Bankruptcy law: An overhaul long overdue

Bankruptcy law: An overhaul long overdue

Currently it takes more than four years to resolve insolvency. As per the new regime, corporate insolvency applications will have to be decided within 180 days.

The passage of the Bankruptcy and Insolvency Code is a huge positive for the Indian economy and its businesses. The government has taken several strides forward to enhance the ease of doing business and make life easy for a prospective entrepreneur who wishes to start a new venture. The Bankruptcy and Insolvency Code is another giant leap that would make exiting a non-viable business easier than it currently is. This helps in several ways. You free up capital for more productive uses. You generate new employment opportunities through better use of capital and of course, this helps in tackling one of the key pain points of the banking sector — resolving the stressed assets problem.

The law in India relating to insolvency was contained in several legislations such as the Sick Industrial Companies (Special Provisions) Act, 1985, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, constitution and process before the Debt Recovery Tribunals and the Companies Act. However, since the inception of these different legislations, several complexities have been faced in their implementation and they hardly satisfied the imperative for revival and rehabilitation of sick industrial undertakings; rendering them inadequate to meet the changing conditions. Hence, reform in this branch of law was long overdue.

Coupled with this, the Insolvency and Bankruptcy Code is being seen as an important piece of legislation to help create a more business-friendly environment. Failure of business affects employees, shareholders, lenders and the economy at large. Easy exit for a business which is on the brink of collapse helps in speedy winding up, productive redeployment of capital and ensures greater availability of credit by freeing up of capital. This, in turn, boosts productivity and economic growth. Against this backdrop, the industry welcomes the passage of this modern bankruptcy law and views its successful implementation as indispensable to achieve an efficient and swift insolvency regime.

Currently it takes (on an average) more than four years to resolve insolvency in India. The new Code seeks to cut down the time frame drastically. As per the new regime, corporate insolvency applications will have to be decided within 180 days, with an option of extending it by only an additional 90 days. This is a very welcome move and will provide certainty to the process, though some flexibility in case of companies where Corporate Insolvency Resolution Process is complex may be desirable.

Effective enforcement of the Code is substantially dependent on the efficient functioning of the National Company Law Tribunal (NCLT) and Debt Recovery Tribunals (DRTs). Hence, the key challenges currently include creation of appropriate implementation infrastructure and capacity, including setting up of NCLT and creation of an effective mechanism to resolve the pending cases with DRTs. As per media reports, by December 2014, 59,645 cases involving Rs 3.74 trillion in bank loans were pending before DRTs, according to the data from the Government’s Department of Financial Services.

Without an effective mechanism to resolve the pending issues with DRTs, the number of pending cases will keep adding, leading to delay of the insolvency resolution process under the Code instead of providing a time bound resolution process. This brings us to the moot point on whether DRTs should be further strengthened with adequate resources or an alternate authority should be created as the forum for the recovery of debt from individuals and partnership firms. In this regard, the proposal of the Financial Sector Legislative Reforms Commission of digitising the DRT process to improve efficiency and effectiveness of the DRTs may also be considered.

Another issue pertains to the whole ecosystem of Insolvency Professionals who will play a very vital role in the entire insolvency resolution process. Minimum qualification and experience requirements of insolvency professionals have been left to the by-laws to be framed by the insolvency professional agencies and on the Government, which is empowered to make regulations in this regard. Absence of provisions related to minimum qualification and experience requirements for insolvency professionals in the Code, gives uncertainty with regard to the competency of insolvency professionals for handling the insolvency resolution process. Certain minimum criteria, pertaining to financial literacy and competency, may be prescribed in the Code itself. Other requirements such as requisite experience of 10-15 years etc. may be prescribed in the Rules, under a delegated authority of the government.

Additionally, before the whole mechanism provided under the Code is institutionalised and the structure becomes fully functional, the Insolvency & Bankruptcy Board of India or the designated financial regulator, as the case may be, should have the right to nominate a prescribed number of persons as Insolvency Professionals, who shall be persons of eminence and with experience in the field of finance, law or insolvency. This will help to kick-start the whole machinery and once the process is in place, then more people can be registered as Insolvency Professionals, based on the guidelines provided under the Code and the Rules.

Though the Code may not be a panacea, as some observers tend to articulate, it is a major step forward in the ongoing reform process of attaining the objective of preferred investment destination for India. With such positive measures as these being undertaken by the Government, achieving the target of securing a rank in the first 50 economies in the Doing Business Report won’t remain a distant dream. Going forward, Moreover, it will greatly help deal with the existing stressed asset scenario being faced by the banks so that they can productively support country’s growth aspirations.

FICCI hopes that the new insolvency framework while providing an enabling environment for growth of India Inc. will also address valid concerns and practical hardships of the Industry and just like any other legislation, the Insolvency and Bankruptcy Code would also evolve over time.

Harshavardhan Neotia is president, FICCI.


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