NPAs Current Affairs

Insolvency and Bankruptcy Board of India inks MoU with RBI

The Insolvency and Bankruptcy Board of India (IBBI) signed Memorandum of Understanding (MoU) with Reserve Bank of India (RBI) for increased cooperation in effective implementation of insolvency law. The MoU was singed at time when authorities are working on ways to address huge amount of non-performing assets (NPAs) in banking sector.

Key Facts

The MoU provides for sharing of information, subject to limitations imposed by applicable laws and sharing of resources available with each other to extent feasible and legally permissible. It calls for periodic meetings to discuss matters of mutual interest, including regulatory requirements that impact IBBI and RBI’s responsibilities, enforcement cases, research and data analysis, information technology and data sharing.

It also provides for cross-training of staff in order to enhance each party’s understanding of other’s mission for effective utilisation of collective resources. It will help in capacity building of insolvency professionals and financial creditors. It calls for joint efforts between IBBI and RBI for enhancing level of awareness among financial creditors about importance and necessity of swift insolvency resolution process of various types of borrowers in distress under provisions of Insolvency Code, etc.

Insolvency and Bankruptcy Code, 2016 (Code)

The Code provides for reorganisation and time -bound and market-determine insolvency resolution of corporate persons, partnership firms and individuals for maximization of value of assets. The IBBI exercises regulatory oversight over Insolvency Professionals, Insolvency Professional Agencies and Information Utilities. It frames and enforces rules for processes such as corporate insolvency resolution, individual insolvency resolution, corporate liquidation and individual bankruptcy under Code.

Background

Both RBI and IBBI are interested in effective implementation of Code and its allied rules and regulations, through quick and efficient resolution process. Therefore, they agreed to sign MoU to assist and co-operate with each other for effective implementation of Code.

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Lok Sabha passes Insolvency & Bankruptcy Code Amendment Bill, 2017

The Lok Sabha has passed the Insolvency and Bankruptcy Code (Amendment) Bill 2017 to pave the way for tightening loopholes in existing code and to make resolution process more effective.

The Bill amends the Insolvency and Bankruptcy Code (IBC), 2016, and replaces an Ordinance promulgated in November 2017.

Background

The IBC was enacted in 2016 to find a time-bound resolution for ailing and sick firms, either through closure or revival, while protecting interests of creditors. Successful completion of resolution process is expected to aid in reducing rising bad loans (NPA-non Performing assets) in the banking system.

Key Features of Bill

Resolution applicant: The bill redefines resolution applicant mentioned in code as a person who submits a resolution plan after receiving an invite by the insolvency professional to do so.

Eligibility for resolution applicants: It amends provision related to eligibility in IBC to state that insolvency professional will only invite those resolution applicants to submit a plan, who fulfil certain criteria laid down by him with approval of committee of creditors and other conditions which may be specified by Insolvency and Bankruptcy Board.

Ineligibility to be a resolution applicant: It prohibits certain persons from submitting resolution plan in case of defaults. These include: (i) wilful defaulters, (ii) promoters or management of the company if it has outstanding non-performing debt for over year and (iii) disqualified directors, among others.

Liquidation: The bill bars the sale of property of a defaulter to such persons who is ineligible to be a resolution applicant during liquidation.

Penalties: The Bill inserts provision to specify that person contravening any provisions of IBC, for which no penalty has been specified, will be punishable with fine ranging between Rs. 1 lakh to Rs. 2 crore.

Comment

The bill has diluted some of stringent provisions of ordinance. It seeks to strike balance in trade-off between punishing wilful defaulters and ensuring a more effective insolvency process. The bill allows defaulting promoters to be part of the debt resolution process, provided they repay dues in month to make their loan account operational and resolution happens within overall time frame specified in the code.

This amendment will help promoters who had submitted resolution plans before ordinance barred them from taking part in the resolution process of companies. It also allows asset reconstruction companies (ARCs), alternative investment funds (AIFs) such as private equity funds and banks to participate in bidding process.

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