Thursday, November 5, 2015
Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors.
The nexus between better insolvency laws and economic growth is forthright. It has been established beyond doubt that the fierce and detrimental bankruptcy laws which ensures to protect the rights of borrowers and lenders, promote predictability, clarify the risks associated with lending, and make the collection of debt through bankruptcy proceedings more effective and pragmatic.
India witnessed an era of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and Board for Industrial and Financial Reconstruction (BIFR) as a failed mechanism for regulating bankrupt companies. The Indian laws are often termed as the toughest laws for the running of businesses in India.
The World Bank has ranked India at 142 out of 189 countries in 'resolving insolvency,' estimating that it takes 4.3 years on average in Mumbai to settle a case. In reality it takes much longer than that. To improve business condition in the country, Bankruptcy Law Reform Committee was setup by the government in Aug, 2014
I. Key reforms
The Bankruptcy Law Reform Commission headed by former law secretary TK Viswanathan has proposed the following key reforms:
1 Early recognition of financial distress in company and timely intervention by the government to rescue the organization. The first important suggestion is one that allows secured creditors to initiate rescue proceedings if a borrower fails to make good on any of its dues within a month of such a demand being made. The current rules under the Companies Act say that a borrower should be unable to repay 50% (or more) of its debt before debtors can initiate rescue proceedings. As the committee argues, waiting for a stage where a company has defaulted on 50% of its debt is probably waiting too long. By such time, the company would probably have turned unviable and a rescue would be unlikely. Act early, is the message.
2. One of the most prominent and paramount feature of The Bill is that it proposes insolvency resolution within 180 days and a new regulator to oversee the process. It's also laid down a clear and speedy system for early identification of financial distress and revival of companies. The prescribed resolution timeline of 180 days can be cut further to 90 days from the trigger date for key categories. The proposed insolvency regulator will cover professionals and agencies specialising in the field.
3. Liquidate non viable company at the earliest.
4. Permitting secured creditors to apply for the rescue of the company, as per the current law it was filled after the company had defaulted by 50 per cent of its outstanding debt.
5. Another feather in the cap was introduced by allowing unsecured creditors representing 25 per cent of the debt to initiate rescue proceedings against the debtor company.
6. The committee has been prudent enough to recommend individual solvency. The report incorporates provision on individual insolvency, a crucial area covering sole proprietorships and small and medium enterprises in India.
II. Crucial benefits
1. Improve the rank of India on ease of doing business
2. The Bill has proposed a number of changes to the liquidation regime, including changes for increased protection of creditor rights, maximisation of asset value and better management of the company in liquidation. Simplifying exit policy is one of the criteria considered by entrepreneurs before setting any organization.
3. It is also proposed that an early intervention by the government could salvage the entity from liquidation.
1. We have witnessed that several provisions which deal with the early intervention by the government to save organization from being defaulted are already available under various laws and have failed to resolve the issue further, ineffective implementation of existing laws are major problems.
2. There is lack of awareness, knowledge and information pertaining to the laws amongst the people who run and manage small businesses and micro enterprises, further they are managed by people who do not have much knowledge about laws and are largely illiterate thus, without required knowledge of existing laws, proper implementation seems to be a distant dream.
3. We anticipate that in lieu of getting subsidies and tax benefits through state intervention, there will be an tendency amongst the entrepreneurs to show a well running organization as a sick organization.
4. Although this may sound like an good news for creditors, on the flip side one needs to tread cautiously in giving the creditors unbridled power and leaving companies with fewer options to protect themselves.
The Industry sentiments about the proposed law seems that it will create a robust and globally competitive insolvency regime.
However lets not get carried away as if one recollects substantial opinions were offered about the state of the debt recovery tribunals. On paper, these were meant to speed up recoveries, but in practice, have done anything but that. Until this judicial bottleneck is cleared, little may change on the ground.
The present laws do not either help a sick industrial unit to revive itself or assist financial institutions to recover their money. A transparent bankruptcy law is overdue, getting a new bankruptcy law in place is critical in sending a message to promoters that the erosion of the sanctity of the debt contract, as it’s been termed by the RBI governor, must be reversed.
Further a new bankruptcy law, coupled with practical changes, removal of judicial bottlenecks and curbing delays will be crucial to the reform process.