Can new insolvency code overcome huge backlog, poor infrastructure?
The new code's provision for a time-bound resolution of insolvency and bankruptcy cases is expected to be severely tested by the large number of pending cases
The first insolvency case under the new bankruptcy code was filed last month, more than two years after the idea of the code was floated in the first budget of the National Democratic Alliance government led by Prime Minister Narendra Modi in 2014.
The case under the new Insolvency and Bankruptcy Code, 2016, was filed by ICICI Bank Ltd against Pune-based steel maker Innoventive Industries Ltd in the National Company Law Tribunal (NCLT). More are expected to follow.
The resolution of these cases under the new code will be keenly watched and is expected to set precedents on how corporate insolvency cases progress under the new code.
The code provides for a time-bound resolution of these cases but analysts and lawyers point out that the huge pendencies at these quasi-judicial institutions will pose a challenge.
The code seeks to reduce the time for resolving an insolvency process to less than a year as against an average time taken of more than four years at present.
A recent report by consulting firm Alvarez and Marsal had estimated that the NCLT, which became operational in July last year, may take more than seven years to clear the 25,000 pending cases it received as a legacy.
Further, questions remain about whether the supporting infrastructure is in place to ensure that the cases filed under the new code reach their logical conclusion.
The government has set up the regulator—Insolvency and Bankruptcy Board of India—and appointed key functionaries. Insolvency professional agencies—which will specialize in helping sick companies either wind up their operations or turnaround their businesses—have also been incorporated and rules framed for their operations. The guidelines for the insolvency resolution process and the liquidation process have also been finalized. But guidelines governing information utilities, which will collate all information about debtors to prevent serial defaulters from misusing the system, are still a work in progress.
The work on guidelines governing individual insolvency is also at a nascent stage. To be sure, the revamp of the debt recovery tribunals (DRTs)—the quasi-judicial body that will oversee the individual insolvency process—is still underway and no where near completion. Huge pendencies and long delays have become a characteristic of these institutions.
The government had announced its intention of setting up e-DRTs and shifting most of the paperwork online to speed up cases but they are yet to be implemented in all DRTs.
Aimed at providing an easier exit for investors from companies, the bankruptcy code was conceptualized to address one of the main concerns of investors looking to invest in India—speedy exits from failed investments without getting into the tangle of a prolonged legal battle with workers and creditors.
This was something that other existing institutions such as the Board for Industrial and Financial Reconstruction had failed to provide.
It was also aimed at addressing the problem of rising bad debts in the Indian banking system brought about by a mix of bad lending practices, economic slowdown and cancellation of allocation of natural resources to companies by the courts. Bad debts in the banking system have been piling up and are estimated at almost Rs6.7 trillion.
Further, if one accounts for restructured loans, the total stressed credit in the banking system is almost 13% of the total advances.
It was also one of the main contributors towards India’s abysmal showing in World Bank’s ease of doing business rankings. India is ranked 130 among 190 countries in the ease of doing business index. Though the government hastened to get the legislation passed by Parliament, it was not factored into the ratings for last year since there was no visible change on the ground.
The bankruptcy code, which received the Parliament’s nod in May 2016, has a wide ambit under its jurisdiction including individuals, companies, limited liability partnerships, partnership firms and other legal entities.
It repealed all existing laws and provisions related to resolving insolvency and bankruptcy for all these legal entities with an aim of improving the ease of doing business.
Sumant Batra, chairperson of the law firm Kesar Dass B. & Associates, raised a few concerns, especially with regard to regulating professionals and the institutional arrangement in that regard. Out of the nine members of the board, only three were to be whole-time members, remaining were ex officio (except the chairperson) or part time, of which two were from the government and one from the RBI, he said.
“My concerns still remain about over involvement of the government, flawed regulatory framework, absence of cross- border law, absolutely illegitimate approach to personal insolvency law making and the extent to which the DRTs have been given jurisdiction under the personal insolvency regime,” he said.
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First Published:27 Jan 2017, 01:46 AM IST
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