Answer Writing Practice for UPSC IAS Mains Exam: Paper - IV (General Studies – III) - 29 January 2019


Answer Writing Practice for UPSC IAS Mains Exam


UPSC Syllabus:

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

Q. 'The Supreme Court has recently upheld the new Insolvency and Bankruptcy Code (IBC), rejecting the challenges mounted by some promoters who had defaulted.’ Discuss the significance of new Insolvency and Bankruptcy Code (IBC). (250 words)

Model Answer:

Approach:

  • Why in news?
  • Introduction
  • Significance of new code
  • Conclusion

Why in news?

On Friday, the Supreme Court upheld the Insolvency and Bankruptcy Code (IBC), rejecting the challenges mounted by some promoters who had defaulted, saying that the insolvency law was working, with the recovery of bad debt marking what it termed as the end of “defaulters’ paradise”. 

Introduction

  • Insolvencyrefers to a situation where any person or a body corporate is unable to fulfill its financial obligations (often occurring due to several factors such as a decrease in cash flow, losses and other related issues).
  • Bankruptcyis 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.
  • The objective of the IBC is to offer a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). Its important provisions are –
  • Insolvency and bankruptcy Board of India will be the overall regulator for insolvency and bankruptcy.
  • Insolvency professionals would handle the commercial aspects of the resolution process. They would be trained and regulated by insolvency professional agencies. They would take over the management of a company, assist creditors in the collection of relevant information, and manage the liquidation process.
  • Debt recovery tribunal will act as adjudicating authority for individuals and unlimited partnership firms. National company law tribunalwill act as adjudicating authority for companies and limited liability entities.
  • Committee of creditors:If a firm defaults on its debt then its control will be shifted to a committee of creditors.
  • In the next 180 days, this committee will evaluate proposals from various parties on enabling liquidation or resuscitating (reviving) the company.

Significance of new code

  • IBC seeks to shift from revival/recovery to resolution. This will ensure maximum assets recovered from the debtor, thus helping the balance sheets of the creditor. This would go a long way in helping the NPA-situation of the banks. Eg. - the Bhushan Steel resolution is nevertheless an encouraging sign for banks because they typically manage to recover only about 25% of their money from defaulters.
  • Speedy resolution would free valuable assets to be used for wealth-creation. There is significant curb on the time involved, a maximum of 270 days. This will expedite the insolvency process. Time is important as the value of the assets corrodes very rapidly, when the firm is precariously placed.
  • It aims at promoting investments, freeing up banks’ resources for other productive uses, boosting credit markets and improving ease of doing business in India, thus making a cumulative positive impact on the economy
  • The fixed time-period and predictable procedural methods will encourage creditors to join the collective insolvency resolution, rather than initiate individual actions.
  • By keeping the role of the adjudicator to a minimum, IBC ensures that delays arising from the bottlenecks in court proceedings are also reduced to the minimum. The principal business decisions such as the economic viability of the debtor, will be determined through negotiations between the debtor and creditors – an exercise that will be facilitated by insolvency professionals. The role of the NCLT is primarily to ensure that the procedures are complied with and no illegality or fraud has taken place.
  • Industry anticipates that the change will provide an easy exit option for insolvent and sick firms.
  • The new code will matter to private sector employees too. The Bill, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market too.
  • Make it easy for the budding entrepreneurs to start or exit from the start-up business. They would be able to get out faster, thus helping the Start-up India Stand-up India campaign.
  • It subsumes a plethora of laws (Securitisation and Enforcement of Security, Corporate Debt Restructuring or CDR and Sick Industrial Companies Act or SICA) that confused creditors; instead it now offers a more streamlined way to deal with troubled assets.
  • The Insolvency and Bankruptcy Code has been hailed as an excellent reform for India that will pay a critical role in improving the ease of doing business.

Conclusion

With the Supreme Court upholding the Insolvency and Bankruptcy Code (IBC) in its entirety, the resolution process will move faster now.

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