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Tuesday, December 07, 2021

Insolvency and Bankruptcy Code: A legislation to promote investments, develop credit markets

Currently, there is no single law dealing with insolvency and bankruptcy in India.

By: ENS Economic Bureau |
December 22, 2015 1:40:48 am
Bankruptcy law, Bankruptcy law India, Industrial and Financial Reconstruction, BIFR, Sick Industrial Companies Act, express column iquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

The government on Monday introduced in Parliament the ‘Insolvency and Bankruptcy Code, 2015’ that provides for resolution of insolvency in a speedier and time-bound manner.

The bill aims at promoting investments, freeing up banks’ resources for other productive uses, boosting credit markets and improving ease of doing business in India.

An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship, according to the statement of objects and reasons of the bill tabled in Lok Sabha by Finance Minister Arun Jaitley.

The bill also provides for setting up of an ‘Insolvency and Bankruptcy Board of India’ to regulate professionals, agencies and information utilities engaged in resolution of insolvencies of companies, partnership firms and individuals.

“The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India…,” as per the document tabled.

It further says that a new legislation is needed to deal with insolvency and bankruptcy as the existing framework is “inadequate, ineffective and results in undue delays in resolution”.

As per the proposed legislation, the corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days. It also provides for fast-track resolution of corporate insolvency within 90 days.

“The government’s move to table the Bankruptcy Law is a welcome step, given the relatively long duration of insolvency proceedings in India vis-à-vis other OECD (Organisation for Economic Co-operation and Development) countries,” said K.V. Karthik, partner, Financial Advisory Services, Deloitte Touche Tohmatsu India LLP.

Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

Other laws which deal with the issue include SICA (Sick Industrial Companies Act), 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Sarfaesi (Securitisation and Reconsutriction of Financial Asseets and Enforcement of Security Interest) Act, 2002 and Companies Act, 2013.

As a result, four different agencies, the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs), have overlapping jurisdiction, giving rise to the potential of systemic delays and complexities in the process. A strong bankruptcy law can help overcome these challenges.

The Code also seeks to balance the interest of all the stakeholders including alteration in the priority of payment of government dues.

N K Premchandran of RSP opposed the bill, saying it was a defective piece of legislation, but later the lower House through voice allowed its introduction.

The Code seeks to provide for designating National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) as the adjudicating authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy.

Till the Insolvency and Bankruptcy Board of India is set up, the central government will exercise the powers of the Board or designate any financial sector regulator the powers and functions.

The bill also provides for priority with regard to distribution of proceeds following liquidation of the company. In the order of priority, the first charge will be insolvency resolution process cost and liquidiation costs to be paid in full.

Liquidation proceeds will then be used to clear debts owed to secured creditors, and then to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors, in that order. Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment.

It also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.

The Code also provides for fast track corporate insolvency resolution process to be completed in 90 days.

“Having a robust insolvency resolution mechanism can help creditors recover a larger part of their investment faster, allowing them to re-invest in other businesses, thereby facilitating the efficient flow of capital across the economy,” Karthik said.

Comparison with the US Chapter 11

In the US, there are two main bankruptcy procedures for corporations, Chapter 7 and Chapter 11.

Chapter 7 is the liquidation code and provides for the appointment of a trustee by the court to oversee the liquidation of the company. Under Chapter 7, the business is closed down before sale and the assets auctioned.

Chapter 11 allows a firm to remain in operation while a plan of reorganisation is worked out with creditors.

The Indian Code provides for quick identification of financial distress and a 180-day plan, extendable by 90 days, to revive a company, following which the company becomes insolvent.

With regard to management control, under the US Chapter 11, the company retains the management control while working to achieve pre-agreed goals within a certain timeframe.

The Indian code provides for management control to pass over to resolution professionals with significant powers, once an insolvency resolution is underway.

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