22 May SC: personal guarantors liable for corporate debt (The Hindu, GS-2,3 Economy, Governance)
Context:- In 2017 Total bad loan in the banks reached a record high more than 11 lakh crore in the public sector bank. This much bad loan hurt the economy. Other tools which were there in place didnt help out in solving the crises. There by government took IBC code to solve the insolvency issue in the banking system. Recent supreme court said that allow lenders to initiate insolvency proceedings against personal guarantors
IBC code:-Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and among individuals.
- Insolvency is when individuals or companies are unable to repay their outstanding debt.
- Bankruptcy is when a court of competent jurisdiction has declared a person or other entity insolvent and further It is a legal declaration of one’s inability to pay off debts.
- Insolvency and Bankruptcy Code (IBC) is to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), bad loans a massive problem that has been pulling the Indian economy down for years.
Objectives of IBC
- To consolidate and amend all existing insolvency laws in India so that banks can get rid off the NPA issue
- To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
- To protect the interest all stakeholders in a company.
- To revive the company in a time-bound manner.
- To promote entrepreneurship.
Salient features of the Insolvency and Bankruptcy Code, 2016
- Covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
- Adjudicating authority; an institutional mechanims:
- National Company Law Tribunal (NCLT) for companies and LLPs
- Debt Recovery Tribunal (DRT) for individuals and partnership firms
Insolvency Resolution Process
- Insolvency resolution process can be initiated by any of the stakeholders of the firm: firm/debtors/creditors/employees.
- If the adjudicating authority accepts, an Insolvency resolution professional (IP) is appointed.
- The power of the management and the board of the firm is transferred to the committee of creditors (CoC). They act through the IP.
- The IP has to decide whether to revive the company (insolvency resolution) or liquidate it (liquidation).
- If they decide to revive, they have to find someone willing to buy the firm.
- The creditors also have to accept a significant reduction in debt. The reduction is known as a haircut.
- They choose the party with the best resolution plan, that is acceptable to the majority of the creditors (75 % in CoC), to take over the management of the firm.
- Establishment of an Insolvency and Bankruptcy Board of India\
- Insolvency professionals:-to handle the commercial aspects of insolvency resolution process.
- Insolvency professional agencies:- to develop professional standards, code of ethics etc in professionals
- Information utilities:- to collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.
- Enabling provisions to deal with cross border insolvency.