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| Finance Minister Nirmala Sitharaman speaks in the Rajya Sabha during the ongoing Monsoon Session of Parliament in New Delhi. (Image | The Hindu) |
It protects defaulting companies from insolvency proceedings for at least six months
Context: Both the houses of Parliament passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, which provides that insolvency proceedings against defaulting companies will not be initiated for at least six months starting from March 25.
Merits of the amendments to IBC
- IBC is not a recovery law - The creditors, including MSMEs (micro, small and medium enterprises), had several other options to recover their claims. The proposed amendments, brought in the form of an Ordinance on June 5, suspended the application of three provisions to prevent any company, stressed due to the COVID-19 situation, from being pushed into insolvency proceedings. A provision for further extension of six months has also been given. The initial six-month period would end on September 24, she said.
- High Recovery Rate - The recovery rate under the Code was 42.5%, while under Lok Adalat (2018-19), the figure was 5.3%; DRT proceedings had led to 3.5% recovery and under the SARFAESI Act, 14.5% of the dues were recovered.
- Immunity to MSMEs - There is a distinction between small and large borrowers, and the amount varies from Rs 1 lakh to Rs 1 crore. IBC cannot be initiated for companies below Rs 1 crore, so Micro, Small and Medium and Enterprises (MSME) are not going to be affected.
- Limited to defaulters arising during lockdown - IBC will be confined to only those default payments that may arise due to the COVID-19 period, and will not affect the applications filed before (March 24, when the lockdown was imposed). So far, 258 companies had been rescued, and roughly one-third were defunct companies. “Nine hundred and sixty five companies proceeded for liquidation, three-fourth of them were defunct, loss of employment is minimal even after liquidation. The 965 companies had assets of Rs 38,000 crore, so in value terms, the asset saved is more than liquidated.
- Does not protect frauds - The Ordinance and the Bill does not provide any protection to frauds. Section 166 of the Companies Act, 2013 remains intact, thus there is no protection from fraud. If the company is pushed into insolvency when it is recouping from losses, the objective of the Ordinance will be lost
Concerns expressed by the Opposition
- Initiating the debate, Congress leader Adhir Ranjan Chowdhary said the proposed amendments had a lot of grey areas, leaving loopholes for large debtors. The worst casualty would be the MSME sector, which employed 1.2 million people and catered to large corporates. The amendments would adversely impact the concepts of asset maximisation and entrepreneurship, he said.
- Vivek Tankha of Congress said that small traders would be affected while the Bill protected big corporates. “Do we want to protect COVID category of industries or all industries based on their performance in the past? Section 10A does not distinguish between COVID and other defaults, so suitably amend Section 7 and 9 by protecting COVID-related defaults on case to case basis,” he urged.
- Communist Party of India-Marxist (CPI-M) Member of Parliament K.K. Ragesh had earlier said that, as per the Ordinance, all the insolvency proceedings had been prohibited for one year and it was going to push the banking sector into crisis. “The IBC has become a bonanza for corporate frauds. Huge concessions to corporates, NPAs accumulated in banks, more than Rs 3 lakh crore lying as NPAs in various banks has been written off through book adjustments,” Mr. Ragesh said.
SOURCE
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