THE GIST of Editorial for UPSC Exams : 06 March 2020 (Moving up in ‘ease of resolving insolvency’ (The Hindu))

Moving up in ‘ease of resolving insolvency’ (The Hindu)

Mains Paper 3:Economy
Prelims level: Insolvency and Bankruptcy Code
Mains level: Highlights of the examination by Insolvency and Bankruptcy Code

Context:

• The World Bank conducts an annual examination of about 200 economies in terms of ease of doing business.
• The result of the examination India improved its overall ranking by 14 spots to 63 on the list, and earned a place among the world’s top 10 ‘improvers’ in ease of doing business, for the third consecutive year.
• In terms of ‘resolving insolvency’, which reflects ease of exit from business, India’s ranking improved by 56 places to 52 from 108 the previous year.

Highlights of the examination by IBC:

• The World Bank recognised that with the reorganisation procedure available, through the Insolvency and Bankruptcy Code, 2016 (IBC), companies have effective tools to restore financial viability, while creditors have better tools to successfully negotiate and have greater chances to realise the money.
• As a result, the overall recovery rate for creditors jumped from 26.5 cents on the dollar to 71.6 cents, and the time taken for resolving insolvency reduced significantly from 4.3 years to 1.6 years.
• India is now, by far, the best performer in South Asia on resolving insolvency and does better than the average for OECD high-income economies in terms of the recovery rate, time taken and cost of proceedings.

Insolvency framework:

• The World Bank measures the perception of stakeholders in respect of ‘resolving insolvency’ on two sets of indicators, namely, the strength of insolvency framework and the recovery rate.
• The strength of insolvency framework is a function of four indices relating to commencement of proceedings, management of firm’s assets, reorganisation proceedings and creditor participation.
• The World Bank considers it positive if an insolvency framework enables direct liquidation of a corporate debtor (CD).
• The IBC enabled the committee of creditors (CoC) to decide to liquidate a CD at any time.
• An amendment ..............................................

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Resolution plan for corporate debtor:

• The IBC envisages a resolution plan for reorganisation of a CD as a going concern.
• This gave the impression that the CD must continue to exist, post-resolution, limiting the possibilities of resolution.
• Though the contours of a resolution plan are left to the imagination of the market, the amendment of August 2019 makes it explicit that a resolution plan may provide for restructuring of the CD, including by way of merger, amalgamation and demerger.
• The recovery rate, as per the World Bank methodology, is a function of time, cost and outcome of insolvency proceedings.
• While reviving ailing firms, the resolution plans have returned about 200 per cent of liquidation value for creditors. This means that the creditors got 200 while they could have got at best 100 minus cost of liquidation, if these CDs were liquidated.
• The outcome should improve with the amendment in December 2019 that releases the CD from the liability arising from an offence committed under the erstwhile management prior to the commencement of the CIRP.

Speed of process:

• The Supreme Court attributed some delay in the law’s functioning in November 2019.
• However, several contentious issues have been settled by the Supreme Court in the last year, bringing in certainty of the process and predictability of outcomes.
• In July 2019, the Bench strength of the AA has been substantially enhanced.
• An amendment..............................

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Way forward:

• The work has begun in right earnest to add several value-added features to insolvency framework.
• These include cross-border insolvency, group insolvency, individual insolvency, valuation profession, market for distressed assets, automation of loan contracts, resolvability of companies, etc.
• The authorities remain committed to address deficiencies arising from implementation of the IBC, in sync with the emerging market realities.
• India’s performance in resolving insolvency should improve further, though the road to success will always remain under construction.

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  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1)With reference to the EKAM Fest, consider the following statements:
1. It is being organised by National Handicapped Finance Development Corporation (NHFDC).
2. Ekam Fest aims to promote Craftsmanship & Products of Divyang/Persons with Disabilities (PwDs) Artisans And Entrepreneurs.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer...........

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Mains Questions:
Q.1) How the Insolvency and Bankruptcy Code improved the ease of resolving insolvency in India?