Insolvency undertaken during times of financial distress. This

Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code is a law associated with bankruptcy of firms which was passed
by the parliament on 5th May, 2016. The major problems it tries to
address are the insolvency and
bankruptcy problems with the entities registered in the country. At the
time this bill was introduced there were overlapping
laws addressing to this issue and there weren’t any specific law which
followed up to see that the interests of the lenders were protected. The
changes which are brought about in this framework also focus on an insolvency resolution driven by the
creditors. It covers every entity except for financial institutions. This bill
was introduced keeping in my mind the need to improve the standing of the credit markets as well as improve the environment
in general in which businesses operate. It tries to combine all the previous
insolvency laws introduced in the country under one umbrella.

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The Financial Resolution and Deposit Insurance (FRDI) Bill,
2017

This bill was in lines with the Insolvency and Bankruptcy Code which
was a bill introduced the previous year but the only difference was that this
bill only deals with financial
institutions whereas the IBC deals with everything else. This bill provides
the detailed guidelines to be followed in case of insolvency or bankruptcy of a financial institution within the
country. This bill covers the scope to protect the interest of these
financial entities which lend money. It seeks to maintain the well-being of
such firms during times of financial distress. It not only seeks to protect but
also discipline these entities during such times. This would help to maintain some stability in the economy
with regards to the financial standings, and at the same time it provides
measures to be undertaken during times of financial
distress. This bill is essentially to strengthen
the already existing laws addressing the issue of bankruptcy and insolvency
of financial institutions in times of financial distress. Though this bill was
followed by some concern as it was petitioned that this bill allows the banks
who are about to be bankrupt to use the money of the depositors with them to
save themselves.

Actions Taken & Analysis

IBC

The IBC helps to distinguish between insolvency and bankruptcy. It
defines insolvency as the inability of a
firm to serve its liabilities in the short run during the course of its
normal operation. Bankruptcy on the other hand is a long-term perspective that
deems a company unfit for survival considering all aspects including past
performance and future projections. The code was set up with the objective of reducing the time for resolution, improve
the degree of recovery and to promote a higher level of debt financing
through a wide range of debt instruments. The code was deemed necessary to
effectively deal with the NPA situation currently bothering the financial
system of the country.

Through
its policies, the IBC would help enhance
investor confidence by eliminating the confusion created by the complicated
framework of judicial actions. It has created a single insolvency and bankruptcy framework that formulates an unambiguous and concise procedure that
all the stakeholders will follow according to a fixed timeline. It helps the
lenders by instilling confidence in them about their rights and ways to enforce
the same. It provides them with the right
to control the actions of the borrower during default and maximize the
chances and degree of recovery of their funds.

It in turn aids the borrowers by way of providing genuine businesses with an
option for reorganization, thus
giving them a second chance for survival. It has set guidelines in place
whereby personal contribution can be sought in case it is found that the asset
diversion was done on a fraudulent basis. It thus encourages the borrowers to focus their attention on the firm’s
liquidity by ensuing tight cash flow through forecasting and monitoring to
actively serve payments & avoid default. The IBC thus ensures that there is consistency with regard to what
constitutes insolvency, the procedure to be followed to resolve insolvency
and that to resolve cases of bankruptcy if and when they are detected.

All major economies across the world
have laid down guidelines and laws to deal with the issues of insolvency and
bankruptcy. The US has established a Bankruptcy
Code which consists of three important chapters. Chapter 7 involves separate filing of cases in bankruptcy courts
and makes the provision for relatively
faster liquidation of assets or complete reorganization of the business
under consideration by appointing a trustee to oversee the procedure. Chapter 11 deals separately with the
procedure of reorganization of businesses with the company remaining
in operation till certain targets are achieved. Chapter 15 was introduced to deal with cross-border insolvency cases. In Germany, however, insolvencies
associated with firms and individual are dealt with on a unified forum. The
court appoints independent insolvency
experts to help with the process of asset realization or business
reorganization. Another case in point is the UK where the situation is analysed
by the court once the cases are filed. After 12 months of filing, if the court
finds that the companies can be turned around, it appoints independent administrators
to deal with the proceedings. Otherwise, the cases are quickly discharged and a
part of the assets of the company authorised for use in paying off its debts.
Thus, the IBC puts India on the path to match itself with global standards and competition endowed by the advent of
globalization.

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