The Insolvency and Bankruptcy Code Bill 2015 can be important for your upcoming exams. It was introduced by Union Finance Minster Arun Jaitley in the Lok Sabha in December 2015. In this article, we will take a thorough look at this bill, its significance, advantages and disadvantages, and its impact on the nature of corporate governance in India.
Background:
As per recent World Bank data, India ranks an abysmal 136 of the 189 countries in terms of fast and efficient resolution of insolvencies, with creditors having limited power in case of default by a company. If passed, the bill could significantly impact corporate governance in India and grant more authority to creditors to ensure faster resolution of bad loans – a major issue ailing PSU banks.
Highlights of the bill
- Insolvency is a situation when an individual/firm is unable to meet the financial obligations due to its creditors. Bankruptcy, on the other hand, is a legally-declared status that an individual/firm cannot repay debts.
- The Insolvency and Bankruptcy Bill, 2015, aims to establish an effective legal framework to ensure timely resolution of insolvency. The bill was drafted by the Bankruptcy Law Reform Committee chaired by TK Viswanathan.
- The new bill stipulates the creation of a formal insolvency resolution process (IRP) for businesses. It aims to establish the Insolvency and Bankruptcy Board of India as the regulator and envisages a specialised bench at the National Company Law Tribunal (NCLT) to adjudicate bankruptcy cases.
- As per the draft bill, any corporate debtor who commits a default, a financial creditor (banks and bond-holders), an operational creditor (trade creditors) or the corporate debtor may initiate corporate insolvency resolution process.
- It further states that corporate IRP has to be completed in 180 days. During this time creditors shall hear proposals for revival in order to decide on the strategy. However, if within 180 days, 75% of creditors do not agree on the revival plan, the firm automatically goes into liquidation (a process of bringing the business to end and distributing its assets to claimants).
- If three-fourth of the creditors decide that the case is complex and may not be addressed within 180 days, the adjudicating authority may permit a one-time extension of 90 days for the process.
- The bill also provides for priority as regards distribution of proceeds after liquidation of the company. In terms of priority, the IRP cost and liquidation costs have to be paid in full. Thereafter, proceeds will be used to clear debts owed to secured creditors, to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, financial dues owed to unsecured creditors and so on.
- For firms with smaller operations, the code stipulates a fast-track IRP which will be completed within 90 days and may be extended if 75% of financial creditors consent to revival plans.
Significance of the bill
- Speedier insolvency resolution – Presently, bankruptcy proceedings in India are governed by multiple laws – the Companies Act, SARFAESI Act, Sick Industrial Companies Act, etc. This makes the resolution process slow and cumbersome with the courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction getting involved. Thus, the proposed bill aims to expedite resolution of insolvency and make the process of debt recovery easy for creditors by doing away with systematic delays.
- More power to creditors – The bill takes into consideration the rights of all stakeholders, including the company, financial creditors and operational creditors, secured creditors and unsecured creditors. As per reports, lenders in India are able to recover only 20% of their loans when businesses go bankrupt as against 70% recovery rate in developed countries. Jayant Sinha, Minister of State for Finance, in one of his recent address on the bill remarked, “In strengthening creditors’ rights and giving an ability to invoke a default for creditors, we are also changing the balance of powers between equity holders and debt holders in a corporation. This will have a big impact on corporate governance.”
- Enhance ease of doing business – On the ease of doing business index, India ranks a pathetic 130 out of 189 countries and figures last among the BRICS nations (Brazil, Russia, India, China and South Africa). This is attributed to the time-consuming and costly procedure of the corporate insolvency resolution process. As per reports, the average time taken for insolvency proceedings in India is about 4.3 years, while it takes only 1.7 years in high-income member countries of the Organisation for Economic Co-operation and Development (OECD).
- Reduce bad loans – Indian economy is facing a problem of mounting bad loan. With bad loans at Rs 4,43,691 crore and counting, a robust bankruptcy law can go a long way in addressing potential cases of bad loans.
Conclusion:
If passed, the proposed Bankruptcy Bill will not just result in timely resolution of insolvency in India but also improve the broader ecosystem of corporate governance.
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