1. Verdict corner: A rethink on the bankruptcy law

Verdict corner: A rethink on the bankruptcy law

The Insolvency and Bankruptcy Bill 2015, if passed, will protect the interests of creditors in the event of corporate insolvency

By: | Published: November 19, 2015 12:15 AM

The government is planning to introduce a bankruptcy Bill—for corporate entities that are headed for failure—in the forthcoming winter session of Parliament. The legislation is aimed at overhauling the bankruptcy mechanism for early identification of financial distress and revival of companies, quickening winding up of defunct companies, and providing an easier exit route to investors. It also proposes insolvency resolution within 180 days and a new regulator to oversee the process.

The bankruptcy code is based on the recommendations given by the Bankruptcy Law Reform Commission headed by former law secretary TK Viswanathan. “The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure, and clearly allocate losses in macroeconomic downturns,” the report said.

Finance minister Arun Jaitley, in fact, had hinted at bringing in the bankruptcy law reform for improving the ease of doing business in his February budget speech. He had said: “We will bring a comprehensive bankruptcy code in fiscal 2015-16, that will meet global standards and provide necessary judicial capacity.”

The panel expects that the implementation of the report will not only upgrade an outdated system that drags out such proceedings for 10 to 20 years, but will also encourage entrepreneurship, and increase GDP growth by fostering the emergence of a modern credit market, and particularly the corporate bond market.

The committee, which had experts from the departments of economic affairs and financial services, the ministries of law, corporate affairs, and micro, small and medium enterprises, RBI and Sebi, has consolidated existing laws and rules relating to insolvency, limited liability entities, unlimited liability partnerships and individuals into a single legislation.

Welcoming the draft, Nakul Dewan, Supreme Court lawyer and barrister at 20 Essex Street Chambers in London and Singapore, said that the much-needed Insolvency and Bankruptcy Code 2015 will protect the interests of creditors in the event of corporate insolvency, which is the real issue in any commercial economy.

According to him, setting out a robust time limit under Section 12 to complete the corporate insolvency process is obviously welcome, as is Section 185 under which a liquidator (the resolution professional) can be held to be criminally as well as personally liable for acting dishonestly. “These are keeping with international standards, where liquidators can be held personally liable for mismanaging the affairs of a company in liquidation,” he said.

Experts feel that India is already low on the ease of doing business rankings because the archaic nature of liquidation proceedings takes several years, hurting investors and lenders, besides costing taxpayers crores of rupees. The World Bank had recently ranked India at 136th position out of 189 countries in “resolving insolvency”.

Supporting Dewan, Supreme Court lawyer Mohit Paul said “it is the need of the hour, because it is seen that even when large companies are unable to clear their dues, the management remains in control and it takes years and years for the creditors to receive their dues after protracted litigation spread over years if not decades. What is further required is that the prescribed time limits for disposal of such cases are strictly adhered by all so that the entire purpose behind formulating such a law (speedy disposal of claims) is not given a go by.”

Experts feel that the new framework will give a boost to banks and financial institutions as they have huge NPAs. “Time is right for the impetus to be given. The government of the day has been given a huge mandate and everyone wants development—infrastructure projects are stalled, economy is in a bad shape, inflation needs to be controlled.

The new law is a step in right direction and will help in FDI, therefore it’ll be a win-win situation for all as it will have a rippling effect on various sectors, leading to overall development of the nation,” Paul said, adding that good bankruptcy laws and procedures can improve the business climate of any country and India is no exception.

Industry bodies Ficci and CII have also given a thumbs up to this proposal, saying that the much awaited reform will bring greater legal certainty, speed and efficiency in winding up of businesses, in the process creating a robust and globally competitive insolvency regime. This will “significantly reduce the time taken for insolvency proceedings in India, which, at present, on an average basis, is estimated at about 4.3 years as against only 1.7 years in high-income OECD countries,” according to Chandrajit Banerjee, director general, CII.

However, lawyers also warn that there is a possibility that Section 185 can result in frivolous complaints being filed against the liquidator, which would be “inimical to the purpose of a robust and time-bound corporate resolution process that the liquidator has to undertake.”

“The way out of this would be to set out practice directions which are followed in litigations in jurisdictions like England & Wales and Singapore, under which any failed action is required to compensate with costs and, if found absolutely baseless, can even attract costs against the lawyer advising such an action. That will allow the liquidator to act without fear and perhaps result in completing the resolution process within the time limit set out,” Dewan added.

Another SC senior lawyer V Shekhar felt that the bankruptcy law is fine if one wants to bring in global standards.

“But the fact of the matter is that there is no mindset to finish any task in a time-bound manner. Existing laws are sufficient. The key is to fast-track proceedings. A new law is nothing but old wine in a new bottle,” he said.

According to the senior lawyer, in order to fast-track bankruptcy liquidation, one needs to do away with too many layers in the legal system. “Against any original order, there should not be more than one appeal. Cases should end at the high court level and the matters where there is any conflicting judgment, interpretation on new subject or any confusion should only travel to the apex court. Besides, huge costs should be imposed on litigants/lawyers who take the courts for a ride,” Shekhar added.

A comprehensive solution to resolve insolvency and bankruptcy cases quickly and efficiently is definitely a good step towards improving the ease of doing business, but for that the Bill needs to be passed in Parliament.


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