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Friday, 06 November 2015 05:14
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Shobhana's edit

Fixing legal process key to new bankruptcy code

Should the recommendations of the Bankruptcy Law Reforms Committee be accepted, lenders in India will finally get some teeth and will feel a lot more secure because they will play the biggest role in deciding the future of a defaulting firm. As the committee has noted, the appropriate disposition of a defaulting firm is a business decision and “only the creditors should make it”. Moreover, both secured and unsecured creditors can now initiate the process to resolve the problem of an insolvent firm, as also employees who have past dues. Most importantly, a time-limit has been set for the ‘insolvency resolution process’, of 180 days; a time-bound process is critical in India given how decisions take forever and promoters are able to stall the process indefinitely to the detriment of lenders. The new system will also force lenders to co-operate with one another—which is not always the case currently—because if  no revival plan gets the support of majority of the lenders (75%), it will trigger liquidation.

 

The committee has borrowed the concept of insolvency professionals and self-regulatory IP agencies functioning under the oversight of a regulator from the West. While the idea is a sound one, how effective these professionals are will depend on how they are able to use the ‘substantial powers’ they are going to be given. Given how clever promoters are at siphoning out money, it will not be easy to spot illegal transactions or to ensure that assets are not stolen. Indeed, unless bankers are vigilant, some asset-stripping could well take place before the promoter turns a defaulter. The present structure dealing with bankruptcy and insolvency is a multi-layered one in which the creditor and the insolvent debtor are subject to separate pieces of legislation. The killer differentiator could be that all provisions in all existing laws dealing with insolvency of registered entities are to be removed and replaced by this Code. Also, the National Company Law Tribunal and Debt Recovery Tribunals—the first for corporate debtors and the second for individual and partnership firms—are to be armed with necessary powers and resources. A common code will make life easier for lenders in several ways; for instance, at present, the laws that guide the recovery of a loan from a firm and those that relate to enforcing a personal guarantee from a promoter are different. Once there is a common code in place, the laws will be similar for individuals and enterprises. This is crucial because in the Indian context, there will be few promoters who give in without a fight. Therefore, ultimately, how much of their dues, and how quickly, banks are able to recover will depend on the legal process. If the process is to work, the law needs to be written such that it leaves no loophole that promoters can exploit—the appeals mechanism, for instance, has to be such that it is time-bound and limited to just the Supreme Court once the appellate tribunal process has been exhausted.

 

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