What does bankruptcy mean?
A company is bankrupt if it is unable to repay debts to its creditors (banks, suppliers etc). The inability to repay debts by some of the Indian firms has resulted in a huge pile of non-performing assets for the banking system. A mechanism to free up the money stuck as bad loans is one of the key for the banking system. IBC is seen as one such.
How the RBI came into the picture of referring accounts for resolution under IBC?
The government had recently amended the RBI Act, which gave powers to the central bank to direct banks to take punitive action against individual accounts under IBC.
How does the process work under IBC?
-
To being with any creditor including banks can start bankruptcy proceedings against defaulters by filing a petition with the National Company Law Tribunal.
-
After that, an insolvency professional with significant powers is appointed to take control of the defaulting company and assist the process.
-
A creditors committee is formed to represent the interest of lenders and any other party that have been affected due to the default by the company.
-
The committee should come up with a resolution plan (which may include selling off defaulted loans or liquidate the company outright). The resolution would require a nod from 75% of the creditors on the committee.
-
The insolvency professional gets 180 days to come up with a feasible solution on the default issue. The timeline can be extended by another 90 days. If no solution is found within 270 days, a liquidator is appointed. The company can also opt for voluntary liquidation by a special resolution in a general meeting.
What is Information Utility under IBC?
-
Information utility is an information network which would store financial data like borrowings, default and security interests among others of firms.
-
The utility would specialise in procuring, maintaining and providing/supplying financial information to businesses, financial institutions, adjudicating authority, insolvency professionals and other relevant stake holders.
Why is it important? How useful is it?
-
The objective behind information utilities is to provide high-quality, authenticated information about debts and defaults, as per the report of the Working Group on Information Utility published by the Ministry of Corporate Affairs.
-
Information utilities are expected to play a key role as they allow storage of financial information of registered users and expeditiously process and verify information received.
-
Moreover, the database and records maintained by them would help lenders in taking informed decisions about credit transactions.
-
It would also make debtors cautious as credit information is available with the utility.
-
More importantly, information available with the utility can be used as evidence in bankruptcy cases before the National Company Law Tribunal.
What are the key challenges for these utilities?
-
While the onus is on financial creditors, operational creditors and corporate debtors to provide the required information, procuring authentic information might be a challenge due to the sensitivity involved. There may also, be resistance in sharing information. Since it is a digital database, there is the risk of exposure to data piracy and data theft.