What is the Insolvency and Bankruptcy Code?

What is the Insolvency and Bankruptcy Code?

What is the Insolvency and Bankruptcy Code?

#GS-03 Economy

For Prelims:

What is insolvency?

  • Insolvency is when a situation arises where individuals or companies are unable to repay their outstanding debt.

What is Bankruptcy:

  • Bankruptcy is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. Hence it is the legal declaration of one’s inability to pay off debts.

About IBC:

  • Insolvency and Bankruptcy Code, helps to provide a time-bound process for resolving insolvency in companies and among individuals.
  • Insolvency and Bankruptcy Code (IBC) was implemented to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA).

For Mains

Objectives of IBC:

  • To consolidate and amend all existing insolvency laws in India.
  • To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
  • To protect the interest of creditors including stakeholders in a company.
  • To revive the company in a time-bound manner.
  • To promote entrepreneurship.
  • To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
  • To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
  • To set up an Insolvency and Bankruptcy Board of India.
  • Maximization of the value of assets of corporate persons.

Challenges for IBC:

  • In FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crore even though the legal limit was set at 330 days.
  • The average number of days it took to resolve such cases increased rapidly over the past five years.
  • 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.
  • In the cases involving 33 out of 85 companies so far which owed more than ₹1,000 crore, lenders had to take above 90% haircuts.