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How Insolvency and Bankruptcy Code can provide exit mechanism in economy

Change is the rule of nature and it applies to businesses and corporates too. Profitability in a business is the natural corollary of the efficiencies of its promoters and/or management. If this efficiency starts slipping, things spiral out of control at times leaving only two options in front of its owners/management – either let the entire venture sink or the owners and management gracefully exit and allow the business’s creditors to try and salvage the situation which may even give a chance for the business to survive. This is possible in cases where, though the promoters/management might have failed, there are still good assets or business prospects in the company.

In these situations, it is necessary to have a mechanism whereby the promoters voluntarily exit and let some other person run the show. But prior to the introduction of the Insolvency and Bankruptcy Code in 2016 the laws in force in India did not provide an exit mechanism for the promoters or management. They merely enabled needful action against erring and inefficient promoters or management and were modes to recover the dues. The earlier laws did not facilitate or explore options to keep the ailing business a going concern.

For example, under the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the creditors are allowed to proceed with filing an application before the DRT and the DRT after due satisfaction issues recovery certificate. The recovery against such a recovery certificate is made through the asset(s) of the company which ultimately means that the business suffers and then dies. Similarly, the erstwhile Winding-up provision under the Companies Act, 1956, provides for filing an application for winding-up of a company if there are any dues and again the ultimate result of this exercise is that the affected business goes into liquidation and with waterfall mechanism provided w.r.t distribution, the creditors get paid.

As mentioned, in the earlier laws there was no mechanism that the company could survive and continue while at the same time the interest of all types of creditors was also safeguarded. Though the Reserve Bank of India brought circulars w.r.t Debt Restructuring etc, however, those were also more from the perspective of safeguarding the Bank Debts (i.e. safeguarding corporate Financial Creditors in other words).

The Insolvency and Bankruptcy Code was enacted with the aim of reorganisation of an affected business and insolvency resolution in a time-bound manner. It aims at maximising the value of a company’s assets by way of providing an exit to current promoters/management who are responsible, in addition to other factors, for bringing the Corporate Debtor into Insolvency.

The I&B Code provides a formulated, time-bound exit mechanism for resolution of insolvency whereby the current management/promoter(s) exit either voluntarily (under Section 10 of the I&B Code) or are asked to step aside. With their exit, other(s) can step in and take over the management of the company with the consent of the stakeholders (i.e. Committee of Creditors) who can vouch in their commercial wisdom that the Resolution Applicant (or new owner) will be able to use the resources of the Corporate Debtor in an efficient manner which will be beneficial for both the Financial as well as Operational Creditors and also for the company as it gets to remain as a going concern.

Both legislation, as well as the judiciary, is taking all possible efforts to strengthen the Code so that the exit mechanism, a main aim of the Code is strengthened and is accepted by the promoters/management in good spirit and give way to new management to keep the business going.
Source: Financial Express

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