India’s new bankruptcy law

India has finally successfully passed the new bankruptcy law. This article on mint gives a good picture on some of the issues with respect to this law.

“The new code will replace existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms. It will amend laws including the Companies Act to become the overarching legislation to deal with corporate insolvency. It will also help creditors recover loans faster.

The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index, since all reforms undertaken by 31 May are incorporated in the next ranking.

On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.

The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.

It also proposes to use the existing infrastructure of National Company Law tribunals and debt recovery tribunals to address corporate insolvency and individual insolvency, respectively.

Anjali Sharma and Susan Thomas of the Indira Gandhi Institute of Development Research wrote in a 10 May column in Mint that the code assumes the existence of institutional infrastructure like information utilities and insolvency professionals, information repositories like stock depositories; a new regulator, without the failings of existing regulators; and a high-quality adjudication infrastructure.

“Unless these four pillars are in place, the Code will fail,” they wrote, highlighting the huge pendencies faced in the debt recovery tribunals.

Responding to the debate in Rajya Sabha, minister of state for finance Jayant Sinha said the government will try to go through a stage-wise process to ensure smooth implementation, “notifying provisions as and when the necessary infrastructure is ready”.

Ashwin Bishnoi, a partner at law firm Khaitan and Co., said the insolvency code proposes a vast change and its implementation will take time.

“The code has set the framework for bringing in changes in the debt recovery tribunals,” he said adding that India has many professionals who can easily step into the role of insolvency professionals.

The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National Company Law Tribunals and courts.

Bankruptcy applications will now have to be filed within three months; earlier, it was six months.

To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.

There are also provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.

Sinha said the code seeks to protect interest of workers who are the most vulnerable. “It enables workmen to initiate the insolvency process and they will be first in line to get the proceeds of liquidation,” he said.”

 

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Author: Bobbur Abhilash

I am a fourth year Doctoral student in the Finance and Control Department at IIM Calcutta.

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