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Welcome step forward

But declaring Bankruptcy Code a Money Bill is problematic

Business Standard Editorial Comment  |  New Delhi 

The Insolvency and Bankruptcy Code, 2015, has been introduced in the Lok Sabha and sent to a Joint Committee of Parliament for scrutiny. The Code is a vital step forward for India's economy, in which the mobility of capital has always been a problem. For too long, capital that was tied up in loss-making enterprises struggled to exit. Disputes between debtors, creditors and other stakeholders went unresolved - meaning companies were often shut down without dues being paid, and their assets depreciated wastefully, unused. Sometimes, assets were stripped by unscrupulous promoters and creditors or employees were powerless; in other cases, debt-ridden corporations never had a chance to work their way out of trouble. The purpose of modern bankruptcy legislation, such as the United States' Chapter 11, is to try and ensure that enterprises keep on working and do not lose value because of shut-downs imposed by stakeholders' failure to agree. The new Code meets this requirement.

There are several important provisions to the Code. Decisions for the company will be taken by a "resolution professional" appointed by the National Company Law Tribunal (or a Debt Recovery Tribunal, for individuals), and confirmed by a committee of creditors. A resolution plan for the company will be submitted by the resolution professional to the committee of creditors, who will have to approve it by a 75 per cent majority. The legislation specifies a reasonable and pragmatic 180-day time-frame for the process, with the possibility of extension by 90 days in special circumstances. Overall, the Code ticks most of the right boxes. Previous attempts to deal with the problem of bankruptcy sometimes failed to accept the possibility that some companies would need to shut down - the Board for Industrial and Financial Reconstruction became little more than a location for gridlock. The SARFAESI Act that followed it left out non-institutional creditors.

One important step forward in the Code is that it explicitly requires the creation of an entire supportive ecosystem. First of all, Debt Recovery Tribunals and Company Law Tribunals will have to be provided with significantly greater capacity if the quick timelines specified in the Code are to be met; in this new system, they will essentially replace district courts. It has been reported that the finance ministry is considering how to move as much of this process online as possible - a sensible thought. Second, an entire cadre of resolution professionals will have to be created in double-quick time, supervised by an Insolvency and Bankruptcy Board. The success or failure of the new law will depend on whether these two ideas can be executed without any hitch or delay.

In a legislative session starved of good news, the introduction of this law is a welcome development. But there is one major problem. It appears to have been introduced as a Money Bill, which means the Rajya Sabha will have no real rights over it. Clearly the government fears it will not be able to overcome the Opposition's obstruction in the upper house of Parliament. But it should not take recourse to methods that blatantly defy the letter and spirit of the Constitution in response. Declaring legislation on an unrelated matter to be a Money Bill is an unhealthy precedent.

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First Published: Wed, December 23 2015. 21:35 IST