Answer Writing Practice for UPSC IAS & UPPSC Mains Exam: Paper - IV (General Studies – III) - 25 July 2019

Answer Writing Practice for UPSC IAS Mains Exam


Answer Writing Practice for UPSC IAS & UPPSC Mains Exam


UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. “The Union cabinet’s approval of amendments to the Insolvency and Bankruptcy Code (IBC) to enhance its efficacy could bring relief to banks, foreign investors and other stakeholders.” State these amendments. Examine, how the IBC has emerged as an effective tool to resolve stressed assets in a time bound manner?

Model Answer:

  • Introduction
  • Proposed amendments
  • Effectiveness of this code
  • Success of IBC so far
  • Challenges posing the IBC
  • Way forward

Introduction:

The Government of India implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been pulling the Indian economy down for years.

The Union cabinet’s approval of amendments to the Insolvency and Bankruptcy Code (IBC)to enhance its efficacy could bring relief to banks, foreign investors and others worried about the impact that quasi-judicial interpretations of the code’s grey areas might have on the country’s credit systems.

Proposed amendments:

  • The cabinet approved key changes in the Insolvency and Bankruptcy Code (IBC) aimed at restricting the resolution process to 330 days, including time for litigation, and ensuring the primacy of financial creditors over operational ones in case of recoveries. 
  • The government has also addressed a longstanding demand of homebuyers who have filed cases against builders for non-delivery of flats. A proposed amendment will ensure that a majority vote from creditors such as homebuyers will be counted as a 100% vote from that class of creditors in favour of or against a resolution plan. For example, if out of 100 homebuyers, half or more of those present and voting back a resolution plan, then all homebuyers would be considered to have voted for it. This is likely to impact insolvency cases such as that of Jaypee Infratech. 
  • CoC to Decide on Distribution: The CoC will have the power to take commercial decisions on distribution of funds to various classes of creditors. Operational and unsecured financial creditors need not be treated on par with secured financial creditors. 
  • FASTER RESOLUTION: The amendments should help free up resolution processes that have got stuck for various reasons. As per the changes, resolution plan will be binding on all stakeholders including the Centre, state governments and local authority to which dues may be owed. 
  • The government has also sought to reduce delays at the beginning of insolvency proceedings initiated by financial creditors by requiring NCLT benches to explain why an application has not been admitted or rejected within 14 days. 

Effectiveness of this code:

  • Unified law:The interest of all parties i.e. lenders, borrowers and even operational creditors is now addressed under a unified law under the IBC.
  • Changed behavior of defaulters:The IBC has given more teeth to lenders and has changed the credit behavior of borrowers. Now, there is a heartening trend of defaulters paying up dues before the case is admitted for insolvency under IBC.
  • Shift of control from debtor to creditor:IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor In Control’ regime, as now the Board of Directors is suspended in case of default and the IP manages the enterprise in the best interest of all its stakeholders.
  • Resolving the ‘chakravyuh challenge’:IBC has made possible for struggling companies to ‘exit’ easily by allowing creditors to take the company to the NCLT for winding up.
  • Spurs professionalism in financing sector:IBC has reduced crony capitalism, under and over invoicing, serial defaulters and lead to better allocation of capital by limiting the escape routes for defaulters and water tight frame for disposal of cases

Success of IBC so far:

  • Due to the institution of IBC, we have seen that many business entities are paying up front before being declared insolvent. The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
  • 4452 cases were dismissed at the pre-admission stage. Hence, it shows the effectiveness of IBC.
  • Presently, there are 1332 cases before NCLT.
  • Realization by creditors around Rs 80,000cr in resolution cases.
  • Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
  • The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
  • 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr.

Challenges posing the IBC:

  • Tribunal issues: The NCLT started off well but they are clogging up now, they’re taking much longer than they did earlier. More than 9,000 cases are before the 11 NCLT tribunals that have been set up around the country.

National Company Law Appellate Tribunal (NCLAT) and that includes more than 2,500 insolvency cases. In the absence of jurisprudence and precedents, different NCLTs are giving different rulings.

  • Concerns with time stipulation: Regarding the time stipulation, in few cases the tribunal laid down that the 14-day period is only directive and not mandatory.

Also, the NCLAT has held that the provisions of the Limitation Act, which sets out the time-limits under which a complainant can approach the courts for redress, do not apply to proceedings under the Insolvency Code.

  • Administrative issues:
    • IBC has failed to secure the due share of banks as the amount realized by banks in cases is falling too low, in some cases amount realized is less than even one-third of bank’s claim value.
    • There have been loopholes in the functioning of Committee of CreditorsNominated members of financial creditors do not have any authority to take decisions upfront. It leads to a conflict of interest in reaching a revival plan.
    • There is no proper infrastructure of the Information Utilities (IU) that provide access to credible and transparent evidence of default.
    • There is a multiplicity of regulators to Insolvency Professionalse. presence of numbers of insolvency professional agencies (IPAs) to regulate professionals.
  • Authoritative Insolvency Resolution Professionals: The IBC’s provision to throw the management out and replacing them with IRPs is consider to be draconian. IRPs are a mix of chartered accountants, cost accountants, MBAs and retired public sector executives but there are many concerns has raised over the quality of the IRPs.
  • Drafting loopholes: Inevitably, there are loopholes in the Insolvency Act and some lawyers complain of poor drafting too. For instance, the act has no provision for an amicable settlement once a case has been admitted.

Way forward:

  • There is need for setting up more tribunals in different parts of the country to handle the greater-than-expected volume of cases.
  • IBC must consider that there are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise.
  • India is more concerned with the recovery of NPA, not with the running of units, thus the first priority is to save the banking system.
  • Thus the banks also must push policy makers towards this move because they’re unlikely to get more if the case comes before the NCLT.
  • Proactive training/on boarding of judges, lawyers, and other intermediaries will be necessary for effective implementation of the code.
  • Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality. There is a requirement of enhanced IU infrastructure.

IBC as a structural reform has demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders, it is the IBC or the insolvency law which has trumped even the GST.

Click Here for Answer Writing Practice Archive

हिन्दी में उत्तर लेखन अभ्यास कार्यक्रम के लिए यहाँ क्लिक करें