JOIN USCredit is the lifeblood of a growing economy, however the same economy can be stifled by non-performing credit.Therefore, in a healthy economy it is crucial that credit is freed from inefficient businesses that are non-performing and redistributed among profitable ones.
The Indian economy is currently saddled with about Rs 3.2 lakh crore of Non Performing Assets (NPAs). The report further states that India lags behind in recovery rate, as well as time taken to recover the loan when compared with many developed nations. India on an average recovers only 25.7% of dues in 4.3 years, compared to recovery of 72.3% in 1.7 years in developed nations.
The new Insolvency and Bankruptcy Code (the Code) addresses several problems that plague the current system. Its consolidates multiplicity of laws, provides a time bound process for resolution of insolvency, makes information available for rational decision-making, shortens and clarifies the appeal process and manner of distribution of recovery proceeds. The Code outlines a 2-stage process with the first stage being the insolvency resolution process and the second stage being liquidation process triggered upon failure of resolution.
An insolvency resolution process can be initiated by either a creditor, or by the debtor itself, upon an event of default. A revival plan is to be proposed and agreed by the creditors within 180 days from the admission of the application. Making this process time bound is very essential as the value of the assets can erode substantially with the passage of time. In event of disagreement or if a decision is not taken within the stipulated time frame the debtor will automatically move to the next stage of liquidation.
The liquidation process will be led by a regulated insolvency professional, the liquidator. The liquidator will form an estate of the assets of the company and hold the estate as a fiduciary for the benefit of all the creditors. The secured creditors may relinquish their security interest to the estate, or realise its security post verification from the liquidator. The recoveries that are obtained are paid out to the various claimants through a well-defined waterfall. The cost of insolvency will be paid first followed by workmen’s dues and secured creditors on pari-pasu basis. Next in line will be unsecured creditors followed by government dues.
The Code provides for setting up of the following institutions to ensure effective governance and implementation of the provisions of the law.
National Company Law Tribunal (NCLT), the adjudicating authority over a company’s insolvency and liquidation process. It will be an overarching body for resolving insolvencies.National Company Law Appellate Tribunal (NCLAT) will have appellate jurisdiction over NCLT. The decisions of the NCLAT can only be appealed to the Supreme Court.
Information Utilities (IU) - will serve as a repository of financial information of a company. The financial and operational creditors will have an obligation to submit the relevant information to the IUs. The information maintained in these IUs will be available to all relevant parties on the payment of a fee.
Insolvency Professionals(IP) will oversee the insolvency and liquidation process. Such professionals are envisaged to be empowered to run the process effectively.
Insolvency and Bankruptcy Board of India (IBBI) – IBBI will be the regulatory body responsible for forming the rules, code of conduct and registration of the above agencies.
Passing of the bill in the Parliament is an important step in creating a viable bankruptcy law. However, timely implementation and execution will be the key to success of the code. This involves setting up of NCLT, formation of IBBI, IUs and IPs. In addition creation of a framework of insolvency professionals with suitable skill set for performing the various activities can be very challenging. More over in situationswhere the right professionals are not availablemay lead to ineffectiveness of the system as in the case of DRT/BIFR.
In the long run, if the code is implemented properly, it would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth. This is the right step towards making India developed and mature market economy.
(Munesh Khanna is the partner of the Deals segment in PwC India, and Ankur Kedia is Associate Director of Deals segment in PwC India)