Government aims to make bankruptcy law operational by end of FY17
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New Delhi: The government is aiming to make the new bankruptcy law operational by the end of 2016-17 as India moves to set up the infrastructure necessary to implement its new insolvency framework.
To this effect, the government will focus on making the national company law tribunal operational and also act as the regulator till it sets up the Insolvency Board, said Jayant Sinha, minister of state for finance, in an interview.
Earlier this month, Parliament passed the Insolvency and Bankruptcy Code, paving the way for a new bankruptcy framework that will make it easier for companies to do business in India by ensuring time-bound settlement of insolvency and faster turnaround of businesses.
But implementation of the new code that seeks to replace several existing archaic legislations will be a daunting task for the government as it is dependent on creation of an ecosystem, including insolvency professionals, information utilities, tribunals and a bankruptcy regulator, called the Insolvency and Bankruptcy Board of India.
“Implementation in any law is the main challenge. We want the bankruptcy law to be operational by the end of this financial year,” said Sinha.
“We would like to make the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to be set up and operational for dealing with companies. Debt recovery tribunals (DRT) are already there for individuals and partnerships,” he said.
The bankruptcy code proposes to use the infrastructure of NCLTs and DRTs to address corporate insolvency and individual insolvency, respectively.
While DRTs are already functioning, NCLTs are yet to begin operations.
Sinha pointed out that the bankruptcy law gives the government the flexibility of phased notifications.
“Till we have an operational entity of the Insolvency Board set up, the central government itself can exercise those powers. Once we have the people selected, we can get the Insolvency Board up and running and the powers can be transferred from the central government to the board,” he said. “We need to see what we need to do to get a few cases through the system. But we would like to do all of that in the next 12 months,” he added.
In a report dated 13 May, global rating agency Fitch Group Inc. pointed out that effective implementation of the insolvency law will remain key and will take time, given the need to develop the ecosystem for implementing the process.
“Setting up a new regulator for a new category of insolvency professionals, and building robust information utilities/repositories, will be time consuming,” Fitch said in the report, adding that using the available infrastructure (of NCLTs and DRTs) may not be optimal, given the backlog.
“Ultimately, political will is key to effective implementation, which will require concerted efforts from interested parties and reforms in the judicial system. We expect the benefits of the code to be visible only over the medium- to long-term,” the report added.
More than 70,000 cases are pending in the debt recovery tribunals, as per government estimates.
The government is hoping to overhaul the DRTs to speed up the recovery process and is planning to move the entire DRT process online.
The government had introduced amendments to the DRT Act in the budget session of Parliament, but these are yet to be passed. It is hopeful that the Bankruptcy Code, along with the proposed changes in India’s two debt recovery and enforcement laws, will help in resolving India’s bad debt problem and consequently repair the impaired bank balance sheets.
“The major challenge will be to have competent insolvency professionals. At present, the court passes a liquidation order, but it takes years for the order to be implemented. It is this gap which has to be addressed,” said Amit Vyas, founder partner at Vertices Partners, a law firm.
“At the end of the day, the tribunal can pass an order, but if there are no professional agencies to implement the orders, then the whole system won’t work,” he said.