New Bankruptcy Code: A major economic reform

Any individual, partnership firm or a company may go bankrupt owing to business or personal losses. When some economic unit becomes bankrupt, it means it is unable to repay its debts and liabilities. Lack of clarity in the law makes it difficult to deal with the situation and in such case, not only creditors are put to a heavy loss, even the unit which goes bankrupt have to undergo huge emotional agonies. At present, there are nearly 12 laws dealing with bankruptcy/insolvency and some of them are more than 100 years old.

The Narendra Modi government has been able to get the new Bankruptcy Code Bill passed in Parliament and it is being considered as a major economic reform. After the passage of the bill, the road is now clear for the Code to become law. The new law would repeal Presidency Town Insolvency Act (1909) and Provisional Insolvency Act (1920) and amends many other laws including Companies Act, Limited Liability Partnership Act, Securitisation Act etc. Unlike other pending bills in Parliament, opposition parties did not have any argument against the bill and hence, the government could get this bill passed easily.

What is this Code?: According to the Code, once a debtor goes bankrupt, his property could be easily taken over by the creditors. As per the new law, if 75% or more creditors agree, then in case of inability of a person or a company to repay its loans, action can be taken in 180 days (with 90 days to grace period).

If even then debt is not paid, the person/firm will automatically be declared bankrupt/insolvent. This implies that with the new law in place, delays in recovery of loans and losses associated with that, would automatically come to an end. Persons and companies not able to repay their loan would be given option to repay loan or declare themselves bankrupt in a time bound manner. If a debtor is found guilty of misconduct, then there is a provision of imprisonment of five years.

According to the new law, the process of declaration of bankruptcy can be carried out by a licensed professional only. The National Company Law Tribunal would propose to declare any company bankrupt and the Debt Recover Tribunal would act to declare an individual bankrupt. According to the new law, a Bankruptcy Fund would also be created; however, the law is silent about how this fund would be utilised.

The Joint Parliamentary Committee (JPC) had stated in the report that there was no single law under which bankruptcy action could be undertaken. Therefore, this is an attempt to make one law in place of several laws. However, there was another observation of the Committee that the draft bill has not touched overseas issues related to bankruptcy. Therefore, it is an incomplete legislation without dealing with overseas issues.

The 'New Bankruptcy Code' could not incorporate this suggestion of the JPC. However, in this regard, government has opined that since the issue is complicated, it would be incorporated in the law after extensive discussion. So far as the question of overseas assets of the bankrupt firm or individual are concerned, the government can deal with that by entering into suitable agreements with foreign governments.

According to the World Bank, in terms of ranking ‘Ease of Doing Business,’ India stood at 136th position. It said it takes more than four years to close a business in India. After the Code comes into force, it would be easier to close down business; and India will move up in terms of ranking in ‘Ease of Doing Business.’

It is notable that at present, there are more than 70,000 insolvency cases pending in different courts. As on December 2015, nearly 3.6 lakh crore of bank loans were stressed (called bad loans). There has been nearly 7.3% increase in the quantum of stressed loans of banks in 2015-16.

Security of Labour
The new Code also takes care of the labour force. In case of bankruptcy of a company, provision would also be made for salary of the workers for 24 months. Though critiques believe that the government has been able to enact new law in a short time, it opines that the law could framed better. The bankruptcy law is an integral part of financial system of a country and it should change with time.

Critiques say that for overseas issues related to bankruptcy, the new law in incomplete. At present, many foreign companies have investments in India and similarly many Indian companies have invested in foreign countries. Foreign banks and other lenders have significant exposure in Indian markets. However, the new law does not have provision for cooperation between Indian and foreign courts to deal with overseas insolvency issues.

Critiques also feel that according to the new law, there would be an excessive government intervention with regard to appointment, termination and inspection of the insolvency professionals. Therefore, it would be difficult to attract talent in this field. Critiques feel that the new law is excessively tilted in favour of the creditors and about the solution of the problems faced by the debtors, the new law does not have sufficient provision.

This is also being argued that the new law would not be able to quickly solve the present problem of non-performing assets of the banking system as it would take more than one year to implement the new law. Therefore, we need to take steps to find solution to present crisis of the banking system.

(The writer is Associate Professor, PGDAV College, University of Delhi)