How is ease of doing business linked with the Insolvency and Bankruptcy Code?
In India, lack of resolution of insolvency is one of the significant factors for the failure of credit market in the country. The present legislations governing insolvency are fragmented, multi-layered and the adjudication of insolvency matters take place in multiple forum, resulting in an unpredictable regime.
The Insolvency and Bankruptcy Code has been hailed as an excellent reform for India that will pay a critical role in improving the ease of doing business.
Why does India need a Bankruptcy law?
Currently it takes, on an average, more than 4 years to resolve insolvency in India. The proposed Bankruptcy Code will replace over a century-old archaic insolvency act – The Presidency Towns Insolvency Act, 1909.
- Delays in making decisions on the viability of business.
- Sometimes, company promoters try to delay reorganisation or attempts to sell-off assets or change of management.
- Delays in disposing off cases by Debt Recovery Tribunal.
- Continued litigation at various levels and delays in appellate level.
- Currently, there are 4 different agencies viz. the HC, the Company Law Board, the BIFR and the DRTs that handle insolvency-related cases.
How can a modern law help?
- Speedy closure will help firms on the verge of brink in two ways, i.e. either restructure the firm or sell-off the assets to recover the money.
- It will promote efficient allocation and greater availability of credits for businesses, as it frees up capital.
- Development of financial markets such as bond market, due to clarity on repayment for debtors.
What is the international experience in this regard?
- US Bankruptcy Code provides for fairly quick liquidation or reorganisation of the company.
- In UK, once the cases are filed, then after 12 months, either the part of assets are discharged to pay-off debt or court-appointed administrators handle the case, if company can be turned around.
Was any committee formed to suggest Insolvency reforms?
- The Bankruptcy Law Reform Committee (BLRC) was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan.
- It was the first committee with the mandate of suggesting comprehensive and not incremental reforms.
- The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions.
What was the recommendation of the Committee?
- The committee proposed an all-encompassing law for corporate and individual insolvency, reflecting the best practices from across the globe.
- The corporates should assess the viability of an enterprise in the early stages of insolvency, such that the creditor and the debtors can negotiate a financial arrangement while preserving the economic value of the enterprise.
- However, if the negotiations fail, then the enterprise is liquidated. The insolvency resolution is required to be done within a period of 180 days.
- It also suggested fast track insolvency resolution for certain entities which is required to be completed within 90 days.
What are the provisions of draft Insolvency and Bankruptcy Code?
The code aims to bring modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.
- It will restore some power to creditors, both financial and operational.
- It will fast-track mechanism of insolvency resolution process may be applicable to certain categories of entities.
- The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
- It also provides for fast-track resolution of corporate insolvency within 90 days.
- Debt Recovery Tribunals will be adjudicating authority over both individual & unlimited liability partnership firms.
- National Company Law Tribunal will be adjudicating authority with jurisdiction over companies with limited liability.
- It has a clause to provide for insolvency professionals who will specialize in helping sick companies. <These professionals will help revive control the management of distressed firm to revive it>
- It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system
- To setup Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
- The bill also seeks to establish Insolvency and Bankruptcy Fund of India.
What about Financial Sector Insolvencies?
- FSLRC recommended creation of a resolution corporation to monitor financial firms and intervene before they go bust.
- The aim is to close-down the firms which can’t be revived or change their management to protect investors or depositors.
The reform is dubbed as 2nd most important reform after GST, as it will also improve the ease of doing business in India.
Published with inputs from Pushpendra