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Six-month limit likely to declare firms bankrupt

Panel says deadline can extend for 90 days in exceptional cases; Plan must be approved by 75%of voting share of creditors

BS Reporter  |  New Delhi 

Bankruptcy panel submits report and draft law

The government-appointed Bankruptcy Law Committee has recommended a speedy process and a timeline of six to a maximum of nine months to deal with insolvency and enable winding-up of operations of a company or a limited liability entity. The draft law prepared by the panel has also proposed early identification of financial distress so that steps can be taken to revive the ailing company.

The committee has prescribed a timeline of 180 days for dealing with applications but it can be extended for another 90 days by the adjudicating authority, only in exceptional cases. 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.

The 15-member committee, headed by T K Vishwanathan, a former Lok Sabha secretary-general, gave its report and its proposed Insolvency and Bankruptcy Bill, to Finance Minister Arun Jaitley on Wednesday. The finance ministry put the report and the draft Bill on its website, for feedback till November 19.

Shaktikanta Das, economic affairs secretary, said a draft Cabinet note would also be sent for inter-ministerial consultation. Once suggestions from here and from website feedback are incorporated, the Centre would decide on the recommendations. The matter would then go to the Cabinet and subsequently to Parliament, he said.

Earlier in the day, Jaitley said the government would endeavour to introduce the final Bill in the winter session of Parliament.

Six-month limit likely to declare firms bankrupt
The legislation prepared by the panel has proposed early identification of financial distress, so that steps could be taken to revive an ailing company. “The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-à-vis business failure, and clearly allocate losses in macro-economic downturns,” the report said.

It also lays down a “clear, coherent and speedy process” for early identification of financial distress and revival of a company.

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.

“An individual insolvency database is also proposed to be set up, with the goal of providing information on insolvency status of individuals.”

“This does not seem like there will be many changes, and that is primarily because the Debt Recovery Tribunals and the National Company Law Tribunal are overburdened with insolvency cases anyways. So it is about creating extra bandwidth. Unless more tribunals are set up, bankruptcy cases under the new laws may be time-consuming,” said Siddharth Nair, partner at BMR Advisors.

Minister of State for Finance Jayant Sinha said on the report: “We also have to ensure that necessary judicial capacity is available. We also need to resolve many of the situations immediately, as they are short of cash in most of these types of cases.”


The draft Bill also consolidates the existing laws on insolvency of companies, limited liability entities, unlimited liability partnerships and individuals. These are presently scattered among a number of legislations.

For companies and limited liability entities, the committee recommends: “An Insolvency Resolution Process (IRP) can be initiated and run for as long as 180 days. The IRP is overseen by an Insolvency Professional (IP), who is given substantial powers...The IP makes sure that assets are not stolen from the company, and initiates a careful check of transactions for the past two years, to look for illegal diversion of assets. Such diversion would induce criminal charges.”

While the IRP is in process, the law would enshrine a ‘calm period’. Whereby, creditors stay their claims, to enable a better chance for a company to survive as a going concern. For the 180 days the IRP is in operation, a creditors committee will analyse the company, hear rival proposals and decide what has to be done.

“When 75 per cent of the creditors agree on a revival plan, this would be binding on the remaining creditors. If, in 180 days, no revival plan achieves support of 75 per cent of the creditors, the firm goes into liquidation,” the report said, adding, “in limited circumstances, if 75 per cent of the creditors decide that the complexity of a case requires more time for a resolution plan to be finalised, a one-time extension of the 180-day period for up to 90 days is possible, with prior approval of the adjudicator. This is starkly different from certain present arrangements which permit the debtor/promoter to seek extensions beyond any limit.”

For individuals and unlimited liability entities, the draft 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) 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.

Under IRP, debtors and creditors will negotiate for a repayment plan agreeable to both. The bankruptcy of an individual can only be initiated once this process fails.

The draft Bill also proposes that anything pending before the Appellate Authority for Industrial and Financial Reconstruction or the Board for Industrial and Financial Reconstruction before the new law commences should stand abated. “However, a company in respect of which such proceeding stands abated may make a reference to the adjudicating authority within 180 days from the commencement of this law.”

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.

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First Published: Thu, November 05 2015. 00:59 IST
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