To fix the issues with the current insolvency regime, the government had set up a high level Bankruptcy Law Reform Committee (BLRC) in August 2014 under Dr. T. K. Viswanathan (former Law Secretary). This committee had submitted its report in November 2015 while suggesting new institutions and structures to modernize the present outdated system. After consultation with stakeholders about the committee recommendations, government prepared a draft bill and introduced it in the Parliament.
Key recommendations:
- A company should not be allowed to remain alive only for the purpose of preventing the unemployment.
- Amend the Companies Act to fasten the liquidation process and to ensure the creditor have dominance over the viability of the company.
- Creditor may initiate the rescue proceeding if the debtor company fails to pay single undisputed debt exceeding a prescribed limit and within 3 months of the notice of demand.
- Committees for distressed micro small and medium enterprises should be established for resolving the financial distress through administrative mechanism.
- Amendment of Securities Contract Regulation Act (SCRA) 1956 which provides certain provisions for settlement in the financial contracts which provide exemptions from the normal operation of insolvency law
- Liquidation should not be the last resort for insolvent companies; rather approach should be to minimize the losses of all parties and give way to concrete framework to the India’s insolvency regime through a mixture of substantive institutional changes.
- The easy exit option will give the entrepreneurs a viable choice to start. However the investment climate would also get a boost and would further strengthen the stability of the economy.
In simple language, it recommends:
- Relating to the provisions on ‘revival/rescue and rehabilitation of sick companies’ and ‘winding up/liquidation’ of companies.
- Impose deadlines for the first time: Under current rules, even deciding whether to save or liquidate an ailing company can take years, leaving it in the hands of managers who can – and do – strip assets with impunity. Under the proposed changes, a decision would have to be reached in 180 days – even 90 days for fast-track applications
- establish a network of insolvency professionals to lighten courts’ workload and tackle delays
The report, which may eventually form the base of a new legislation, seeks to strengthen the hand of the creditors and also reduce the time frame of resolution for unviable assets.
Why Bankruptcy reform needed
- to modernize a process that takes several years and costs investors and taxpayers billions
- overhaul rules governing the liquidation or revival of companies in India, a country with no single bankruptcy code and where competing laws, unclear jurisdictions and inadequate resources can leave cases languishing for decades.
- Foreign and domestic investors say the difficulty in exiting ventures can deter them from entering.
- A stronger bankruptcy law is seen as crucial to improving the credit culture in the country, which, in turn, could help expand the availability of credit from non-banking sources by allowing a vibrant corporate bond market to develop.
- Example: Collapse of liquor tycoon Vijay Mallya’s Kingfisher Airline empire have burnt investors. The airline was grounded in 2012 with some $1.5 billion in debt and its shares are now worthless
Facts:
- The World Bank says it takes 4.3 years on average to exit from a firm, more than twice as long as in China.
- The inadequacy of India’s insolvency regime has also weighed on the country’s global rankings (130 out of 189).
What is the current process of exit?
Two ways:
- Troubled companies in India, or their creditors, largely turn to the Official Liquidator, a government-appointed officer attached to the country’s high courts, who administers assets and oversees liquidation.
- Banks can turn to separate Debts Recovery Tribunals (DRT), partly staffed by officials on assignment from the banks themselves and overseen by the Ministry of Finance.
Currently both are overstretched.
Major issues in current process:
- Chief among the problems is that for a single troubled company, creditors and owners can all initiate competing proceedings in different courts, tribunals and states.
- Current legislation – especially the Sick Industrial Companies Act of 1985 – is geared towards reviving companies, so appeals frequently follow a wind-up order, resulting in virtual paralysis.
- The Official Liquidator system is a disaster. It takes a minimum of five years and can take 10 years, by which point there is virtually no value left in the asset,
- Staffing constraints meant it could take 15 to 20 years to wind up a company.
- There are very limited numbers of persons available and there are hundreds, thousands of companies to be wound up.
Proposed Changes:
Proposed changes will scrap the Official Liquidator and introduce a system of registered insolvency practitioners, with a regulatory body, working under a company law tribunal.
Critically examine the importance of findings and recommendations of the Interim Report of the Bankruptcy Law Reform Committee for Indian economy. (200 Words)
Indian laws are often termed as the toughest laws for the running of businesses in India. To improve business condition in the country, Bankruptcy Law Reform Committee was setup by the government in Aug, 2014. Some of the recommendations of the committee which submitted its report are-
- Early recognition of financial distress in company and timely intervention by the government to rescue the organization.
- Liquidate unviable company as soon as possible.
- Allow secured creditors to apply for the rescue of the company, earlier it was filed after the company have been defaulted by 50 per cent of its outstanding debt
- Unsecured creditors representing 25 per cent of the debt be allowed to initiate rescue proceedings against the debtor company
- Recommendation on individual solvency
Effect of recommendation if implemented Positive effect
- Improve the rank of India on ease of doing business
- Easy exit policies are one of the criteria considered by entrepreneurs before setting any organization
- Early intervention by the government will save the organization from liquidation
Negative effect-
- Various provisions which deal with the early intervention by the government to save organization from being defaulted in already available under various laws, ineffective implementation of existing laws are major problems.
- Many small businesses and micro enterprises 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
- In lieu of getting subsidies and tax benefits through state intervention, entrepreneurs may show a well running organization as a sick organization
Related Notes: