor or were unsuitable to run the company.

Source: Indian Express