Major changes in the offing as law panel's bankruptcy proposals seek overhaul of system

The bankruptcy of an individual can be initiated only after the failure of the resolution process.

hidden November 05, 2015 07:20:05 IST
Major changes in the offing as law panel's bankruptcy proposals seek overhaul of system

New Delhi - The government on Wednesday published long-awaited proposals to overhaul an outdated and overburdened bankruptcy process, calling for public comment on what could become the country's first unified bankruptcy code.

If adopted, the changes would bring in "insolvency professionals" to run the resolution process, and set up creditor committees to reach a verdict on an ailing company's future in up to 180 days, removing government involvement and ending decades of judicial gridlock.

The proposed bill aims to dramatically speed up decisions on whether to save or liquidate ailing companies, in a move to curb asset stripping and ensure higher recovery rates for creditors - both key to fostering a modern credit market and increased investment in India.

Currently, according to the report, lenders recover a paltry 20 percent of the value of debt.

The panel also proposed early identification of financial distress so that steps could be taken to revive the ailing company.

Major changes in the offing as law panels bankruptcy proposals seek overhaul of system

Representational image. AFP

TK Vishwnathan, former law secretary, presented the Bankruptcy Law Committee Report to Finance Minister Arun Jaitley in New Delhi.

"The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns," the report said.

It also lays down a "clear, coherent and speedy process" for early identification of financial distress and revival of the companies.

The draft proposes to establish an Insolvency Regulator to exercise regulatory oversight on insolvency professionals and agencies.

"The Insolvency Adjudicating Authority will have the jurisdiction to hear and dispose of cases by or against the debtor," it said and added the Debt Recovery Tribunal should be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms.

The report recommends a transition provision during which the Central government will exercise all powers of the Regulator until the time the Regulator is established.

The National Company Law Tribunal (NCLT) should be the Adjudicating Authority with jurisdiction over companies, and limited liability entities, it added.

The draft Bill has consolidated the existing laws relating to insolvency of companies, limited liability entities, unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation.

Meanwhile, finance ministry said that after taking the suggestions into consideration, the government will take a final decision on the report and introduce the Bill in Parliament.

The ministry has invited comments and suggestions on the report available on its website till 19 November.

The draft proposes for information utilities which would collect authenticate and disseminate financial information from listed companies. It also made a case to revamp the revival/ re-organisation regime applicable to financially distressed companies.

Jaitley, in his Budget Speech 2015-16, had identified Bankruptcy Law Reform as a key priority for improving the ease of doing business and had announced that a comprehensive Bankruptcy Code, meeting global standards and providing necessary judicial capacity, will be brought in the fiscal.

A recent World Bank report ranked India at 130 out of 189 country on the ease of doing business, up 12 places from 142nd rank last year.

In terms of resolving insolvency parameter, the country has been ranked at 136th position.

The law panel's report suggests insolvency resolution plan prepared by the resolution professional has to be approved by a majority of 75 percent of voting share of the creditors.

It also provides for a fast track insolvency resolution process which may be applicable to certain categories of entities. In such a case, the insolvency resolution process has to be completed within a period of 90 days from the trigger date.

The bankruptcy of an individual can be initiated only after the failure of the resolution process.

In "Fresh Start" individuals with assets less than specified thresholds shall be eligible to apply for a discharge from their qualifying debts.

In insolvency resolution process, the creditors and debtor will engage in negotiations to arrive at an agreeable repayment plan.

The draft proposes that any proceeding pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) or the The Board for Industrial and Financial Reconstruction (BIFR) immediately before the commencement of the new law should stand abated.

"However, a company in respect of which such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the commencement of this law," the recommendation said.

Commenting on the report, Minister of State for Finance Jayant Sinha said: "We also have to ensure that necessary judicial capacity is available so that as and when particular cases come to te bankruptcy code...We also need to resolve many of the situation immediately because they are short of cash in most of these bankruptcy types of cases."

The minister said government it trying to put together a comprehensive solution where "we can resolve default and bankruptcy cases as quickly and efficiently possible".

Agencies

Updated Date:

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