The Ministry of Corporate Affairs has recently proposed several amendments to the Insolvency & Bankruptcy Code (IBC), 2016. These changes aim to tackle issues stemming from Non-Performing Assets (NPA) and offer a fairer distribution of proceeds among creditors.
Proposed Changes in the Insolvency & Bankruptcy Code
The Ministry has offered solutions to alleviate concerns from creditors about not receiving an equitable share from the resolution of a company’s debts. It suggests a system that utilizes a specific formula for dividing the money, taking into account each creditor’s claim size. The balance over the liquidation value will be pro-rated amongst all creditors depending on their unsatisfied claim.
Understanding the Insolvency & Bankruptcy Code, 2016
Implemented by the Government in 2016, the IBC aims to consolidate all insolvency and bankruptcy laws, addressing the Non-Performing Assets (NPA) issue that has been adversely affecting the Indian economy for many years.
Bankruptcy is declared when a court has ruled that a person or other entity can’t repay their outstanding debts. Insolvency is a situation where individuals or corporations fail to pay off their debts. The IBC covers all individuals, companies, Limited Liability Partnerships (LLPs), and partnership firms.
The Role of Adjudicating Authorities
The National Company Law Tribunal (NCLT) handles cases for companies and LLPs, while the Debt Recovery Tribunal (DRT) manages individuals and partnership firms.
Process of Distributing Proceeds Among Creditors Under the IBC
A company owes several creditors, including public sector banks, private lenders, non-banking financial companies, trade creditors, vendors, employees, government bodies, and more. The Code categorizes these creditors according to the nature of their debt.
Significance of Jurisprudence in Proceeds Distribution
The Supreme Court recently provided a ruling on the case of the distribution of proceeds among creditors in the Essar Steel India Limited case. The resolution plan’s approval is under Section 30(4) of the Code, which allows for the Committee of Creditors to consider the security interest’s value.
Position of International Law on Proceeds Distribution
The United Nations Commission on International Trade Law (UNCITRAL) proposes that secured creditors should receive payment based on their security’s worth, while unsecured and junior creditors may not receive anything at all. This approach aims to protect the interests of secured creditors.
Previous Year Question from UPSC Civil Services Examination
The 2017 examination posed a question on the ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ – a scheme by the RBI designed to restructure the financial framework of large corporate entities experiencing genuine difficulties. The question was designed to evaluate the candidates’ understanding of government schemes addressing economic concerns.
