A government-appointed committee has suggested setting up an insolvency regulator to exercise regulatory oversight over insolvency professionals and agencies in a bid to ensure speedier winding up of insolvent companies and providing easier exit route to investors.
The Bankruptcy Law Reforms Committee (BLRC), headed by TK Vishwanathan, in its report has also recommended, for the first time, bankruptcy and insolvency processes for individuals with annual gross income of less than Rs 60,000 and aggregate assets of not more than Rs 20,000. They can apply for a discharge from their debts which are liquidated and unsecured up to Rs 35,000.
The proposed Bankruptcy Code will replace over a century old archaic insolvency act — The Presidency Towns Insolvency Act, 1909 — and ensure time-bound disposal of insolvency application.
“The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns. The Bill lays down a clear, coherent and speedy process for early identification of financial distress and revival of the companies and limited liability entities if the underlying business is found to be viable,” an official statement said.
According to the draft, a timeline of 180 days has been prescribed for dealing with applications for insolvency resolution which can be extended for 90 days by the adjudicating authority, though only in exceptional cases. The draft Bill also provides for a fast track insolvency resolution process which may be applicable to certain categories of entities. In such a case, the insolvency resolution process has to be completed within a period of 90 days from the trigger date. However, on request from the resolution professional, based on the resolution passed by the committee of creditors, a one-time extension of 45 days can be granted by the adjudicating authority.
According to World Bank, creditors in India recover 25.7 cents on the dollar in 4.3 years compared to 2.6 years in South Asia where one can recover 31.8 cents a dollar while in the US, 80.4 cents a dollar in 1.5 years, due to absence of clear bankruptcy guidelines. Earlier, the government had though enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act to ensure that banks get a preference over other stakeholders in settling of dues, India lacks an effective over-arching mechanism to ensure quick winding up of businesses and compensation to other stakeholders.
According to the Presidency Towns Insolvency Act, an individual can face charges for non-payment of as little as Rs 500.
“The adjudicating authority will have the jurisdiction to hear and dispose of cases by or against the debtor. The Debt Recovery Tribunal shall be the adjudicating authority with jurisdiction over individuals and unlimited liability partnership firms. The National Company Law Tribunal will have jurisdiction over companies, limited liability entities,” according to the draft.
The resolution professional will investigate and prepare a final list of all qualifying debts within 180 days from the date of application after which the adjudicating authority will pass an order on discharging of the debtor from the qualifying debts and accord an opportunity to the debtor to start afresh, financially.