Slow notification impacts bankruptcy code

The current law is somewhat biased in favour of the debtor, say experts

The Insolvency and Bankruptcy Code in India is unable to realise its potential because its provisions are being notified in bits and pieces and not at one go, say professionals.

By not notifying the sections that will make the part of the code on bankruptcies of individuals effective, the interests of the guarantors are not being safeguarded, while companies enjoy the 180-day breather.

The current law is somewhat biased in favour of the debtor, as evidenced by the fact that it does not have to settle its dues for 180 days after filing for insolvency, experts say.

Insolvency professionals say a delay in notifying the bankruptcy provisions will put undue pressure on guarantors as creditors will try to recover dues from them. The rules do not permit liquidating a company’s assets during the 180-day period.

“Since they (guarantors) do not have immunity in the NCLT (National Company Law Tribunal), their assets can be liquidated,” Misha, partner at leading law firm Shardul Amarchand Mangaldas, says.

According to the new code, corporate insolvencies are to be filed at NCLTs, while individual and partnership bankruptcies are to be handled by Debt Recovery Tribunals (DRTs).

None of the sections related to individual bankruptcies has been notified.

Nilesh Sharma, an insolvency professional and senior partner with Dhir and Dhir Associates, says that because of the provisions on insolvency resolutions and bankruptcies of individuals and partnerships not being notified, corporate debtors can file for an insolvency resolution but their guarantors cannot do so. Because of this, the guarantors and their assets do not get the breather and the creditors can proceed against them.

Part III of the code deals with insolvency resolutions and bankruptcies for individuals and partnership firms.

While the principal debtor cannot be pulled up, the assets of the guarantor can be liquidated. Sharma says, “Sales of the assets of the guarantor and appropriation of the sales proceeds by one or more of their creditors will result in an unfair distribution of sale proceeds of their assets.”

Insolvency professionals are also of the opinion that guarantors will not be able to work efficiently in such a situation.  The code came into force in December 2016. As things stand now, corporate insolvency codes have been notified and their insolvencies can be filed at an NCLT. Within two weeks of receiving an insolvency petition, the NCLT has the powers to accept or decline it. Vijay Mallya-led UB Engineering and Innoventive Industries are some of the instances in which insolvency cases have been filed under the new code.