A code to tackle insolvency, bring in more regulation

Being bankrupt is a state of inability to repay debts to creditors. The current legal and institutional framework does not aid lenders in effective and timely recovery, or restructuring of defaulted assets, causing undue strain on the credit system.

At present, there are multiple overlapping laws and adjucating forums dealing with financial failures and insolvency. The banks and affected parties looked up to the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for legal remedies. Then there were 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 — both timely and adequately.

The new law, which became effective since May 2016, provides for the resolution of insolvency in a speedier manner for stressed assets which would help in promoting investments, freeing up banks’ resources for other productive uses, boosting credit markets and improving ease of doing business in India. It attempts to simplify the process of insolvency and bankruptcy proceedings, and also seeks to balance the interest of all stakeholders, including alteration in the priority of payment of government dues.

The importance of the bill is the creation of an Insolvency and Bankruptcy Board of India, which will regulate the functioning of various newly created authorities and institutions such as Insolvency Professionals, Agencies and Utilities. While the National Company Law Tribunal will adjudicate resolutions for companies, the DRTs will resolve issues pertaining to individuals in a time-bound process for each category. These processes will be completed within 180 days, though a fast-track option is also available, subject to certain caveats.

It is also a very encouraging move where the resolution process will be conducted by licensed insolvency professionals, who are part of insolvency agencies and bring a lot of practical and operational experiences. Another novel feature is that furnishing of the performance bonds equal to the assets of a company. The professional utilities will be stabilised who will collect and disseminate financial information to speed up the entire process.

The creation of an institutional infrastructure for IPA, IPs and IUs is a progressive move wherein they would be allowed to conduct professional upgradation through examinations and continuous education seminars and code of conduct for them. Entities like financial creditor, operational creditor and corporate debtor are the other entities who gain prominence in the new set up. These agencies are going to have a major impact in terms of timeliness of settling the dispute and also in increasing the coverage of the bill. The timeline of admitting or rejection of the suit, limited to 14 days and to settle the dispute within 180 days, are the steps to quicken the wheels of justice. The entire process of declaration of moratorium, public announcement, and interim relief — are all the new and path breaking setups in the new order. The positive impact of the code is high resolve to help the industry, and to take steps wherein recovery processes are not driven into the quagmire of delays and endless litigation. Global ranking of India in the parameter of resolving insolvency is at a very discouraging low of 136 amongst 189 countries. Also it takes about four years to resolve a case of bankruptcy in India compared with Japan’s six months and China’s two years. Even the UK, from where many of our laws are based, takes only one year to settle such case. India, now aims to reduce its timelines to one year.

Another procreative impact of the new order is to explore addressing cross border insolvency issues through bilateral agreements with other countries. It proposes shorter aggressive time frames for every step in the insolvency process — right from filing of the application to the time available for filing claims and appeals at various levels of tribunals.
The new law will also help protect the workers of the bankrupt company get their mandatory dues such as PF, gratuity and pension funds with a clear cut provision to exclude such dues from the estate of the company/individual. Also the salaries of the workers up to 24 months will get first priority, even ahead of the secured creditors. The positive impact of the new bill runs to the ways and means of corporate persons, firms and individuals who intend to liquidate themselves voluntarily and who have not committed any default. Among the other procedural developments is the initiation of the resolution process by the debtor or even the creditor, where the process is administered by the insolvency professional.

Before the code was passed, the entire structure was operated by archaic laws wherein creditors were relatively powerless when faced with a default, while the promoters were able to insist on their right to stay in control. With the new code in place, it is expected that India will witness an improvement. The code promises to bring a new wave of reforms with a confidence to the international investors that creditors are secured in India. The status of India as an emerging stable market in manufacturing and services would be reinforced.

 (The writer is a President, IMC (Chamber of Commerce and Industry) and Chairman FirstRand Bank India/ Non-Executive Director FirstRand Global Board South Africa)