 "Resolution of insolvency shouldn't take above 18 months: T K Viswanathan")
Former Union law secretary T K Viswanathan, key architect of the just-enacted Insolvency & Bankruptcy Code and chairman of the Bankruptcy Law Reforms Committee, shares his views on the future of the legislation in an interview with Sudipto Dey. Edited excerpts:
Now that Parliament has cleared the Code, by when do you expect the new bankruptcy regime?
It can start functioning within a month. It is so structured that it need not wait for the entire infrastructure and eco-systems envisaged in the Code to be in place on day one. Section 241 (revised as 244 in the Code) provides for transitional arrangements, that until the Insolvency and Bankruptcy Board is constituted or a financial sector regulator is designated under Clause 195, its powers shall be exercised by the central government. It also authorises the Centre to issue regulations for recognition of persons as insolvency professionals, insolvency professional agencies and information utilities under the Code.
All the necessary consequential amendments to the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, which are crucial to the resolution of insolvency and bankruptcy of individuals and partnership firms have been identified, and effected by virtue of the fifth Schedule inserted by Section 246 (old number, now Section 249) in the Code. The proposed amendments are part of the ongoing exercise undertaken by the finance ministry. This will make the functioning and access to tribunals more efficient and widen the circle of stakeholders. Operationalising of the Code need not wait for these amendments to be in place.
Any suggestions to expedite the creation of infrastructure for the new regime?
The exercise to fill the posts in the NCLT and its appellate tribunal is on and receiving top priority. I am sure the finance ministry has started the process for establishment of the Insolvency and Bankruptcy Board as envisaged under the Code. Once that is done, the momentum will pick up.
A World Bank report said the time taken to resolve insolvency in India is 4.3 years. What is the estimated improvement in timeline for resolution of an insolvency situation under the new regime?
It should not take more than 18 months.
Not all the existing rules and regulations get subsumed under the new Code. Could this overlap in legislation be a source for litigation?
No, the Code has overriding effect. The old Section 234, now the new Section 238, state the Code's provisions shall override anything inconsistent (with it) in any other law or any instrument having effect by virtue of any such law.
Will the Code have any impact on the burden of cases being handled by the judiciary?
Chapter XIX of the Companies Act, on rescue and rehabilitation of sick companies, is replaced by the Code. All proceedings before the Board for Industrial and Financial Reconstruction will abate. As far as the Presidency Towns Insolvency Act of 1908 and Provincial Insolvency Act of 1920 are concerned, they are rarely invoked by creditors, as more effective remedies are available elsewhere.
Are individual insolvency and corporate bankruptcy treated differently under the Code?
Part II of the Code deals with insolvency of corporate entities. It also provides for a fast-track insolvency process under Chapter IV, where the resolution period will be shorter (90 plus 45 days). There is a provision for voluntary exit of corporates under Chapter V.
Usually under the present provisions of the Companies Act, to wind-up and close a business takes a minimum of three years. The time-line of 180 plus 90 days applies only to corporates. For individuals and partnerships, there is no specific mandatory period within which the resolution decision has to be taken. This is because individual businesses are varied and vastly different, with no standardised information about their activities. More, a corporate person can be liquidated but an individual cannot. He has to be declared bankrupt.
Once an insolvency petition is filed for corporates under Section 17, the management of the company is taken over by the interim resolution professional, and a moratorium will be declared by the tribunal. In individual insolvency, there is no provision for takeover of management.
For individual insolvency there is a fresh start process under Part III, Chapter II, not available for corporates. Also, the adjudicating authorities are different - NCLT for corporates and DRT for individuals. However under corporate insolvency, if any director has given a personal guarantee, this will also be adjudicated by the NCLT, not by a DRT.
Now that Parliament has cleared the Code, by when do you expect the new bankruptcy regime?
It can start functioning within a month. It is so structured that it need not wait for the entire infrastructure and eco-systems envisaged in the Code to be in place on day one. Section 241 (revised as 244 in the Code) provides for transitional arrangements, that until the Insolvency and Bankruptcy Board is constituted or a financial sector regulator is designated under Clause 195, its powers shall be exercised by the central government. It also authorises the Centre to issue regulations for recognition of persons as insolvency professionals, insolvency professional agencies and information utilities under the Code.
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The government could not introduce amendments to the Debt Recovery Tribunal (DRT) Act and the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act. Also, the National Company Law Tribunal (NCLT) is yet to take shape. How much of a setback is that?
All the necessary consequential amendments to the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, which are crucial to the resolution of insolvency and bankruptcy of individuals and partnership firms have been identified, and effected by virtue of the fifth Schedule inserted by Section 246 (old number, now Section 249) in the Code. The proposed amendments are part of the ongoing exercise undertaken by the finance ministry. This will make the functioning and access to tribunals more efficient and widen the circle of stakeholders. Operationalising of the Code need not wait for these amendments to be in place.
Any suggestions to expedite the creation of infrastructure for the new regime?
The exercise to fill the posts in the NCLT and its appellate tribunal is on and receiving top priority. I am sure the finance ministry has started the process for establishment of the Insolvency and Bankruptcy Board as envisaged under the Code. Once that is done, the momentum will pick up.
A World Bank report said the time taken to resolve insolvency in India is 4.3 years. What is the estimated improvement in timeline for resolution of an insolvency situation under the new regime?
It should not take more than 18 months.
Not all the existing rules and regulations get subsumed under the new Code. Could this overlap in legislation be a source for litigation?
No, the Code has overriding effect. The old Section 234, now the new Section 238, state the Code's provisions shall override anything inconsistent (with it) in any other law or any instrument having effect by virtue of any such law.
Will the Code have any impact on the burden of cases being handled by the judiciary?
Chapter XIX of the Companies Act, on rescue and rehabilitation of sick companies, is replaced by the Code. All proceedings before the Board for Industrial and Financial Reconstruction will abate. As far as the Presidency Towns Insolvency Act of 1908 and Provincial Insolvency Act of 1920 are concerned, they are rarely invoked by creditors, as more effective remedies are available elsewhere.
Are individual insolvency and corporate bankruptcy treated differently under the Code?
Part II of the Code deals with insolvency of corporate entities. It also provides for a fast-track insolvency process under Chapter IV, where the resolution period will be shorter (90 plus 45 days). There is a provision for voluntary exit of corporates under Chapter V.
Usually under the present provisions of the Companies Act, to wind-up and close a business takes a minimum of three years. The time-line of 180 plus 90 days applies only to corporates. For individuals and partnerships, there is no specific mandatory period within which the resolution decision has to be taken. This is because individual businesses are varied and vastly different, with no standardised information about their activities. More, a corporate person can be liquidated but an individual cannot. He has to be declared bankrupt.
Once an insolvency petition is filed for corporates under Section 17, the management of the company is taken over by the interim resolution professional, and a moratorium will be declared by the tribunal. In individual insolvency, there is no provision for takeover of management.
For individual insolvency there is a fresh start process under Part III, Chapter II, not available for corporates. Also, the adjudicating authorities are different - NCLT for corporates and DRT for individuals. However under corporate insolvency, if any director has given a personal guarantee, this will also be adjudicated by the NCLT, not by a DRT.