INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016
WHY IN NEWS?
- Recently, the Union government exempted aircraft leases from the IBC moratorium that prohibits the repossession of any leased assets of a company undergoing insolvency process.
MORE ABOUT THE NEWS:
- In June 2023, the government exempted licences and leases relating to oilfields from the purview of the moratorium.
- Now, the exemption of leased aircraft.
- This was a discharge of an obligation under the Cape Town Convention (CTC), which India acceded to in March 2008.
- Reportedly, this move would reduce leasing costs for Indian carriers by about $1.3 billion.
- 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 bankruptcy legislation seeks to address the issues faced currently in the context of insolvency and winding up.
- The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).
- The legislation will not only improve the ease of doing business in India, but also facilitate a better and faster debt recovery mechanism.
OBJECTIVES OF THE CODE:
- It is a way to save a business as a going concern, through restructuring, change in ownership, mergers and other methods.
- To maximize the value of assets of the corporate debtor.
- To promote entrepreneurship, availability of credit, and balancing the interests.
- Improved handling of conflicts between creditors and the debtor.
- It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.
- Set a limit between malfeasance and business failure.
- It can also provide flexibility for parties to arrive at the most efficient solution to maximize value during negotiations.
ABOUT MORATORIUM PROVISION OF IBC:
- The IBC moratorium is typically for six months, but is routinely extended.
- The Cape Town Convention moratorium is typically for two months unless the country has agreed to a different duration.
- The lessor gets back the aircraft if the company does not elect to retain it within two months, which conflicts with the six-month moratorium under the IBC.
- It is not rare for insolvency proceedings to conclude in two months and proceedings like prepack take less than two months in some jurisdictions.
CHALLENGES IN IBC:
- As the door for exemptions are open, the list of exemptions would keep on increasing and, over time, could be larger than the remaining, diluting the central idea behind the moratorium.
- The committee of creditors has significant discretion in accepting resolution plans and appointing Insolvency Professionals.
- The Parliamentary Standing Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on an average had to bear an 80% haircut in more than 70% of the cases.
- The average number of days it takes to resolve such cases increased rapidly over the past five years.
WHAT NEEDS TO BE DONE?
- An obvious but difficult option is to shorten the IBC process to two months for the airline industry.
- Other options include increasing the period of the CTC moratorium to match the IBC moratorium.
- A systematic impact analysis to quantify the gains and losses from the perspective of an economy should guide an exemption.
- The Parliamentary Standing Committee suggested that the pre-packs option be extended to all corporates after review.
- Citing the more than 50% vacancy in the Tribunal compared to the sanctioned strength, it suggested recruitment in advance based on the projected number of cases.
- The IBBI has also called for a new yardstick to measure haircuts.
- The law must lay down guiding principles and require the Government to apply those principles to carry out an impact analysis of any proposed differential dispensation, in consultation with the public.
SYLLABUS: MAINS, GS-3, INDIAN ECONOMY
SOURCE: THE HINDU