Expand adjudication regime for ibc
Against minimum threshold for IBC resolution.The Insolvency and Bankruptcy Code (IBC) is a key structural reform meant to swiftly resolve corporate distress and redeploy the resources locked up in the failed firm. It is remarkable that parts of resolution regime, such as on how to allocate the proceeds of resolution among different classes of claimants, remain incomplete. The Insolvency and Bankruptcy Board of India must tidy up the loose ends. The government should resist the temptation to carry out pointless tinkering with the legislation. Reportedly, the government now wants to raise the minimum threshold (defaults above ₹1 lakh) that triggers the insolvency process. This is a bad idea.
The code is clear about the primacy of financial creditors over operational ones (such as suppliers of goods) with regard to claims to recoveries. At the bottom of the priority list come equity holders, and just above them, preference shareholders. This is how it should be. The point is to put clear rules in place, to minimise the scope for discretion by the Committee of Creditors, who now decide who should get how much from the proceeds of resolution/liquidation, with the appellate tribunal also tending to veer outside the spirit of the law. Raising the threshold for defaults to make banks take only big cases to IBC is ostensibly meant to reduce the load on the National Company Law Tribunals. Don’t small companies need to be resolved? The remedy is to set up more and specialised benches of the adjudicating authority to deal with small and medium companies, and not keep them out of IBC.
The IBC has brought a behavioural change in the borrowers, given the fear that they would lose their companies if they do not repay their loans. Ensuring the code works well will improve the health of Indian banking, and get wheels of the economy moving. A functional market for corporate control, removing legal obstacles to leveraged buyouts and creating a vigorous market for corporate debt are other parts of the institutional framework required to ensure that corporate resources are put to optimal use.
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