NEWS HIGHLIGHTS
Theme : Effects Of Liberalization On The Economy
GS - 3
Union Finance Minister said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy code(IBC)
Insolvency :Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity, a person, family, or company becomes insolvent when it cannot pay its lenders back on time.Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.
TABLE OF CONTENT
- Context
- Insolvency
- Bankruptcy
- What is Insolvency and Bankruptcy Code
- Importance of IBC
- Challenges before IBC
Context : Union Finance Minister said that the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy code(IBC)
Insolvency : Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity, a person, family, or company becomes insolvent when it cannot pay its lenders back on time.Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.
Bankruptcy : Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one is obliged to pay off what is owed with help from the government.
What is Insolvency & Bankruptcy Code :
- In a growing economy, a healthy credit flow and generation of new capital are essential.
- When a company or business turns insolvent or “sick”, it begins to default on its loans.
- In order for credit to not get stuck in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible from the defaulter, as quickly as they can.
Importance of IBC :
- Resolution: First objective is finding a way to save a business through restructuring, change in ownership, mergers etc.
- Maximizing the value: The second objective is to maximize the value of assets of the corporate debtor
- Credit facility: To promote entrepreneurship, availability of credit, and balancing the interests of all stakeholders.
- Easy exit: The Insolvency and Bankruptcy Code would provide such an environment to ensure easy exit for sick companies and help the country to improve its position in ease of doing business.
- Speedy winding up: The bankruptcy code will make it easier for companies to wind up failed businesses and bring India on a par with developed nations in terms of resolving bankruptcy issues.
- Time bound disposal: Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further. It minimizes the problem of delay as there are strict timelines within which the case has to be disposed of. Quick disposal of cases will maximize the recovery amount.
- Information database: It prepares a database to provide information on the insolvency status of individuals. In addition to this, specialized insolvency professionals help in guiding through the process.
- Easy process of claim: Easy process of claim by the creditors also encourages financial institutions to extend credit facilities thus strengthening the financial markets with increased availability of credit for business.
Challenges before IBC :
- Weak Resolution: IBBI data for the 3,400 cases admitted under the IBC in the last six years, more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution.
- Increasing deadlines: The IBC was thus initially given a 180 day deadline to complete the resolution process, with a permitted 90 day extension. It was later amended to make the total timeline for completion 330 days is almost a year.
- In FY22, it took 772 days to resolve cases involving companies that owed more than 1,000 crore. The average number of days it took to resolve such cases increased rapidly over the past five years.
- On Haircuts (Debts that banks forgo):The 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.
FAQs:
1. What is Insolvency?
Answer : Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity, a person, family, or company becomes insolvent when it cannot pay its lenders back on time.Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.
2. What is Bankruptcy?
Answer : Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one is obliged to pay off what is owed with help from the government.