 "Bankruptcy Code to give fillip to ease of doing biz: FinMin")
The Insolvency and Bankruptcy Code, 2016, which was approved by Parliament yesterday, "would take India from among relatively weak insolvency regimes to becoming one of the world's best insolvency regimes", it said in a release.
"History was created on May 11, 2016 when the Rajya Sabha passed the Code. With the passing of this Bill, India has crossed an important milestone in becoming a world-class economy. The Lok Sabha had already passed the Bill on May 5, 2016," it said.
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Hitherto, India was lacking the legal and institutional machinery for dealing with debt defaults as per global standards.
Recovery proceedings by creditors either through the Contract Act or special laws such as the Recovery of Debts due to Banks and Financial Institutions Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act have not had "desired outcomes".
Economic Affairs Secretary Shaktikanta Das maintained that the government's effort will be to create all structures regarding Bankruptcy Code as "early as possible".
"We are working on framing the rules and regulations and drawing guidelines (regarding bankruptcy code). We are also looking at administrative issues relating to the Bankruptcy Code," he said.
Commenting on the Code, Misha, Partner, Shardul Amarchand Mangaldas & Co said the new law has various positive features, including the fact that it consolidates bankruptcy and insolvency laws for both corporate and individuals within an effective framework for timely resolution.
"However, a major concern in the Code is the provision of handing over of entire management and affairs of the corporate to insolvency professionals during the corporate insolvency process... This would dis-incentivise corporate debtors to voluntarily invoke the insolvency process under the Code," she said.
The vision of the new law, according to the ministry's statement, is to encourage entrepreneurship and innovation.
"It is true that some business ventures will always fail, but such failures will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on instead of being bogged down with decisions taken in the past," it said.
The Code empowers operational creditors (workmen and
suppliers) also to initiate the insolvency resolution process upon non-payment of dues.
In order to develop the credit market in India, in the case of liquidation, financial debts owed to unsecured creditors have been kept above the government's dues in the list of priorities (waterfall).
Currently, action through the Sick Industrial Companies Act and the winding up provisions of the Companies Act have neither been able to aid recovery for lenders nor restructure firms. Also, laws dealing with individual insolvency, the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920, were almost a century old.
This has hampered confidence of the lender and development of the credit markets in India. Resultantly, credit by banks is the largest component of the credit market in India and the corporate bond market has not yet developed to the desired level.
The ministry said the government decided to embark on a fundamental and systemic reform which would address this problem, both commercially and judicially. The idea is to come up with a comprehensive solution, which would encompass borrowing by firms and individuals.
In recognition of the fact that major sub-components of lending are done by non-banks, particularly the corporate bond market that serves infrastructure projects, bankruptcy reforms needed to have a consistent treatment of default.
"While systems of well-functioning advanced economies were studied, the design that was implemented for India reflects a careful judgement about what would work under Indian conditions," the ministry said, adding that "history" was created on May 11, 2016, when the Rajya Sabha passed the Bankruptcy Code unanimously.
Pavan Kumar Vijay of Corporate Professionals, a Delhi-based legal and corporate law consultancy firm, said enactment of the Code will "go down in the history of economic reforms in India as a total game changer".
"All-time lines are clearly defined and the core is either to restructure or wind up," he said.
The Code provides for a fast-track insolvency resolution process for corporates and limited liability partners (LLPs). This will be an enabler for start-ups and small and medium enterprises (SMEs) to complete the resolution process in 90 days (extendable to 45 days in deserving cases).
The Code also addresses the important issue relating to cross-border insolvency by providing the enabling mechanism on the subject. The government will come out with a detailed framework for cross-border insolvency at an appropriate time, the Finance Ministry said.