The Bankruptcy Law Reforms Committee has submitted its final report to the Centre, including a draft Insolvency and Bankruptcy Bill. The bill aims to bring in a modern framework to deal with bankruptcy and insolvency of a variety of economic players, including individuals, but excluding financial firms. It seeks to replace the myriad legislation currently in force, including century-old laws governing personal insolvency. This is a much overdue reform and Finance Minister Arun Jaitley must make good on his budget promise to bring it in this winter session of Parliament. India ranks an abysmal 136 out of 189 countries in “resolving insolvency” in the Doing Business 2016 report — on average, secured creditors in India recover 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings, which take 4.3 years to conclude. This is in contrast to the OECD countries of 72.3 cents and 1.7 years.
The fact that creditors are relatively powerless when faced with default and promoters are, in the words of RBI Governor Raghuram Rajan, able to “insist on their divine right to stay in control” tends to chill the market for credit. As a result, credit in India is limited to a few large companies and secured loans. The draft bill attempts to restore some power to creditors, whether financial or operational — even, say, sugarcane farmers who are owed arrears by a mill or unpaid employees would count as creditors — by allowing them to initiate the insolvency process, eliminate the possibility of forum shopping, and hand over the steering wheel to a committee of financial creditors, which would be bound to dispose of the case in 180 days.
But legislatively prescribed timelines are no panacea. As has been seen in the case of debt recovery tribunals, even though the law mandates them to dispose of cases in six months, only a fourth of the cases pending at the start of the year are concluded during that year. Then there are delays at the appellate level, also because high courts frequently step in, despite the Supreme Court rueing this. Ultimately, the speediness of the process — this is critical as delays cause huge loss of value in firms — will depend on the pace of the dispute-resolution and adjudication mechanism. Further, the working of the framework is premised on an elaborate ecosystem of information utilities, insolvency professionals and a regulator. For now, a significant start has been made to grease the process of creative destruction.