Dr Ashwani Mahajan
Any individual, partnership firm or a company may go bankrupt owing to business or personal losses. When some economic unit becomes bankrupt, it means, it is unable to repay its debts and liabilities. Lack of clarity in law, makes it difficult to deal with the situation and in such a situation, not only creditors are put to a heavy loss, even the unit which goes bankrupt have to undergo huge emotional agonies. At present, there were nearly 12 laws, dealing with bankruptcy/insolvency and some of them were even more than 100 years old.
Narendra Modi Government has been able to get new Bankruptcy Code Bill passed in the Parliament as it being considered as a major economic reform. After passage of the bill in Lok Sabha and then Rajya Sabha, the road is now clear for ‘New Bankruptcy Code’ to become a law. New law would repeal Presidency Town Insolvency Act (1909) and Provisional Insolvency Act (1920) and amends many other laws including Companies Act, Limited Liability Partnership Act, Securitisation Act etc. Unlike other pending bills in the parliament, opposition parties did not have any argument against the bill and hence Government could get this bill passed very easily.
What is The New Bankruptcy Code?
According to ‘New Bankruptcy Code’, once a debtor goes bankrupt, his property could be easily taken over by the creditors. As per the new law, if 75 percent or more creditors agree, then in case of inability of a person or a company to repay its loans, action can be taken in 180 days (with 90 days to grace period). If even then debt is not paid the person/firm will automatically be declared bankrupt/insolvent. This implies that with new law in place, delays in recovery of loans, and losses associated with that would automatically come to an end. Persons and companies, not able to repay their loan would be given option to repay loan or declare themselves bankrupt in a time bound manner. If a debtor is found guilty of misconduct then there is a provision of imprisonment of 5 years.
According to the new law, the process of declaration of bankruptcy can be carried out by a licensed professional only. National Company Law Tribunal would propose to declare any company bankrupt and Debt Recover Tribunal would act to declare an individual bankrupt. According to the new law, a Bankruptcy Fund would also be created, however the law is silent about how this fund would be utilised.
Joint Parliamentary Committee (JPC) had stated in the report that there is no single law under which bankruptcy action could be undertaken. Therefore this is an attempt to make one law in place of several laws. However, there was another observation of the Joint Parliamentary Committee, that the draft bill has not touched overseas issues related to bankruptcy. Therefore, it would be incomplete legislation without dealing with overseas issues. The ‘New Bankruptcy Code’ could not incorporate this suggestion of the JPC. However, in this regard, Government has opined that since the issue is complicated, it would be incorporated in the law after extensive discussion. However, so far as the question of overseas assets of the bankrupt firm or individual are concerned, government can deal with that by entering into suitable agreements with foreign Governments.
Ease of Doing Business
According to World Bank in terms of ranking about ‘Ease of Doing Business’, India stood at 136th position. According to World Bank’s report it takes more than 4 years to close a business. Therefore, after ‘New Bankruptcy Code’ comes into force, it would be easier to close down business; and India will move up in terms of ranking in ‘Ease of Doing Business’. It is notable that at present, there are more than 70 thousand insolvency cases pending in different courts. As on December 2015, nearly 3.6 lakh crores of banks loans are stressed, what we call bad loans. There has been nearly 7.3 percent increase in the quantum of stressed loans of banks in 2015-16.
Security of Labour
‘New Bankruptcy Code’ also takes care of the labour. In case of bankruptcy of a company, provision would also be made for salary of the labour for 24 months.
Law Could Have Been Better
Though, critiques believe that Government has been able to enact new law in a short time, however they opine that the law could have been made better. Bankruptcy law is an integral part of financial system of a country and it should change with time. Critiques say that for overseas issues related to bankruptcy the new law in incomplete. At present many foreign companies have investments in India and similarly many Indian companies have invested in foreign countries. Foreign banks and other lenders have significant exposure in Indian markets. However, the new law does not have provision for cooperation between Indian and foreign courts to deal with overseas insolvency issues.
Critiques also feel that according to the new law, there would be an excessive Government intervention with regard to appointment, termination and inspection of the insolvency professionals; therefore it would be difficult to attract talent in this field. Critiques feel that the new law is excessively tilted in favour of the creditors and about the solution of the problems faced by the debtors, the new law does not have sufficient provisions. This is also being argued that the new law would not be able to quickly solve the present problem of NPAs of the banking system, as it would take more than one year to implement the new law. Therefore we need to take steps to find solution to present crisis of the banking system.
(The author is a associate Professor, PGDAV College, University of Delhi)
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