The government introduced the 'Insolvency and Bankruptcy Code 2015', or the bankruptcy Bill, in the Lok Sabha on Monday. The Bill is one of the steps that Finance Minister Arun Jaitley has identified as crucial for India to improve ease of doing business.
The Bill has been introduced as a money Bill, which means it will not have to be passed in the Rajya Sabha, where the government has struggled to get legislative work done.
The Bill provides for resolution of the bankruptcy process in a time-bound manner. It provides a timeline of six months, or 180 days, to a maximum of nine months, or 270 days, to deal with insolvency and enable winding-up of operations of a company or a limited liability entity.
It also provides for fast-track resolution of corporate insolvency within 90 days. The Bill also proposed early identification of financial distress so that steps can be taken to revive the ailing company.
It also provides for setting up of a 'Insolvency and Bankruptcy Board of India' to regulate professionals, agencies and information utilities engaged in resolution of insolvencies of companies, partnership firms and individuals.
The Bill states that during the insolvency resolution period, an interim resolution professional would manage the debtor. The professional would prepare a plan that needs to be approved by a majority of 75 per cent of voting share of the financial creditors. Once the plan is approved, the adjudicating authority must give its nod. However, if an insolvency resolution plan is rejected, the adjudicating authority will order for liquidation.
Among other recommendations, the Bill suggests an insolvency regulator, for oversight over professionals in this regard. It lays down a transition provision during which the Central government will exercise all the powers of the regulator till the time one is set up. "This will enable quick starting of the process on the ground, without waiting for the proposed institutional structure to develop," the report states.
The Bill recommends the existing Debt Recovery Tribunals be the adjudicating authority for individuals and unlimited liability partnership firms. And, that the National Company Law Tribunal be the one for companies and limited liability entities. It also proposes setting up of information utilities, to collect and collate financial information from listed companies and their creditors. For individuals and unlimited liability entities, the Bill suggests two processes. One is 'fresh start', under which individuals with income and assets less than specified thresholds s (annual gross income of less than Rs 60,000 and aggregate value of assets of less than Rs 20,000, and aggregate value of qualifying debt less than Rs 35,000) shall be eligible to apply for a discharge from their qualifying debts. After which, the resolution professional will examine the debts, based on which the adjudicating authority will pass an order, writing off the debts and providing a chance for the individual to financially start afresh.
The Bill stated that a new legislation was needed to deal with insolvency and bankruptcy as the existing framework was "inadequate, ineffective and results in undue delays in resolution".
Currently, there is no single law dealing with insolvency and bankruptcy. Liquidation of Companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.
The other laws that deal with issue include SICA, 1985; Recovery of Debt Due to Banks and Financial Institution Acts, 1993, Sarfaesi Act, 2002 and Companies Act, 2013.
The objective of the code, the statement said, "is to consolidate and amend the laws relating to re-organisation and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit..."
Jaitley, in his 2015-16 Budget speech, had identified bankruptcy law reform as a key priority for improving the ease of doing business. He'd announced that a comprehensive bankruptcy code, meeting global standards and providing necessary judicial capacity, would be brought in the financial year.
A recent World Bank report ranked India at 130th out of 189 countries on ease of doing business, up 12 places from 142nd rank last year. In terms of resolving insolvency parameters, the country has been ranked 136th.