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Read Current Affairs Topic: Bankruptcy Law Enactment, A Much Needed Exit Policy Reform
Recently, the World Bank improved the rank of India in ‘Ease of Doing Business’ from 130 to 2016 to 100 in 2017. Among the many factors behind this quantum jump, the enactment of Insolvency and Banking Codes (IBC) 2016 was considered as a vital one. For the erstwhile exit policy, it was said that exiting a business was more cumbersome than starting a business due to the age old multiple overlapping laws. The new code has brought a paradigm shift through a single legislation.
In the erstwhile system, bankruptcy was handled under several different laws some of which were more than century old like Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The IBC will replace these laws and amendment to another 11 laws including the Companies Act, 2013, Sick Industrial Companies (Special Provisions) Repeal Act, 2003, among others. The IBC provides for a unified law for winding up a business.
According to the World Bank, it take more than four years to resolve a bankruptcy case in India. The new bankruptcy law will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters. Delaying a decision on whether to shutter a firm or to try to revive it causes destruction of value for all involved and proves to be a drag on the resources.
The erstwhile system caused undue stress on financial institutions due to the lack of timely recovery or restructuring of defaulted assets. The main features of the new IBC are as under:
- The IBC covers individuals, companies, limited liability partnerships and partnership firms.
- The code proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system.
- It also proposes setting up of Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.
- The corporate insolvency and individual insolvency will be addressed by National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) respectively.
- A creditor or borrower can approach to NCLT on first day of the default.
- The borrowers company in the interim period will be run by insolvency professional who will be appointed by a creditors’ committee constituted by the lenders.
- The committee will decide on debt recast plan within 180 days. Another 90 days will be provided to arrive at a final plan.
- The bankruptcy law even allows suppliers to initiate insolvency proceedings. If no resolution is arrived at within 180 to 270 days, the assets have to be auctioned off to recover dues.
- To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.
- The cross-border insolvency will be addressed through bilateral agreements with other countries.
The economic reforms till now have been more successful in dealing with the problems of entry rather than the problems of exit. The latter is equally important, since it will allows the capital to be reallocated to enterprises that will be able to put them to better use. 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.
In January 2017, the ICICI Bank initiated bankruptcy proceeding against the Innoventive Industries. This case was seen as the test of new bankruptcy law. The latter moved to the Supreme Court of India citing contradictory provisions in IBC and Maharashtra Relief Undertakings (Special Provisions) Act, 1958. However, the Supreme Court ruled in favour of IBC. This case took more time to resolve than stipulated in the IBC.
The current infrastructure is not enough for timely implementation of IBC. The NCLT has started with 11 benches which is not sufficient to cope up with the large number of cases which will potentially come up. However, many experts support the latest reform on exit policy and call the challenges as teething troubles which will disappear as the system strengthens.
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