1. Editorial: Bankrupt process

Editorial: Bankrupt process

Fixing India’s bankruptcy laws is critical

By: | Published: February 12, 2015 12:56 AM

The interim report of the Bankruptcy Law Reform Committee (BLRC), released on Tuesday, notes that despite being structurally similar to some efficiently-functioning insolvency regimes across the world—especially for winding up or liquidation—the Indian regime has not proved to be very effective in practice. That does not come as a surprise. Had there been a set of tough bankruptcy laws in India, in the nature of a Chapter Eleven in the US, thousands of crores could have been saved; in the absence of these, not only have banks lost serious amounts of money, physical assets too have been wasted. Going by the experience of banks, recovering dues from promoters is extremely difficult because given the way the courts work, companies are able to prolong the process to a point where the cases drag on for years; indeed the report identifies delays, both at the level of insolvency officials or at the court as a key reason for the failure of the insolvency regime. As bankers point out, it has also become virtually impossible to dispose of assets—given how these need to be auctioned—as it involves enforcing a personal guarantee. That is reflected in the observations of the World Bank’s Doing Business report, which says that while resolving an insolvency in India takes 4.3 years on average, the most likely outcome is that the company will be sold piecemeal and the average recovery rate is 25.7 cents on the dollar.

Indeed, none of the ways by which banks have attempted to recover their loans—the Sarfaesi or the debt recovery tribunals, for instance—have proved effective. The piecemeal sale has resulted from multiple creditors initiating proceedings—often for the same assets—irrespective of whether the company is viable. Which is why the BLRC has come up with a host of specific changes, relating, among other things, to the conditions that should be in place for a creditor to initiate rescue proceedings. For instance, the committee has pointed out that if a company has already defaulted on 50% of its outstanding debt, it is unlikely that it can be rescued. As such, it believes the process of rescuing the firm should be started as early as possible by either the management or the secured creditors. Indeed, the debtor company should be permitted to kickstart the process even before a default, on the grounds that there is a likelihood of not being able to pay. However, that is unlikely, which is why creditors should be allowed to begin a rescue process on the grounds of a possible insolvency as is the case in many parts of the world. The committee believes that unsecured creditors, representing 25% of the value of debt, should also be allowed to initiate rescue proceedings, so that they are encouraged to lend. The measures listed to strengthen the hand of crediotrs—a say while determining how viable a company is, for instance—are welcome and should go a long way in helping them recover what is rightfully theirs.

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