[Answered] “The Insolvency and Bankruptcy Code, 2016 (IBC) has the potential to make credit cheaper, its sources wider and engender corporate accountability.” Analyze the statement.

Insolvency is a condition of inability to pay back debt. IBC,2015 creates a consolidated (single), time-bound process for resolution of the same.

It has the potential to make credit cheaper by strengthening the rights of creditors thereby reducing risk associated with lending and increasing competition in lending and IBC could also help inculcate responsible behaviour by corporate borrowers.

Cheaper credit:
• Comprehensive rights to the creditors:Rights of the creditors are secured by having a single comprehensive law unlike the earlier regime where insolvency was dealt with multitude of laws which applied inconsistently to different categories of creditors.
• Collection action: Collective action by all creditors together could achieve better outcomes by jointly deciding on a borrower’s viability and path for resolution. To retain the collective character of insolvency, similarly placed creditors must be treated alike, as directed in the International Monetary Fund principles. IBC addresses this by creating a level-playing field for all stripes of creditors.
• Accelerating decision-making of resolving the dispute: IBC incentivizes quick decision-making by having an outer limit of 180 days for the resolution to be completed.
• Level-playing field for creditors and prevents hold-outs: Approval of 75% of all creditors voting by value to pass any resolution plan and repayment of dissenting at least liquidation value would prevent the risk of certain lenders stallingthe proceedings.
Engenders corporate accountability:
• Ensuring responsible corporate borrowing: By introducing criminal penalties forfraudulent trading for the first time IBC ensures that there is no concealment of information about financial health of debtor. Also the promoters and management of the company are made personally liable if it can be demonstrated that they were aware that the company was in a precarious financial situation and yet took on more debt.
• Deterrence against corporate profligacy and recklessness: IBC also has provisions criminalizing the concealment of assets, falsification of accounts and defrauding creditors. Based on investigation ordered by creditors, if it is discovered that assets or property was fraudulently transferred from the company as far back as two years prior to the insolvency proceedings, these transactions may be reversed.

Thus, IBC follows international best practices and need to be supplemented with strong institutional infrastructure and implementation path so that we will improve in the ‘resolving insolvency’ ranking (Ease of doing Business) of present 136 among 185 countries.


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