According to the World Bank, India is ranked 136 among 189 countries on the parameter of resolving insolvency and that it takes more than four years to resolve a case of bankruptcy in India. Currently, over 70,000 liquidation cases are pending in debt recovery tribunals and courts.With a view to make it easier to wind up a failing business and recover debts in Asia’s third-largest economy, parliament has attempted to overhaul the bankruptcy law in India. The Insolvency and Bankruptcy Bill, 2015 which seeks to strengthen the hands of lenders to recover outstanding debts, was earlier passed by the Lok Sabha (Lower House) on May 5, 2016, and was passed by the Rajya Sabha (Upper House) on May 11, 2016. With the president providing his assent on 28 May 2016, India now has a new bankruptcy law – The Insolvency and Bankruptcy Code, 2016 (the Bankruptcy Code) which will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of defaulters.
Before the enactment of the Bankruptcy Code, India had multiple laws to deal with insolvency, which led to significant delays in winding up a company. The Bankruptcy Code aims to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1090 and the Provincial Insolvency Act, 1920. In addition, it amends 11 other laws including the Companies Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and Sick Industrial Companies (Special Provisions) Repeal Act, 2003. The Bankruptcy Code envisages a framework for the resolution of insolvency for individuals, companies, limited liability partnerships and partnership firms.
Salient features of the act
• Two distinct processes for resolution of individuals (fresh start and insolvency resolution).
• Proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days where 75 percent of the financial creditors agree.
• Contains provisions for a fast-track insolvency resolution process for companies with small operations where the resolution process has to be completed within 90 days with a window for a one-time extension of 45 days.
• For individuals and partnerships, it allows the debtor to apply for forgiveness of a specified amount of debt, provided that his assets are below the prescribed limit, which has to be completed within six months.
• Proposes the setting up of a new entity, the Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals and information companies (those which will store all the credit information of corporates).
• Proposes two authorities to deal with insolvency: the National Company Law Tribunal to adjudicate cases for companies and limited liability partnerships, while the Debt Recovery Tribunal will do the same for individual and partnership firms.
• Proposes the creation of a new class of insolvency professionals that will specialise in helping sick companies. The insolvency professionals will supervise negotiations between the debtor and creditors, and if negotiations succeed, a repayment plan as agreed by a majority of the credits will be submitted to the adjudicator.
• Specifies that for most offences committed by a debtor under corporate insolvency, the penalty will be imprisonment of up to five years with a fine of up to INR10 million. For offences committed by an individual, the imprisonment will vary based on the offences; however, for most of these offences, the fine will not exceed INR500,000.
Conclusion
The Bankruptcy Code is only a starting point for easing exits for debtors in distress, preserving value and providing creditors with greater certainty in outcomes. The passing of the Bankruptcy Code and implementation of the same will give a big boost to ease of doing business in India. It could take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes. However, its implementation will remain the key, as the new code is contingent on the creation of a complementary ecosystem including insolvency professionals, information utilities and an active bankruptcy regulator.
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