IAS Gyan

Daily News Analysis

Transforming business and the insolvency system

5th October, 2020 Economy

Context: The Insolvency and Bankruptcy Code (IBC 2016) is one of the key legislative reforms that would help aid India’s path to self-reliance on a high growth trajectory.

  • The IBC, along with the Goods and Services Tax regime, among other key reforms, helping in significantly improving the ease of doing business in India and enabling it to emerge as a ‘Make for World’ platform.
  • These reforms has lead to surge in Foreign Direct Investment into India in 2019-2020, to the tune of nearly $74.5 billion, or a significant increase of 20 per cent from the previous year.

A key reform step

  • The IBC has been a far-ranging and structurally significant reform that has transformed insolvency resolution in India.
  • It replaced an inefficient bankruptcy law regime.
  • The IBC has focused on time-bound resolution, rather than liquidation, as an empowering tool to support companies falling within its ambit.
  • It has successfully instilled confidence in the corporate resolution methodology, and perhaps, more importantly, on creating a possibility for the creditors recouping some of their investments in firms being liquidated or going in for resolution.
  • Its core implication has been to allow credit to flow more freely to and within India while promoting investor and investee confidence.
  • Despite the suspension of the IBC for a limited duration due to the COVID 19 pandemic, in the short, medium and long term, it will prove to have been a timely reform.
  • It will greatly streamline insolvency processes in a sustainable, efficient, and value retaining manner.

Issues with its implementation:

  • India, unfortunately, suffers from a serious backlog in court cases, to the tune of nearly four crore matters pending final judgment. The coronavirus pandemic exacerbated this.
  • The enforceability of contracts has been a challenge.
  • On an average, it takes as many as 1,445 days for a contract to be enforced, and that too at a cost of nearly 31% of the claim value. This is simply unacceptable.

Criminal penalties

  • Government of India is working toward decriminalisation of minor offences. As Criminal penalties including imprisonment for minor offences act as major deterrents for investors.
  • NITI Aayog will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.
  • The government’s intent is to help differentiate between good faith mistakes and intentional bad faith actions, so as to penalise the former, and criminalise the latter.

Moves that will help

  • Rolling out of the commercial courts, commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts
  • removing of over 1,500 obsolete and archaic laws.
  • major and multi-dimensional effort by the government to provide comfort, relief and reliability to the potential investors.


  • It is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
  • The IBC goes beyond other similar pieces of legislation across the world, and through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.
  • For India’ s rapid rise in the Ease of Doing Business rankings, IBC’s played an important role.
  • According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018, a leap of 56 places.
  • Two key drivers for the IBC are relatively short time-bound processes, and the focus on prioritising resolution rather than liquidation.
  • The report of the Bankruptcy Law Reforms Committee speaks of the critical need for speed in the working of the bankruptcy code.
  • Inability to make significant decisions without full clarity of ownership and control delays resolution. The delays result in low value liquidation due to a high economic rate of depreciation.

Helping MSMEs

  • The MCA along with IBBI are working diligently on putting in place a Micro, Small and Medium Enterprises (MSME) and non-MSME framework to help expedite this process.
  • At the same time, given the need for social distancing and the suspension or limitation of physical hearings, a concerted effort should be made to enhance the role of digitally conducting all processes and hearings to achieve greater efficiency in the new normal.
  • Bringing in technology would help ease of access to justice and greatly help ease of doing business from a process and efficiency standpoint as well.
  • The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs.
  • Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.

Conclusion: Further streamlining of the Insolvency and Bankruptcy Code can instil more confidence in foreign and local investors.

Going forward, there could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process. This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.