IBC, Launched As a Big Reform by Centre, Needs Amends Now And Why

The primary motive of the IBC was to save businesses, remove inefficient promoters, and speed up recovery of loans.

The Insolvency and Bankruptcy Code (IBC) which was expected to be a huge reform seems to have become insolvent itself after 4-5 years.

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The Insolvency and Bankruptcy Code (IBC), which was expected to be a huge reform, seems to have become insolvent after four to five years. The primary motive of the law was to accelerate resolution in case of insolvency or bankruptcy of businesses, save bankrupt businesses, sack inefficient promoters, and speed up recovery of loans.

The Quint's Sanjay Pugalia explains why IBC, which was launched by the government as a big reform, needs to be improved and why the Centre needs to free itself from legal loopholes.

As per a 2021 data, there has been a recovery in only 40 percent of the cases.

Initially, the cases were estimated to be resolved in 180 days. This period was later increased to 270 days, but in most cases, it has taken more than 400 days to come to a resolution. In several cases, despite promoters being removed, there has been no major recovery from the businesses and in some, the sacked promoters have returned to take control of the firms.

The Legal Loopholes

Let's see what happened with Dewan Housing Finance Limited (DHFL).

Their promoter was thrown out of the company, and DHFL was put in the process of IBC. It was decided that the company would be given to Piramal Enterprises. However, the promoter returned and offered before NCLT to take back control of the company, in the last hour.

This is a big loophole in the IBC law, that a sacked promoter can come back and offer to take back control. Should this be the case? Should promoters, who have criminal charges against them or are deemed unfit and inefficient to run the now insolvent or bankrupt company, be allowed to claim control of the company at a later stage?

Time for the Govt to Consider Reforming IBC

Earlier, there were estimates that Non-Performing Assets (NPAs) had increased to 13 percent, but that has now come down to about 8 percent. In such a situation, one would think this shows the benefits of the IBS law, but this is misleading. Companies have rather taken lesser or fewer loans in the past few years. As a result, NPAs have come down. One positive effect of the IBC law is that there has been a slight difference in the credit culture.

Now, one can only hope that the shortcomings of this law are removed so that a stable and better structure can be created.