As a layman, it is very important to under one of the new laws introduced by our “MODI” government. As we all are now aware of so much talked GST (Goods and Service Tax) which is testing its spirit, till today, the other one of the landmark Legislature is IBC, 2016 i.e Insolvency and Bankruptcy Code, 2016.
We all know, that any financial facility, when not repaid either in the form of principal or even it’s interest, beyond certain days from its due date, is called as Non- performing asset. NPAs are resulting in weaker incomes to banks, blockage of funds of a fundable amount and is leading to lower economic growth.
Hence, NPAs are required to be recovered as early as possible, the same as in the case of any disease. Before the IBC era, mainly Banks and financial institutions opt for RDDFI ie. Recovery of Debt due to Banks and Financial Institutions Act, 1993 & SARFAESI ie. Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.
The old law has resulted in:-
• Delay in NPA recovery.
• Failure to resolve NPAs which has poses major systemic risks
• There was an urgent need for legislation which would expedite NPA resolution.
• The old regime was corporate debtor centric ie. Business decisions were taken as per the decision
of the Board of director and Banks have no role. Even no diversion of funds and best use of assets
and resources were not ensured.
The IBC 2016 has important changes that have solved age-old “Root-cause” of failure of recovery by banks and financial institutions.
- IBC code is the latest law and is overriding all other laws if inconsistent with provisions of IBC. So, even if any matter is pending before adjudicating authorities under previous or existing laws for recovery etc., an application can be made under IBC.
- It is time bound. The code has prescribed a timeline which has to be followed. This is a boon for stakeholders, as it is protecting corporate debtors assets and focusing on resolution aspects in a time-bound manner.
- Under IBC the debtor is no more in possession of business or any decision. IBC has given powers to Financial creditors, who have taken a risk and provided necessary finance for running of a business / for setting up etc. IBC aims for creditor driven resolution which is necessary for the earliest recovery and revival.
- IBC code also gives power to non-financial creditors i.e. any supplier of goods or services. They can apply against defaulting corporate debtor and whole CIRP ( corporate insolvency resolution process can be started. )
- IBC gives breathing time i.e. time for resolution, time for analysing wrongs as the same has provided for Moratorium period. During the time of moratorium, any recovery proceeding, suit matters etc are kept as status quo situation. So, that, the corporate debtor can be revived at earliest.
- IBC appoints Insolvency resolution professional as a mediator, as a helping hand for the completion of CIRP or Liquidation matters. IRP is a backbone in addition to Adjudicating authority and IBBI which is the main regulator for IBC.
An Article by CA Darshan Patel – Senior Partner at B J Patel & J L Shah, IP and RV