BANKRUPTCY AND INSOLVENCY CODE
Bankruptcy and Insolvency code bill, 2016 is the bankruptcy law that consolidates all the laws related to insolvency in India by creating a single law. The bill was passed by the Lok Sabha on 5th May 2016 and came into effect as an Act on 28th May 2016. The terms insolvency and bankruptcy mentioned in the name of the bill are related to each to other. Insolvency is defined as inability of debtors, individuals or corporates to repay their debts on the other hand bankruptcy happens when debtors, individuals or corporates are declared incapable of repaying their debt. Thus, bankruptcy is just a formal declaration of insolvency. Both the terms mentioned in the name of the bill are related to each to other.
Why is the Bankruptcy and Insolvency code required in India?
According to statistics, nearly 60,000 bankruptcy cases are pending in Indian courts and it takes 4.3 years for a company to shut down its operations in India. This bill will reduce the time taken to 1 year. According to another statistics, India ranks 130th in Ease of doing business and 40th in global competitive index. Both ease of doing business and global competitive index ranking criteria have one parameter in common i.e. resolving insolvency. The law will help in improving ease of doing business by consolidating all the laws dealing with Insolvency and bankruptcy into one single entity.
Most importantly, this bill will tackle one problem that has become a thorn in the flesh of RBI and central government i.e. NPAs or Non-performing assets. By definition, for a bank, it means any asset which hasn’t performed for over a period of time or in other words an asset on which bank hasn’t received any principal or interest over a period of time, usually 90 days. However, with respect to agriculture/ Farm loan, NPA is defined as non-repayment of loans till 2 crop seasons for short duration crop and for long duration crops, the repayment period stands for 1 crop cycle. It is estimated that 13% of all commercial loans which totals 8-10 lakh crore in India are NPAs. Industrial Development Bank of India (IDBI) and Indian Overseas Bank (IOB) have highest NPA ratio while State Bank of India (SBI) has highest amount of NPAs.
A huge pile of NPAs can have a plethora of challenges for Indian authorities. Interest income is one of the sources of income for lending agencies like banks. A loan/credit that is NPA has not yielded interest for at least 90 days. Any loss in Interest payment will result in loss of bank’s income. The NPAs suck the liquidity out of the market which means less cash flow. Companies will react to this by ossifying the credit policies. This measure can negatively affect the economy as some businesses won’t be able to take a loan. Also, the principal used to finance loans is basically depositor’s money and not the bank’s money. Thus, the principal needs to be replaced in order to keep the depositor’s money intact. An NPA also affects the efficiency of lending companies. Efficiency is the ability of the company to recover the principal and earn interest as compared to their peers. NPAs can have a ripple effect on small banks. Small banks run of low capital infusion and liquidity. More the NPAs, the less the liquidity and capital inflow. The issue could get aggravated in case of any economic upheaval or downturn. This could lead to collapse of banks as small banks won’t be able to stand against any economic upheaval or downturn.
Before this law, the liquidation of companies was handled under various laws like Sick Industrial Companies Act, The Provincial Insolvency Act, Companies Act, and Recovery of debts due to banks and financial Institutions Act, The Provincial Insolvency Act etc. The laws from British era that dealt with individual debtors made contributed to the already complex process. Also, the overlapped jurisdiction of different authorities like High Court, NCLT (National Company Law Tribunal), Debt Recovery Tribunal slowed down the debt recovery process. This complexity of laws and overlapping of jurisdiction was one of the main sources of problems for the banks to recover their loans.
Salient features of the bill
• The code covers companies, individuals, partnership firms, Limited Liability partnership firms.
• The bill seeks to build a new class of insolvency professionals (IPs) that would help sick companies. It also advocates the creation of information utilities (IUs) that will collate all the information about the debtors. The bill advocates the setting up of Insolvency and bankruptcy board that will regulate both IPs and IUs.
• National Company Law Tribunal (NCLT) will act as the negotiating authority and deal will cases with insolvency, bankruptcy process and liquidation of companies while on the other hand Debt Recovery Tribunal (DRT) will act as a negotiating authority for individuals.
• The insolvency proceeding will be initiated by NCLT/DRT after verifying the claims of the initiator. The insolvency proceedings can be initiated by any stakeholder: debtor, employee etc. Once the liquidation process starts, then the liquidation of debtor’s assets are put on hold.
• NCLT/DRT will then appoint an Interim resolution professional (IRP) as proposed by the lender who has initiated the proceedings. The IRP will then take over the reins of the company as the board of directors stand suspended. During this period the IRP can appoint professionals, accountants or legal experts to assist him in running the company. The IRP will verify the claims of all creditors, get cash flow in control, and call meeting of Committee of Creditors (CoC) on the 30th day of being appointed as the IRP. On the first meeting, the CoC will decide whether to continue with the same IRP or appoint a new RP (Resolution professional) by 75% majority vote. If the company decides to retain the IRP then he/she would be addressed as RP.
• The RP will look into the commercial part of the proceedings, develop code of ethics, professional standards while Information utilities (IUs) will collect, verify, collate the financial information to be used in the proceedings. The RP will then assist the CoC in preparing a restructuring process that could either be liquidation of assets of the company or a revised payment plan. For companies, the restricting process has to be prepared and approved within 180 days and a one-time extension of 90 days if the case is complex and for start-ups, small companies the resolution process has to finish by 90 days and could be extended by 45 days.
• However, if the resolution plan didn’t have the approval of 75% of CoC even after the extended 270 days (180 + 90 extended days) or the resolution plan is rejected by NCLT or DRT on technical grounds, then assets of corporate debtors are put in the liquidation process.
• In housing and real estate projects, the bill places the beleaguered house owners, who invested in the project, at the lowest priority of creditors after financial institutions, ancillary industry lenders. Thus, earning the wrath of Supreme Court who instructed the central government to look into the matter.
• During the first 6 months of the bill’s implementation, 75% of insolvency proceeding were filled by unsecured operational creditors and not by financial creditors.
• There is the uncertainty of regulatory norms for banks and fear of scrutiny by anti-corruption investigation agencies and other bodies among bank management.
• The law doesn’t have any provisions regarding synergy among Indian and foreign courts over the issue of overseas insolvency proceedings.
• The law favours excessive government checks with regard to appointment, termination, and scrutiny of Insolvency professionals.