Bankruptcy bill, power to creditors

The draft insolvency and bankruptcy bill, on which the government has sought public comments, seeks to address the major problem of credit default on the part of companies and similar entities and individuals. The draft was submitted to the finance ministry by an expert panel after wide consultations. Creating an effective framework to deal with insolvency and bankruptcy and laying down procedures, either to salvage or liquidate a failed business is vital for protecting the interests of various stakeholders and strengthening business confidence. It is a major factor in the ease of doing business.

India ranks a dismal 136 among 189 countries in resolving insolvency issues, according to the latest ease of business report. The proceedings take many more years in India and the recovery for creditors in much less than in countries where there are good systems and processes for recovery of debt and management or liquidation of defaulting entities. There are many laws at present to deal with the problem which together ensure that it worsens and festers. Asset stripping and wrong transfer of funds are common. The proposed bill takes a comprehensive view, and gives more power, both financial and operational, to the creditors to initiate the insolvency process and to leave the management of the defaulting company to a team of insolvency professionals. The existing laws allow promoters to resist reorganisation and asset sale efforts  and to delay the process through litigation. Creditors, very often the banks, shareholders and employees are all affected by the failure of a business. The economy and the tax payers suffer too. Under the proposed law, efforts can be made to revive the company through a change of management or by additional funding if the project is viable. Otherwise, it facilitates quick disposal of assets to pay off the lenders. There will be a common bankruptcy code for all kinds of enterprises and individuals.

The bill has laid down a 180-day time limit, extendable by 90 days, for the insolvency resolution process to be concluded. This envisages a quicker process than in countries like the UK and creates doubts whether it can actually be accomplished. Legislatively prescribed timelines are not followed in many cases now. Loopholes, which allow dilatory practices, should not be put in the proposed legislation. Even when the new law creates a mechanism to address insolvency issues, there is scope for appeals to courts. It must be ensured that the appeals mechanism is not misused to defeat the purpose of the law.