Although liquidation and bankruptcy seem to be similar words, bankruptcy of a company is not the same thing as winding up.
Although liquidation and bankruptcy seem to be similar words, bankruptcy of a company is not the same thing as winding up. Indian laws do not define bankruptcy. The Companies Act, 1956, contained provisions for winding up of a company in case default is committed by such a company to honour its dues. Similar provisions are incorporated in the Companies Act, 2013. But the government realised that these provisions are not effective enough to recover dues from incorporated entities. Therefore, the Insolvency and Bankruptcy Code, 2016, was enacted.
IBC provides the right to corporate and financial creditors, employees and workmen to initiate insolvency resolution process if the company fails to repay dues. It includes provisions for initiating insolvency against individual and proprietor debtors. But these provisions have not been implemented yet under IBC. The Insolvency and Bankruptcy Board of India (IBBI) planned to implement the regime for individual insolvency in a phased manner starting FY2018.
Currently, in the case of individual insolvency, the remedy is sought under British-era Acts such as the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920. These old Acts would be repealed once new individual insolvency regulations are notified under IBC.
The enactment and implementation of IBC has been smooth so far. However, the number of pending insolvency applications with NCLT—a tribunal constituted to handle corporate insolvency applications—is a surprise for the government. With an expanding number of cases under IBC, the government had constituted a 14-member committee to identify and suggest ways to address issues faced in implementation of the law. The Insolvency Law Committee submitted its report on March 26, 2018, which includes suggestions on various provisions of IBC; but it was silent on enforcement of provisions relating to individual insolvency.
Under IBC, all insolvency applications against individuals would be entertained by debt recovery tribunals (DRT). But, currently, 38 DRTs are in operation and there is a huge pendency of cases with DRT benches. There is a dire need to build the infrastructure as with the current number of benches and judges, the tribunals won’t be able to dispose off insolvency applications on time. The provisions of individual insolvency prescribe minimum threshold of default amount of Rs 1,000 to file the application with the tribunal.
Although the government is considering increasing the limit for default value from Rs 1,000 to Rs 10,000, mere raising it would not be of much help. There must be a rationale behind determination of the minimum limit of default amount. The government should also consider the capacity of the extant framework for implementing IBC before fixing the minimum threshold for default value.
As per reports, 9,073 cases were under consideration by NCLT, including 1,630 cases of merger and amalgamation, 2,511 cases of insolvency and 4,932 cases under other sections of the Companies Act. NCLT judges are already overloaded and any additional applications would slow down the resolution process. At present, there are about 1,700 insolvency professionals registered with IBBI. This figure is too less compared to the number of litigations that might arise when provisions for individual insolvency are enforced.
Bearing in mind the number of pending cases, the government might shift the enforcement of provisions for individual insolvency to next year. To provide a congenial environment for smooth enactment and implementation of individual insolvency provisions, IBBI must focus on building capacities of insolvency professionals and keep a close watch on their conduct. It must facilitate operationalisation of information utilities so that authentic information could be made available to adjudicating authorities and insolvency professionals to complete the transactions expeditiously.
The legislature might come up with a new structure by adding more DRT benches and revisiting provisions relating to individual insolvency so as to allow an individual to knock the door of DRTs for recovery of dues and ask for insolvency of an individual. It will boost the ecosystem for insolvency resolution and will provide new hope to individuals.
By Rakesh Bhargava & Ansh Bhargava
Authors are directors, Taxmann.