1. Edit: Insolvency code will help banks recover debts faster

Edit: Insolvency code will help banks recover debts faster

The efficacy of any mechanism can be gauged only after it has been put in place and tested for some length of time.

By: | Updated: May 9, 2016 7:38 AM
Strides Shasun What is refreshing about the new policy framework to resolve insolvency and bankruptcy in corporations is that it doesn’t seek to rescue a business at any cost as existing regulations, such as a SICA, attempt to do. (Reuters)

The efficacy of any mechanism can be gauged only after it has been put in place and tested for some length of time. Nevertheless, the Insolvency and Bankruptcy Code, promises to throw up an efficient process that facilitates bankers’ efforts to recover their dues. What is refreshing about the new policy framework to resolve insolvency and bankruptcy in corporations is that it doesn’t seek to rescue a business at any cost as existing regulations, such as a SICA, attempt to do. It instead creates a mechanism which gives creditors enough powers to decide whether a company should be resuscitated subject to a specified time-frame. If efforts to revive the company fail, creditors must initiate bankruptcy. This is a good approach since it forces banks to take action quickly. Unlike in the developed world, in India, too much time is wasted before bankruptcies are initiated and quick closures will help save precious assets and free up capital.

The policy attempts to address a key problem that banks face while trying to recover their dues, namely, the ability of promoters to endlessly prolong litigation in one court or another on the most frivolous of grounds. The Debt Recovery Tribunals (DRTs) are clogged with cases that have gone on for years. Now that corporate cases will be dealt with by the National Companies Law Tribunal (NCLT), a high-powered judicial authority acting more as a referee than being part of the resolution process, cases should be cleared quickly. While it is always possible the promoters may approach the High Courts, it is to be hoped these courts will take cognisance of the stature of the NCLT and consequently refrain from admitting petitions of promoters needlessly. If promoters are seen to be stalling cases, the Insolvency and Bankruptcy Board must step in.

Even otherwise, the Code is framed keeping in mind the need for quick action. For instance, a consensus on insolvency needs to be hammered out in 180 days and, hopefully, the grace period of 90 days will be used sparingly. Moreover, unlike in the current environment in which the consortium approach is followed and it is usually the lead bank that initiates action, the new Code allows any creditor to approach the NCLT to initiate insolvency. However, while that might appear progressive, at the end of the day, creditors will need to work together to arrive at a consensus. In some ways the rules leave no room for any dithering; if negotiations for a repayment plan by the promoters—following an insolvency—fail, the company will be declared bankrupt. The Code ushers in an altogether new set of players—Insolvency Professionals (IPs)—who will act as caretakers of the assets of debtors until the creditors decide on the future of the company. In the current sluggish economic environment, though, finding buyers for assets may not be that easy. While the Code is a promising one, it has to be kept in mind that the DRTs and SARFAESI were also considered to be the panacea for creditors when introduced.

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