6 Reasons That Led To The New Insolvency And Bankruptcy Law
The new insolvency and bankruptcy law which was implemented in 2016 is one of the biggest reforms in recent times which has impacted the country’s economic landscape. It has completely transformed the way insolvency was resolved in the nation and has maximized recovery of creditor’s investments. Expert lawyers in India say that some problems surfaced after the legislation was applied to actual cases but the government stepped in and made necessary changes to keep its effectiveness intact. The piece of legislation has played its part in re-energizing the credit market and boosting the overall economy of India. In this article, we are discussing the reasons which necessitated the framing of the insolvency and bankruptcy code (IBC).
1. Resolving The Serious Issue Of Mounting NPAs
One of the biggest reasons which forced the authorities to formulate the regulation was the serious problem of rising Non-performing Assets (NPAs). In fact, the NPA ratio of the country was the poorest among all emerging economies in the world except Russia. The Economic Survey of 2017 reported that bad and restructured loans formed almost 20% of the total loans dispensed by creditors. Moreover, lenders were suffering additional losses because of the legal action they had to take against erring borrowers. NPAs were a major obstacle in the road of economic growth and it was important to remove them as soon as possible.
2. Eliminating Confusion Caused By Multiple Laws
Insolvency and bankruptcy in India were governed by numerous legal regulations like the Companies Act, SICA, SARAFAESI etc. This led to a complex situation as multiple agencies were tasked with laying down the different laws. The various regulations were also open to multiple interpretations by all the concerned parties. It was common to see government agencies accusing each other of encroaching upon their jurisdiction. Debtors also exploited the loopholes to prolong litigation and delay repayments. Moreover, agencies seldom showed understanding of commercial interests while dealing with the cases. A unified code formed after repealing 2 laws and amending 11 others has eliminated the confusion caused by numerous legislations.
3. Replacing Insufficient Older Resolution Mechanisms
It was not as if there were no resolution processes before the bankruptcy and insolvency act. Banks depended upon the Corporate Debt Restructuring (CDR) or the Joint Lenders Forum (JLF) mechanisms for debt restructuring. However, without proper monitoring systems and inaccurate business viability assessments, CDRs were not even moderately successful. The RBI entered the picture in 2015 and introduced Strategic Debt Restructuring (SDR) for settling debts. This scheme was met with lukewarm response by bankers which forced the central bank to come up with the Scheme for Sustainable Structuring of Stressed Assets (S4A) in 2016. All these processes turned out to be insufficient for addressing the NPA problem. The code lays down a systematic and time-bound procedure with no ambiguity which can be exploited by an interested party.
4. Putting A Stop To Endless Litigations
The multiple bankruptcy and insolvency laws in India allowed borrowers to use litigation as an effective stalling tactic. Creditors when faced by unwilling debtors also knocked on the doors of the courts to recover their money. The under-staffed Indian judiciary system had to handle the extra burden of such cases. Lenders were continuously losing more money as cases dragged on in courts with no end in sight. According to a report dated 31 October 2015 a total of 1,274 cases were pending in various courts for over 20 years. In order to put a stop to insolvency cases ending up in courts, it was necessary to devise a completely new framework. The insolvency and bankruptcy law reduces the chances of interested parties thinking of litigation as a possible method of resolution. Furthermore, its time-bound nature ensures that matters will be settled sooner rather than later.
5. Improving Country’s Position In The World
The inefficient insolvency resolution mechanism and issue of NPA affected India’s position in the global economy. The country was ranked at 130 in World Bank’s “Ease Of Doing Business” report in 2016. The same organization placed the country at 137 in the insolvency resolution indicator. In the pre- IBC era, it took almost 5 years to wind up the operations of a sick company. All these factors caused big concerns among foreign investors who were looking to enter Indian markets. The government wanted to change this situation and improve the nation’s standing in the “Ease Of Doing Business” index. The code played a major role in helping India jump a staggering 23 places to 77 in the last year’s World Bank survey.
6. Protect Creditors Interests
Earlier, the biggest sufferers were the creditors who had virtually no hopes of recovering their investments. The borrowers, including some well-known names of the Indian corporate world, acted as if they enjoyed immunity from settling their liabilities. As mentioned earlier, the stressed judiciary was also incapable of dealing with the issue in a timely manner. It was necessary to legally arm the lenders and put them in the driver’s seat. The new law was framed with the intention of putting the fear in the minds of defaulters that they will pay heavily in case they act irresponsibly. The creditors are now assured that the law will protect their rights and necessary measures will be taken to make timely recoveries. Another vital reason behind formulating the code was to give a boost to the nation’s credit and corporate bond market.
The insolvency and bankruptcy law has emerged out of failed mechanisms and insufficient regulations. It has empowered lenders and at the same time gives honest business failures an opportunity to revive themselves.