The New Bankruptcy Code

Reported by: |Updated: June 27, 2016

The Insolvency and Bankruptcy Bill, which became a law in May 2016 is considered a transformational legislation that is expected to specifically help in resolving issues relating to winding up of insolvent companies and lowering NPAs of the banks. Our insolvency law had remained outdated and unreformed as a result of which rehabilitation or winding up of the companies had become a long winding and laborious process. Until now, it took more than 4 years to resolve a case of bankruptcy. With the new law, it becomes possible to have time-bound settlement of insolvency, faster turnaround of businesses and creation of structured information about serial defaulters.

With this law, experts believe India will be able to move up in the World Bank’s ease of doing business index from the current 136 among 189 countries.

How does it help banks? The law will compel corporate borrowers to make efforts and avoid defaults so that they can continue to be in control of their business. Borrowers will lose control of the corporate entity they own as soon as the process of insolvency is initiated under the new regime. This is bound to force them not to default in the first place. Banks will also be able to have a strong say in issues relating to recovery. Credit rating agency Moody’s Investors Service has pointed out to this fact but maintained that the existing infrastructure may hamper the proceedings to some extent. Moody’s has said the new law can reduce threshold for creditors to invoke the insolvency resolution process and introduce third-party insolvency professionals as intermediaries to oversee the process, replacing the debtor’s existing management and operate the company as a going concern upon initiation of the process. One important aspect is the limit on the duration of process to maximum of 270 days, after which a company will be automatically liquidated.

However, will this really help cut down the current NPAs? May not. But the law is indeed a preventive mechanism to contain future NPAs. Besides, it may also lead to creation of a framework to transform the ‘failed entrepreneurs’ into an asset as like in the developed countries, the government can itself initiate measures to identify the causes of the failure and lead them back into success.

That way there would be little or no recurrences of bad loans and the term ‘wilful defaulter’ that evokes public ire at the sheer helplessness of the entire banking system to act may cease to exist over a period of time