The ink on the insolvency law passed by the UPA-2 in 2013 was yet to dry up when the NDA, soon after assuming power in 2014, announced the setting up of the Bankruptcy Reforms Commission to propose a new law. Based on the Commission’s recommendations, the government introduced the Insolvency and Bankruptcy Code in Parliament to enact a comprehensive law to deal with insolvency of corporate entities and natural persons.
While the government deserves a pat on the back for the speed with which the legislation has been brought, many significant changes suggested raise serious concerns. The Bill proposes to establish an Insolvency and Bankruptcy Board of India, comprising of senior government functionaries and such others appointed by the government. The Board will have the power to appoint, license and de-license insolvency professionals, and hold disciplinary proceedings against them. Establishing such a Board is conceptually flawed, creates conflict of interest and amounts to undesirable intrusive involvement in the insolvency process by the government.
The government or any Board set up by it should have no direct role in licensing of insolvency professionals or their appointment and removal. Their role should be confined to recognising a body or bodies of professionals, which, in turn, are responsible for licensing, accountability, de-licensing, as well as qualifications and continuous education and observance of standards of its members. Professionals are appropriately self-regulated through statutory frameworks that vest such powers on their respective representative bodies, like the Bar Council of India, Institute of Chartered Accountants of India, and Institute of Company Secretaries of India. The Bill, as proposed, could serve as a disincentive in attracting talented professions to join the insolvency profession.
Similarly, the government should have no role in deciding which professional should be appointed or removed as liquidator. The government is an invariable party in insolvency proceedings or has direct or indirect interest in proceedings due to dues owed to it or its instrumentalities. There is a direct conflict of interest that Board—as a government instrumentality—will have by being involved in the process. The role of the government should be only to act as the overall watchdog of the insolvency industry, and undertake regular stock-taking and oversight to ensure that best practices are being observed.
Indian companies are rapidly growing multinationals in character and have made high-stake acquisitions abroad. The Bill does not provide any mechanism for administration of cross-border insolvencies in the event proceedings start in any foreign jurisdiction involving their assets or creditors in India.
The proposed law excludes the debtor from an equitable participation in the resolution process. Going by the Bill, if the creditor committee approves a plan, there is no requirement for hearing the affected parties including the debtor. Other stakeholders—workers, statutory authorities, state governments—have been kept out. The participation of all stakeholders is necessary for the revival of a company.
While the initiative to reform the obsolete personal insolvency law needs to be applauded, cultural-shift preparedness has to be assessed and taken into account in preparing the legislative framework. Otherwise, implementation of the law would offer a number of challenges and defeat the laudable objective. Personal insolvency is not only an economic phenomenon, but also has deep social and cultural connotations. The law will apply to over 1.2 billion people with diverse cultures, traditions, customs and way of life.
No one can possibly question the need for a robust insolvency system, but insolvency is a complex subject, and a law on it should not be passed in a rush. The law will be able to do little to resolve the NPA crisis, as it will take more than two years to be implemented after it is passed.
Creating insolvency practitioners framework, making appointments to NCLT and the Board (if the government insists on keeping it), framing rules and building capacity in the system is going to take time. Resolution of NPAs cannot wait that long and require immediate solutions, perhaps similar to what Indonesia, Thailand and South Korea applied post the Asian financial crisis, i.e. setting up of state-sponsored asset reconstruction companies or revamping the prevailing framework of asset reconstruction companies to facilitate quick, cost-effective and efficient resolution of NPAs.
The author is an international insolvency expert