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Why does India need a bankruptcy law?
The failure of businesses impacts employees, shareholders,
lenders, and the
broader economy.
In a country like India particularly — because of delays in
making decisions on
the viability of businesses, tactics employed by company
promoters to delayreorganisation or attempts to sell off assets,
changes of management, or litigation
that goes on and on — the drag on new business units, jobs,
income generation
and economic growth can be significant.
India does have some laws — including one on Securitisation and
Enforcement
of Security — and other mechanisms, like Corporate Debt
Restructuring or CDR,
to address the problem of insolvency of firms. But the fact is
some of these laws,
such as the Sick Industrial Companies Act or SICA, have not
worked because of
inefficient enforcement and court delays.
So how can a modern law help?
Like in the West, a modern law with a focus on speedy
closure will help firms on
the brink to be either restructured or sold off with limited
pain for all involved.
In some cases, if this is done swiftly, assets can be put
to good use and the firm
can be revived.
Delaying a decision on whether to shutter a firm or to try to
revive it causes
destruction of value for all involved. Indian policymakers have
recognised this.
For banks or lenders, the money recovered can be lent
again, promoting
efficient allocation of resources, besides development of
financial markets suchas a bond market with clarity on repayment
for debtors.
An efficient and swift insolvency regime ensures greater
availability of credit or
funds for businesses by freeing up capital, and is thought to
boost innovation and
productivity.
What is the international experience?
The US has a Bankruptcy Code that provides for fairly
quick liquidation or
reorganisation of business with what is popularly known as
Chapter 7, with
cases being filed in bankruptcy courts; Chapter 11, which deals
with
reorganisation of businesses; and Chapter 15, on cross-border
insolvencies.
Individual bankruptcies are dealt with separately. In the UK,
once cases are filed
for bankruptcies, after 12 months, there is either discharge
with part of the
assets being used to pay off debts, or, in situations where
companies can be
turned around, court-appointed administrators handle cases.
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The German insolvency law is applicable to both
individuals and firms, with
independent court-appointed insolvency practitioners helping in
realising assets
or reorganising the business.
What is India planning?
A committee headed by former law secretary T K Viswanathan has
suggested a
timeline of 180 days — extendable by 90 days — to deal with
applications for
resolving cases of insolvency or bankruptcy.
During this period, the management of the distressed firm or
debtor could be
placed in the hands of a resolution professional — a new class
of professionals
equipped to deal with such cases, who would be supervised by a
proposed new
regulator.
The proposal also envisages them getting into talks to
revive firms, and work out
a repayment plan. A Debt Recovery Tribunal will be the
adjudicating authority
over both individuals and unlimited liability partnership
firms.
The National Company Law Tribunal will be the adjudicating
authority with
jurisdiction over companies with limited liability. The law will
have to be
approved by Parliament.
What about financial sector insolvencies?
The Financial Sector Legislative Reforms Commission
(FSLRC) has
recommended the creation of a resolution corporation to monitor
financial firms,
and intervene before they go bust. The aim is to either
close firms that can’t be revived, or change their
management to protect investors or depositors. This is important
because the
failure of large banks or institutions imposes costs on
taxpayers in the form of
bailouts or capital infusion.
The proposal is to promote the Deposit Insurance and
Credit Guarantee
Corporaton (DICGC) as resolution corporation.
