BANKRUPTCY CODE: A PROGRESSIVE BILL AND A NEED OF THE HOUR

INTRODUCTION:

Law as an instrument is the best tool as well as the worst disability. It can enable you, and at the same time varied interpretation of the same law may disable your process. It is, therefore, of central importance that law should enable business or what in better way is known as enable “ease of doing business”[1]. In a recent survey done by World Bank[2], India has been ranked at 127^th position for ease of doing business; the report, inter alia, enlist the following reason i.e. due to the cumbersome process of addressing the problem of insolvency. In India, the present set of laws, at best provides a time consuming process to address the challenges faced by the stakeholders in a debt affected company.[3]

TK Vishwanathan[4] Committee[5] has drafted a code which had submitted its interim report on February, 2015 and final report in November, 2015. The Insolvency and the Bankruptcy Code, 2015 (“Code”) has charted a consolidated and effective outline for tackling the bankruptcy of the companies; and it is being hoped that the same shall be approved at the Parliament bringing about reformatory changes to the laws which deal with bankruptcy. Whether the bill can be passed in the Parliament and the Act can be brought to effect is yet to be seen. A brief analysis of the Code may help us to understand the merits and the demerits of this proposition; and whether it will be able to bring about an omnibus solution to problems and the challenges faced by the corporates in dealing with insolvency and bankruptcy resolution of the companies.

PROPOSED CODE: BANKING LAW REFORMS COMMITTEE REPORT

The Report and the proposed Code may be termed as a culmination of several committee(s), their recommendations and efforts which can date back to half a century with the proposal of similar reforms coming as early as 1970’s.

 

The Code envisages setting up of two primary functionaries:

• Insolvency and Bankruptcy Board (“Board”)
• Insolvency and Bankruptcy Fund.(“Fund”)

The Board and the Fund shall be regulated and shall be under the aegis of the regulating authority.

The list of recommendations which aims at challenging the present set of laws; and bringing about an overhauling change in the current setup of bankruptcy resolution can be traced in the following features of the Code:

KEY FEATURES:                                                        

• The jurisdiction of trying the matters relating to bankruptcy shall be exclusively vested with Debt Recovery Tribunal (in case of individuals)
• The jurisdiction of trying the matters relating to bankruptcy shall be exclusively vested with  the National Company Law Tribunal (in case of Corporates)
• The process shall be divided in two parts:
• Resolution of Insolvency
• Adjudication of Bankruptcy
• The specific timeline of 180 days have been set, in case of an application for insolvency resolution is received by Board, to decide whether resolution of insolvency is possible or not.
• Non-resolution of the matter by way of change of management and Board’s decision whether the revival is not possible will lapse resolution process into adjudication of Bankruptcy.
• Specific timeline of 180 days for adjudication by the board has been provided (which is extendable further period of 90 days).
• Differentiation between operational and financial creditor.
• The Bankruptcy law proposes to engage a separate set independent intermediaries
• Information Utilities: This agency shall be primarily used for assimilation of the entire gamut of data relating to any bankrupt company (which is being adjudicated) such as its the outstanding debts, for accumulating any information which shall be required and relevant for the process.[6]
• Insolvency Resolution Agents: The Insolvency Resolution agents shall be registered, regulated and qualified entities which shall be specified for this purpose and shall be mix of lawyers, accountants and enforcement agencies.[7] The Code specifies such agents as Insolvency Resolution Professionals (“IRP”).

(9) Such independent agencies shall be regulated entities acting in their fiduciary capacities

(10) The concept is of setting up a trust and resolution of the entire process by keeping the   proceeds in a trust.[8]

The Code deals with primarily professionalizing or privatising the process of adjudcation bankruptcy and aims at reducing the entire process from decade long process to a process with specific turnaround time.

ROLE OF A TRUSTEE RESOLUTION THROUGH CREATION OF TRUST AND INSOLVENCY PROFESSIONAL

In an interview to a leading business daily[9], TK Vishanathan, the man behind the entire Code, had expressed that in the present system of rehabilitation of the companies, there is a 51% of erosion of the net worth, till the entire process goes through.

Thus following the US Bankruptcy Code, this Code too enumerates about appointing a trustee and setting up a liquidation trust as under Section 36 of the Code.[10]  The entire proceeds of insolvency shall be conducted as per the draft Code by creation of an independent trust which shall be managed by Insolvency Resolution Professional or IRPs. U/S 36 (3) & (4), the Code enumerates the list of the assets that can and cannot be taken within the folds of the Liquidation Trust. Therefore, the aim is to move away from a model where there is erosion of the net worth of the company to a model which provides for retention of the assets by initiating the concept of fast, efficient and effective method.

COMPARISON WITH THE CURRENT SET UP:

The problem of non-performing asset in the present scenario is acute, as a result several forms of debt restructuring methods have been adopted to address the issues relating to tackling the challenges of debt. Such a Corporate Debt Restructuring[11] (“CDR”) and methods for Strategic Debt Restructuring [12](“SDR”) along with the others have been introduced to tackle the issue. However, each one of them also faces a number of challenges from inside the company along with the ones from the system.

It is largely understood that the existing laws helped only the secured creditors. The new Code helps in the process of giving comfort to the unsecured creditors such as those subscribing to the debenture, therefore bringing about a Code which is progressive and welcoming change. One of the leading business newspapers[13] had reported that: “So far, while banks have had the support of legislations such as the SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), unsecured creditors have been on their own”[14]

KEY SUGGESTIONS AND INNOVATIVE SOLUTIONS UNDER THE REPORT AND THE PROBLEMS AND THE PROSPECTS OF THE REPORT AND NEW DRAFTS INSOLVENCY CODE

The process is devised as an ‘irreversible process’ which can be broadly classified into two segments initially the resolution of insolvency; in case of non-resolution of the insolvency of the company then declaration of bankruptcy, Therefore, the code aims at locating the sign of weakness of the corporate at a very early stage and try to address the situation by time-bound liquidation.

While much of corporate credit in India currently comes from banks, the hope is that eventually we will move towards a deeper corporate bond market which will take over part of this funding. Giving unsecured creditors, such as those subscribing to debentures issued by a company, greater power[15] will give investors greater comfort in subscribing to such securities. Moreover, the Code will help to bring about a unified system and a defined prioritization of the payouts which clearly defines the waterfall of who should be paid out first.

CONCLUSION:

In a recent statement Raghuram Rajan[16] has expressed how the big defaulters should also be taken to task. The current set of laws and ‘lethargy of the courts’[17] to address the issues of defaulting companies have enabled promoters and the corporate guarantees of the group companies of the defaulters to get away. Therefore, the current scenario provides at best a ‘no exit route’ policy which needs to be amended to attract investment and enable India to formulate a proposition where ‘ease of doing business’ can be guaranteed. It is understood as the need of the hour to facilitate a process which shall in a consistent and coherent process, address the challenges faced as on date for effective bankruptcy resolution and opening up new avenues to tackle with bankruptcy of companies. There are still questions looming at large whether the system for implementation of the Code and the infrastructure should both of them grow organically or greater stress should be given in building the infrastructure before the decision to implement the same. In spite of all this the Code is believed to bring in overhauling changes to the entire system of bankruptcy. But it is also true the implementation of the Code and its process which needs to be judged. The well-meaning exercise of constituting the special Tribunals such as Debt Recovery Tribunal may be stated to have fallen short of bringing about much benefit to our debt ridden economy without effective implementation. So unless an effective set of intermediaries are created which shall be able to function with minimum delay it shall be difficult to implement the Code as proposed.

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*Rinie Nag is working with a Trustee company and has about five years of experience working in areas related to debt recovery.

[1] Doing Business 2015, 12^th Edition, A World Bank Flagship Report published by World Bank, an organisation of International Monetary Fund, available at : http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16-Full-Report.pdf

[2] Supra Note 1

[3] Report of the Bankruptcy Law Reforms Committee(BLRC) Volume I, press release by Ministry of Finance available at :http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf

[4] Former Secretary General of Lok Sabha and former Law Secretary, headed the Bankruptcy Reform Committee

[5] How Filing For Insolvency May Get Easier For Banks With A New Bankruptcy Law, press release by Economic Times available at :http://articles.economictimes.indiatimes.com/2015-12-16/news/69090972_1_bankruptcy-law-insolvency-kingfisher-airlines

[6] Supra Note 5

[7] A Robust Insolvency Resolution System Can Speed Up Loan Recovery For Banks, Radhika Merwin, press release by Hindu Business Line available at : http://www.thehindubusinessline.com/money-and-banking/a-robust-insolvency-resolution-system-can-speed-up-loan-recovery-for-banks/article8018743.ece

[8] ‘Epstein’s Bankruptcy and Related Law in a Nutshell’, 8^th Edition, David G. Epstein, Published by  West Nutshell Series , ISBN-13: 978-0314279132

[9]  ‘New Bankruptcy Law Is Necessary for Reviving Economy’,Dipak Mondal, published by Business Today, available at : http://www.businesstoday.in/magazine/features/tk-vishwanathan-on-the-new-bankruptcy-code/story/227090.html

[10] ‘Summary of the Recommendations of the Bankruptcy Law Reforms Committee (BLRC)’,  Volume II, press release by Ministry of Finance available at :http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf

[11] Supra Note 9

[12] ‘Strategic Debt Restructuring Scheme’, press release by  Reserve Bank of India, available at: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9767

[13] Making of a bankruptcy law, Ira Dugal press release by Livemint available at : http://www.livemint.com/Money/R7wh8M7Io8CSIFyAyLW9OJ/Making-of-a-bankruptcy- law.html

[14] Supra Note 13

 

[15] All you wanted to know about…The Bankruptcy Code, Eswarkrishnan Chellam press release by Hindu Business Line available at : http://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-aboutthe-bankruptcy-code/article8037501.ece

[16] India: Insolvency and Bankruptcy Code 2015: Well Worth the Wait, Article by Jyoti Singh and Vishnu Shiram, Phoenix Legal

available at : http://www.mondaq.com/india/x/462788/Insolvency+Bankruptcy/Insolvency+And+Bankruptcy+Code+2015+Well+Worth+The+Wait

[17] Supra Note 15