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Editorial Today – Insolvency and Bankruptcy Code

Background According to Doing Business 2016 report India ranks 136 out of 189 countries when it comes to resolving insolvency.

Importance of Bankruptcy law The code seeks to improve the ease of doing business in the country.

Earlier Bankruptcy law Multiplicity of laws has been a problem in the way of banks failing to recover their loans.

Technically, what exactly does bankruptcy amount to India? Being bankrupt is a state of inability to repay debts to creditors.

Insolvency Resolution in new code The law applies to both individuals and corporate firms.

How it proposes to do this By creating a host of new institutions.

Various stages of process There are five stages in all.

Insolvency regulator  To oversee and regulate insolvency agencies.

Tribunals National Company Law Tribunal and Debt Recovery Tribunals.

Penalties Imprisonment

Advantages of Bankruptcy code Quicker resolution of bad loan problems  and will matter to private sector employees too.

Conclusion

 

Background

  • According to Doing Business 2016 report India ranks 136 out of 189 countries when it comes to resolving insolvency.
  • On average, secured creditors in India recover only 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings and the whole process takes 4.3 years to conclude. This contrasts poorly with the Organisation for Economic Co-operation and Development (OECD) countries where creditors recover 72.3 cents within just 1.7 years on average.
  • With the new code in place, it is expected that India will witness a drastic improvement on both parameters.

 

Importance of Bankruptcy law

  • India’s banking industry is in the throes of a crisis. Bad debts are piling up at banks. According to central bank data, stressed assets rose to 14.5% of banking sector loans at the end of December 2015. That’s almost Rs 10 trillion of loans that are stuck. Freeing up this money is crucial for the banking sector to go about its business.
  • The code seeks to improve the ease of doing business in the country by enabling banks to wind up companies faster if resolution isn’t feasible.
  • Moreover India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.

 

Earlier Bankruptcy law

  • There are, several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple of laws dating from the time of the British Raj for dealing with individual debtors.
  • However, this multiplicity of laws has been a problem in the way of banks failing to recover their loans.
  • Thus the government plans to repeal an ineffectual, century-old insolvency law and amend 11 laws currently dealing with defaulters.

 

Technically, what exactly does bankruptcy amount to India?

  • Being bankrupt is a state of inability to repay debts to creditors. Under the proposed law, a bankrupt entity is a debtor who has been adjudged as bankrupt by an adjudicating authority that has passed a bankruptcy order. The adjudicating authority would be the National Company Law Tribunal (NCLT) for companies and limited liability partnerships, and the Debt Recovery Tribunal (DRT) for individuals and partnership firms.

 

Insolvency Resolution in new code

  • The law applies to both individuals and corporate firms.
  • For individuals the process could be initiated either by the debtor or the creditors.
  •  For companies, the resolution process will have to be completed within 180 days, with an extension of up to 90 days if 75 percent of creditors agree.

 

How it proposes to do this

  • It proposes to do this by creating a host of new institutions. These would include:
  •  Insolvency Professionals, who will conduct the insolvency resolution process, take over the management of a company, assist creditors in the collection of relevant information, and manage the liquidation process.
  •  Insolvency Professional Agencies, who will examine and certify these professionals.
  •  Information Utilities, which will collect, collate and disseminate financial information related to debtors, and
  •  Insolvency and Bankruptcy Board of India, a regulator that will oversee these new entities.

 

Various stages of process

There are five stages in all.

  • One, when a loan default occurs, either the borrower or the lender approaches the NCLT or DRT for initiating the resolution process.
  • Two, the creditors appoint an interim Insolvency Professional (IP) to take control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities, and constitute the creditors’ committee.
  • Three, the committee has to then take decisions regarding insolvency resolution by a 75% majority.
  • Four, once a resolution is passed, the committee has to decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company. If no decision is made during the resolution process, the debtor’s assets will be liquidated to repay the debt.
  • Five, the resolution plan will be sent to the tribunal for final approval, and implemented once approved.

 

Insolvency regulator

  • The Bill envisages a new regulator — the Insolvency and Bankruptcy Board of India.
  • The insolvency regulator would have representatives from government and the central bank, and oversee and regulate insolvency agencies.

 

Tribunals

  • The National Company Law Tribunal would under the code address grievances relating to insolvency, bankruptcy and liquidation of companies. Debt Recovery Tribunals would deal with individual cases. Their decisions could be challenged in appellate tribunals and before the Supreme Court.

 

Penalties

  • A debtor could be jailed for up to five years for concealing property or defrauding creditors.

 

Advantages of Bankruptcy code

  • The Code, if passed into law, can ensure quicker resolution of the bad loan problems dogging PSU banks.
  • Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to get a fresh start.
  • The new code will matter to private sector employees too. The Bill, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market too.
  • Cynics think that the Bill will promote hire-and-fire policies. The optimists say that as long as employees are adding value, they will continue to be sought-after.

 

Conclusion

  • The new Code streamlines and consolidates all these laws to make the process simpler. Industry anticipates that the change will provide an easy exit option for insolvent and sick firms. The passage of this bill will enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the recovery amount. The creditors will not be stymied by red-tape and promoters will directly become accountable for any financial lapses.
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