New Bankruptcy Bill has positives
For the beleaguered NDA government, smarting under the bitter Bihar Assembly verdict, the need to fast-track some doable economic reforms and reestablish its development credentials has never been more urgent. With the excruciating Winter Session of Parliament looming large, where a motley number of Opposition parties have gathered to put the Treasury Benches on the mat, the task on hand for the feisty Finance Minister Arun Jaitley has been clearly cut out.
So wittingly or unwittingly, the government has signaled its appetite for incremental reforms by putting in place a plan to overhaul the country’s archaic bankruptcy laws. Suffice to say, the presentation of the Bankruptcy Law Reforms Committee headed by the former Law Secretary T.K. Viswanathan, which included a draft Insolvency and Bankruptcy Bill, triggered the move. The draft bill, now open for public comment, outlines the contours of a unified law to govern the cumbersome insolvency resolution process and the liquidation of all sorts of corporate enterprises. It seeks to get rid of the numerous legislations currently in vogue, including the century-old laws governing personal insolvency.
In the weighty words of the Committee, the enactment of the proposed Bill would lend greater clarity to the law and enable the application of consistent and coherent provisions to different stakeholders hit by business failure or inability to pay their debt. Moreover, the proposed Bill would address the challenges being faced at present for a swift and effective bankruptcy resolution. It seeks to improve the handling of wrangles “between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-à-vis business failure and clearly allocate losses in macroeconomic downturns”.
With the twin objectives of improving the ease of doing business in India and ensuring better debt recovery to creditors, the intended bankruptcy code is designed to make it easier for sick companies to either wind up their business or craft a turnaround and for reluctant investors to exit with at least a little of their sunk cost. It will cover individuals, companies, limited liability partnerships (LLPs), partnership firms and other legal entities registered in India as may be notified, except for those with a dominantly financial function.
The insolvency process is set to be time-specific. A major recommendation pertains to establishing an Insolvency Regulator to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities coupled with an Insolvency Adjudicating Authority, which will have the jurisdiction to hear and dispose of cases by or against the debtor. In the latter are subsumed the Debt Recovery Tribunal (DRT) to be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).
The National Company Law Tribunal (NCLT) would be the Adjudicating Authority with jurisdiction over companies, LLPs entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (NCLAT). The latter would also be the appellate authority to hear appeals arising out of the orders passed by the regulator in respect of insolvency professional or information utilities. The draft bill proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database has been also proposed to be set up with the goal of providing information on insolvency status of individuals.
Interestingly, the draft Bill lays down a clear, coherent and speedy process for early detection of financial distress and revival of companies and limited liability entities, if the underlying business is found to be viable. It prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of an interim resolution professional/resolution professional. An insolvency resolution plan prepared by the resolution professional has to be approved by a majority of 75 percent of the voting share of the financial creditors. Once the plan is approved, it would require the imprimatur of sanction of the Adjudicating Authority (AA). If an insolvency resolution is rejected, the AA will make an order for the liquidation.
While setting out an insolvency regime for individuals and unlimited liability partnerships, the Bill seeks to put in place a bankruptcy process as a precursor which envisages two distinct methods viz., Fresh Start and Insolvency Resolution. Under the Fresh Start process, indigent individuals with income and assets lesser than specified thresholds (annual gross income does not exceed Rs 60,000 and aggregate value of assets does not exceed Rs 20,000) shall be eligible to apply for a discharge from their “qualifying debts” (i.e., debts which are liquidated, unsecured and not excluded debts and up to Rs 35,000).
The resolution professional will probe and prepare a final list of all qualifying debts within 180 days from the date of application. On the expiry of this span, the AA will pass an order on discharging of the debtor from the qualifying debts and accord an opportunity to the debtor to begin afresh, financially. In the Insolvency Resolution Process, the creditors and the debtors will engage in negotiations to arrive at an agreeable repayment plan for a composition of the debts and affairs of the debtor, supervised by a resolution professional. The bankruptcy of an individual can be set off only after the failure of the resolution process. The bankruptcy trustee is responsible for the administration of the estate of the bankrupt and for distribution of the proceeds on the basis of the priority.
The draft Bill lays down a transition provision during which the Central government would exercise all the powers of the Regulator till the time the Regulator is established. Legal eagles are quick to come out with a view that the proposed Bill is quite ambitious in the creation of a new institutional architecture to deal with insolvency. The establishment of a new regulator, the creation of a new profession of insolvency professionals and the establishment of institutions known as information utilities — meant to provide precise information on defaults — are all daunting challenges that will take the time to fructify. But the transitional arrangement till the bold institutional architecture is in place need to be carefully crafted to well serve stakeholders so that the confidence of the companies and individuals in the system is not diluted to the deleterious impact of the larger economy.
(The views expressed are strictly personal)