2nd Generation IBC reforms

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Context: 

The Insolvency and Bankruptcy Code (IBC) needs second-generation reforms as there are concerns regarding the present functioning of the Code, as per Amitabh Kant, G20 Sherpa and former CEO of Niti Aayog.

Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code, 2016 (IBC) is an Indian law which creates a consolidated framework that governs insolvency and bankruptcy proceedings for companies, partnership firms, and individuals.

Read about the code in detail here:

https://www.iasgyan.in/daily-current-affairs/insolvency-and-bankruptcy-code-ibc-2016#:~:text=Insolvency%20and%20Bankruptcy%20Code%202016,undertaken%20by%20the%20insolvency%20professionals.

What are the Second Generation reforms to IBCs?

The second-generation reforms to the IBC are the proposed changes in IBC to address the systemic inefficiencies and enhance the overall framework for insolvency resolution in India. 

By incorporating private sector involvement, introducing innovative resolution mechanisms, and improving operational efficiencies, these reforms seek to create a more responsive and effective insolvency regime.

These reforms are intended to address current inefficiencies in the functioning of the IBC and enhance its overall effectiveness in resolving insolvency issues in India.

Need for the reform

Extended Resolution Timeframes: The average resolution time at the National Company Law Tribunal (NCLT) increased from 654 days in FY23 to 716 days in FY24. The admission of cases also took longer, rising from 468 days in FY21 to 650 days in FY22.

Declining Creditor Recovery Rates: The recovery rate for creditors fell from 36% in FY23 to 27% in FY24, leading to a cumulative recovery of only 32% since the IBC's introduction in 2016.

Proposed Features of Second-Generation Reforms

Improved Court Management: 

It must have a provision for allowing non-sovereign or private entities to leverage technology for better management of court processes.

Successful privatization of Passport Seva Kendras as a model for enhancing the efficiency of court proceedings should be adopted.

Substantive Changes to the IBC

Substantive changes to the IBC are necessary, particularly regarding cross-border insolvency, which involves cases that span multiple jurisdictions. Additionally, strengthening creditor rights is essential to ensure that their interests are adequately protected within the resolution process. 

Sectoral focus rather than collective focus

The reforms should also recognize and incorporate the unique challenges faced by various sectors in insolvency cases. 

Pre-packaged insolvency

Pre-pack arrangements should be introduced to expedite resolution processes, which will be particularly beneficial for Micro, Small, and Medium Enterprises (MSMEs).

Pre-packaged insolvency Pre-packaged insolvency, also known as a "pre-pack", is a bankruptcy procedure that allows a company to work out a restructuring plan with its creditors before declaring insolvency. The process is informal and consensual, and aims to resolve debt quicker and more cost-effectively than traditional insolvency proceedings. Read more here: https://www.iasgyan.in/daily-current-affairs/pre-packaged-insolvency-resolution-process-ppirp

Operational Efficiency

This can be achieved by implementing innovative resolution mechanisms that streamline the process. Capacity building for resolution professionals is also essential, ensuring they possess the interdisciplinary skills needed to handle cases effectively. 

Additionally, minimizing judicial delays is vital to accelerate the resolution process.

Expected Outcomes of Reforms

The expected outcomes of these reforms include a significant reduction in the delays currently experienced in insolvency resolutions. 

It is anticipated that the proposed amendments will lead to increased recovery rates for creditors and contribute to a more robust financial ecosystem. 

Moreover, these reforms aim to revitalise unproductive assets, transforming them into productive ones through timely resolutions.

Important article for reference 

NCLT

Sources:

https://www.business-standard.com/industry/news/there-is-a-need-for-second-generation-ibc-reforms-says-amitabh-kant-124100101199_1.html

PRACTICE QUESTION Q.Which of the following statements is true about pre-packaged insolvency, also known as a "pre-pack"? A) It is a formal bankruptcy procedure requiring court approval before any restructuring plan is negotiated. B) The process is typically lengthy and involves extensive legal proceedings. C) It allows a company to negotiate a restructuring plan with creditors before officially declaring insolvency. D) Pre-packs are exclusively used for large corporations and not available for small businesses. Answer: C)  Explanation: Pre-packaged insolvency, also known as a "pre-pack", is a bankruptcy procedure that allows a company to work out a restructuring plan with its creditors before declaring insolvency. The process is informal and consensual, and aims to resolve debt quicker and more cost-effectively than traditional insolvency proceedings.