India’s Freedom to Exit Code – Bankrupt Companies Ki Kahani

20 Oct 2021by R&R Admin

India’s Freedom to Exit Code – Bankrupt Companies Ki Kahani

Have you heard of the mills that became defunct and had to close down? What about companies that set up operations and then suddenly disappeared? Well, if you asked someone a few decades ago what happened to XYZ Company – the pet   buzzword would have been Woh company ka deewala nikal gaya.

Did we not have laws governing insolvency, bankruptcy before the IBC code in 2016?

We did have several provisions such as

  • The Sick Industrial Companies (Special Provisions), Act 1985,
  • The Provincial Insolvency Act 1920,
  • The Presidency Towns Insolvency Act, 1909,
  • The Code of Civil Procedure, 1908, and the SARFAESI Act, 2002.

With so many provisions and changes, why then did we need a new IBC code?

India has several provisions and laws for liquidation and bankruptcy, yet, these laws did not solve complex issues while NPA kept rising.  These disparate provisions did not fulfill the purpose they were established for. What companies needed was a one-stop solution for insolvency, which was missing.

What went wrong with the previous provisions?

  • The Sick Industrial Companies Act, 1985 failed as it considered the final balance sheet to detect insolvency instead of looking at the sick company's future cash flow.
  • Section 424A and 424L introduced in the Indian Companies Act, 1956, to deal with revival were never enforced.
  • The Recovery of Debts due to Banks and Financial Institutions Act, 1993, planned special Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals to unlock the public money and use it to develop the country. However, this act did not apply to those banks and Financial Institutions (FIs), which had less than Rs. 10lakh in dues.
  • The SARFAESI Act, 2002, considered the interests of only secured creditors to act against the borrowers. However, this act failed to consider unsecured creditors’ rights while taking action.
  • The corporate debt restructuring mechanism (CDR) in 2001 was for banks and FIs with exposure, not more than Rs. 10cr. CDR was non-statutory and voluntary or based on an agreement between the creditors and borrowers to restructure debt.
  • RBI announced the Strategic Debt Restructuring in 2015 to change the company management to deal with stressed assets. SDR did not solve as many cases as expected.

In 2016, the Government enacted the Insolvency and Bankruptcy Code (IBC) after the previous laws were either time consuming, using the wrong approach or indicator to detect bankruptcy. With several merger and acquisition cases coming to the surface, Insolvency and Bankruptcy Code, 2016 has become a talk of the town. So, this week we take a deep dive into recent cases of   IBC one at a time.

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