A separate bankruptcy law may be on the cards. Finance minister P Chidambaram has recently flagged this idea to the chiefs of public sector banks, official sources said. The government reckons that a separate bankruptcy law/code and efficient bankruptcy courts would help fast-track restructuring/winding up of indebted companies and prevent deterioration of their assets.
Replicating legislation and best-practices in countries like the US is what is aimed at.
The Companies Bill, 2013, passed by Parliament recently, deals only with matters involving the formation of a company, its management, accounts and finance, corporate governance, investor protection and accountability issues, apart from matters related to insolvency. There are also a host of other laws, including SICA and Sarfaesi, which are relevant in this context.
The current thinking is that a separate Bankruptcy Act will look into all the matters relating to corporate bankruptcy, including those involving cross-border issues.
When contacted, corporate affairs minister Sachin Pilot told FE that he will apply his mind on the proposed bankruptcy law when it comes before him. ?Meanwhile, we have made a number of provisions in the new companies law regarding winding up and liquidation. The proposed National Company Law Tribunal (NCLT) will be able to deal with defunct companies at a much faster rate,? he said.
The discussion on drafting the legal framework for the proposed law has begun in the finance ministry, sources said. The proposed law is aimed at helping companies, which can’t repay debts, either start afresh under a new management enabled by an approved restructuring plan or wind up.
While discussions are still confined to the finance ministry, the corporate affairs ministry will also be roped in soon, the sources said. ?We need to focus not only on the ease of doing business, but also on the ease of closing business,? an official said.
The need for a standalone bankruptcy law has found favour with the lawmakers due to the piling up of cases of corporate sickness and delinquency over the years. High-profile cases like that of Kingfisher Airlines and multiple instances of debt restructuring for many corporates have reminded policymakers of the urgency of an efficient system to deal with corporate bankruptcy.
As per the official data, the numbers of companies under liquidation as on March 31, 2012, at various high courts stood at 5,727, out of which 1,046 cases were pending for over 20 years. Till 2012, 4.16 lakh companies, out of a total of 13 lakh registered in India, were identified as defunct or inactive.
India is the only major emerging economy among the BRIC nations (the others being Brazil, Russia and China) not to have separate bankruptcy legislation.
According to corporate insolvency law expert Sumant Batra, the insolvency chapter in the Companies Bill, 2013, has two main shortcomings: It does not have provisions on cross-border bankruptcy and norms specifying qualifications /licensing and accountability of insolvency practitioners and valuers. It is important to have qualified and licenced insolvency practitioners and valuers to ensure that the NCLT gets proper assistance to deliver quality decisions, Batra added.
Several attempts have been made in the past to frame a bankruptcy legislation. In September 2008, the Raghuram Rajan-led committee on financial sector reforms had pointed out the importance of having a well-functioning bankruptcy code saying, ?If India is to have a flourishing corporate debt market, corporate public debt, which is largely unsecured, needs to have value when a company becomes distressed.? In 2001, an RBI-appointed advisory group on bankruptcy laws chaired by NL Mitra had suggested the need for a ?comprehensive bankruptcy code?. The report said the bankruptcy code should ?incorporate the provisions relating reorganisation on renegotiation (similar to Chapter XI proceedings of US Bankruptcy Code ), corporate insolvency leading to winding up and liquidation of a corporate entity and settlement of all other related issues including cross-border claims and counter claim settlement and cross-border corporate insolvency.?
