Stating that once the Insolvency and Bankruptcy Code, 2016, comes into force, a repeat of the Vijay Mallya-like episode will become impossible, former Union law secretary TK Viswanathan said the law also allows workers of a company to initiate voluntary liquidation proceedings. Mallya, the promoter of debt-ridden Kingfisher Airlines has been declared a willful defaulter for not repaying debt. The chairman of the government-appointed committee which drafted the law, also said that as long as a company repays its dues to lenders and complied with other statutory obligations, it could ask for its operations to be wound up. Excerpts from an interaction Vishwanathan had at The Indian Express on Monday:
Why does the country need a bankruptcy law?
Once a person has promoted a company, they stick with it no matter what happens, especially if it goes bankrupt. But, so far, India didn’t have any institutional mechanism to deal with such cases. The present law provides that once a resolution process begins after someone has triggered it, the management of the company is taken over and immediately a resolution professional takes over. The board of directors is suspended and the creditors’ committee comes into operation and deals with the day-to-day operations of the company and try to see how to get some finance, so that the firm continues as a growing concern.
Won’t the workers and employees be affected if this is done?
No, their rights are not affected and the value of the company is not destroyed. There is no siphoning off of the company’s assets which is right now happening under the Companies Act. In the present companies Act, you will find that the official liquidators are under the control of the high court and then it takes many years (10-20 years) for the resolution to pass, but these things will be a thing of the past as under the new code the management is taken over, the resolution process moves in and there are lot of provisions that deal with the fact that you can’t indulge in issues where the enforcement of claims is delayed. All these things will not be possible because the law provides a look back period of 2 years. So transactions which are two-year-old can be reviewed, cancelled and nullified. So it is very difficult right now to borrow money and not pay. One can enforce the whole thing within 180 days, at the most 270 days and if you can’t arrive at a resolution plan, the company goes into liquidation.
How do you avert a situation like the one the country is facing in Mallaya episode?
This would not have happened now. Now the workers are entitled to trigger a resolution under the Act and thus would have not allowed the matter to go this far. This would have never happened. It is the easiest diagnosis of the sickness of a company, the rehabilitation process moves in and then such things are things of the past.
What about foreign assets?
There is a clause that provides for mutual co-operation. We have not handled cross-border insolvency of assets. To have cross-border insolvency, we need to have proper ecosystem. We are lacking on that law. In western countries, they have proper resolution professionals, information utilities, where all the credit information about the debtors is easily available.
We have a difficulty because the information asymmetry regarding the debtors assets and liabilities are not known to creditors. As a result, there are lot of transactions that try to undervalue the assets. The recovery rate is not good. But, under the code, we have provided for information utilities where all credit transactions will be recorded and be readily available. So, it becomes very easy to assess the creditworthiness of the prospective debtors. The lenders will be in better position and there will be more transparency. It will be more than Cibil. Now, we want to have multiple information utilities where they may not be repositories, but only provide you the information to have a repository means to be sure of the information.
Prevailing laws take a lot of time. How will it work under the new law?
We have provided six timelines and they have to be adhered to. I think, if the tribunal doesn’t adhere to the timeline, they will have to provide reasons for the same, and secondly, we have condoned the discretion of the tribunal to interfere into the resolution plan or process arrived at by the creditors committee. Market conditions can’t be decided by judges. The creditors committee gets you the money and the judges are there as umpires. So there is not much scope for judges to interfere. The creditors committee decides on most of the things.