Insolvency and Bankruptcy Code, not a panacea for Non-Performing Assets

Abstract

While the financial markets saw many reforms in the last two decades, the legal framework for resolution of stressed assets did not keep pace with it. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 had a different purpose, providing a legal framework for securitization, establishment and regulation of asset reconstruction companies and enforcement of security held by secured creditors without intervention of the courts. The archaic Board for Industrial and Financial Reconstruction (BIFR) and the Sick Industrial Companies Act (SICA) were inadequate to the address the resolution of stressed assets in the system. The Insolvency and Bankruptcy Code (IBC) rolled out in 2016 is an important measure to address this issue. The code provides a framework for time bound insolvency resolution of corporates and others, putting the creditor in control in case of a default, through the Resolution/Insolvency Professional and the Committee of Creditors. The adjudicator is the National Company Law Tribunal (NCLT) and the appellate authority is the NCLAT. The Corporate Insolvency Resolution Process (CIRP)’s focus is on resolution as a going concern, with the objective of maximising value of the assets and not recovery through liquidation. The law mandates a timeframe of 270 days for arriving at a resolution of the stressed asset, failing which, it goes into liquidation. The short timeframe is a dream come true, in a country where cases wind through the overburdened judicial system for years, if not decades. As originally envisaged, the law was a game changer from a creditor perspective.