The government is expected to introduce amendments to the Insolvency and Bankruptcy Code (IBC), to introduce provisions for putting in place a resolution framework in case of individual insolvency and cross border insolvency, sources said. The changes will enable initiation of resolution process in case of personal guarantors to corporate debtors, proprietorship and partnerships.
Provisions for cross border insolvency would enable Indian firms to claim their dues from foreign companies, while allowing foreign creditors to recover loans from Indian companies, sources said. Apart from foreign creditors, this would also help foreign branches of Indian banks to recover their dues in India.
A committee set by Ministry of Corporate Affairs, in its report on cross border insolvency last year, had suggested adopting the UNCITRAL or United Nations Commission on International Trade Laws on cross-border insolvency. The Insolvency and Bankruptcy Code, at present, does not effectively deal with cases involving cross-border insolvency. While changes will allow initiation of insolvency resolution in such cases, the government will also need to sign treaties with foreign countries for allowing Indian creditors to pursue insolvency resolution in case of foreign companies. The UNCITRAL Model Law envisages a balance between liquidation and reorganization and provides framework for resolution in four areas of cross border insolvency.
In case of individual insolvency resolution, the Insolvency and Bankruptcy Board of India (IBBI) has already finalized the norms for such cases, which are expected to be notified soon. The new framework divides individuals into three categories: personal guarantors, proprietors and common individuals. This process is likely to begin in phases starting from guarantors to proprietors. The IBC law will also need to be amended to provide for a mediation mechanism. Cross border insolvency provisions will apply to corporate debtors to start with and not in personal cases.
At present, Section 234 of the IBC mentions that “the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.” But there is no explicitly legal arrangement for cross border insolvency. “We are ready with the changes required to pursue insolvency resolution in individual and cross-border cases. The government may take these up anytime,” a senior government official said. The government is expected to amend Section 234 and Section 235 of the IBC.
In many of the insolvency resolution cases that financial creditors pursue, the corporate debtors have assets or subsidiary companies outside India. These assets can be taken into account after cross-border insolvency kicks in. “Having adequate reciprocal arrangements or treaties with other countries is the key to effective implementation of the cross-border insolvency law,” the official said. The IBC has been the most significant financial sector reform launched by the NDA government, aimed aimed at speedy resolution of stressed assets of more than Rs 10 lakh crore.
It has resulted in a recovery rate of around 43 per cent, even as nearly 48 per cent of the cases have faced delays. The IBC requires a corporate insolvency resolution process to be completed in 180 days, which can be extended by another 90 days to a maximum of 270 days. These time limits have been set to ensure that recovery of non performing assets (NPAs) in a time-bound manner.