Changes in six laws on the anvil to usher in bankruptcy code

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New Delhi | Updated: November 9, 2015 12:50:56 AM

The National Democratic Alliance (NDA) government is likely to propose amendments to six laws next year towards bringing in the new bankruptcy code for companies, partnerships and individuals.

Bankruptcy code: At present, rights of both the borrowers and the lenders are protected under separate laws and are adjudicated by different authorities, giving rise to conflicting judgments and delays in reviving and liquidating non-viable companies. (Reuters)Bankruptcy code: At present, rights of both the borrowers and the lenders are protected under separate laws and are adjudicated by different authorities, giving rise to conflicting judgments and delays in reviving and liquidating non-viable companies. (Reuters)

The National Democratic Alliance (NDA) government is likely to propose amendments to six laws next year towards bringing in the new bankruptcy code for companies, partnerships and individuals.

Amending the Companies Act regarding selection of members of the proposed National Company Law Tribunal (NCLT) and subsuming the relevant provisions of three other laws — the Sarfaesi Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and the High Courts Act — in the bankruptcy code are on the cards. Besides, the government will also repeal two pre-Independence laws — the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 dealing with personal insolvency cases so that the new Insolvency and Bankruptcy Bill, when enacted, could provide a comprehensive corporate rescue framework.

Personal insolvency falls in the concurrent list of the Constitution allowing both the Central and state governments to legislate on that subject, persons familiar with the discussions in the government said. Finance minister Arun Jaitley on Friday held discussions with senior officers handling the subject to prepare a road map for the legislative changes.

At present, rights of both the borrowers and the lenders are protected under separate laws and are adjudicated by different authorities, giving rise to conflicting judgments and delays in reviving and liquidating non-viable companies.

The TK Viswanathan panel that made the recommendations said, quoting a 2014 World Bank report, that the average time to resolve insolvency is four years in India, compared with less than a year in Singapore and one year in London.

One of the first steps the government is going ahead with is changing the eligibility and the selection process of members of the NCLT outlined in the Companies Act, 2013, which did not get the Supreme Court sanction. NCLT would be the sole body, besides the proposed NCLT Appellate Tribunal, adjudicating on corporate revival, restructure, liquidation and amalgamation processes once they come into force.

“Having a unified structured and robust bankruptcy law will protect the rights of borrowers and lenders, clarify the risks associated with lending, foster predictability, and make debt collection through insolvency proceedings more certain, thereby facilitating credit lending. This will lead to an increase in the flow of capital in the economy,” said Rohit Mahajan, partner and head, forensic, financial advisory, Deloitte in India.

At present, although banks have the power under the Sarfaesi Act to take possession of assets of a defaulter if demand to pay up dues were not met for two months, such recovery is often challenged in debt recovery tribunals. The tribunal decisions are also subsequently appealed against at high courts, delaying the rescue as well as winding up of unviable companies. Also, the revival and winding up proceedings under the Board for Industrial and Financial Reconstruction (BIFR) provided for by the Sick Industrial Companies Act is fraught with delays, with promoters of defaulting companies often seen to be using the protection under this scheme to avoid making payments.

“The strongest message from the government that would make insolvency reforms a success ought to be on legitimising failure. If stigma is attached to failure, entrepreneurs would not be forthcoming in resolving insolvency.

Legitimising business failure is essential for encouraging entrepreneurial risk-taking,” said Sumant Batra, leading insolvency practitioner and former president of Insol International, a global body of bankruptcy judges and corporate turnaround experts.

The bankruptcy code proposed by the Viswanathan panel recommended a six-month moratorium on debt recovery action by lenders, during which, the company would be run by a tribunal appointed receiver. Under the existing law, the automatic stay on loan recovery starts from the day a sick company registers with the BIFR and continues during the pendency of the revival process.

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