Bankruptcy bill introduced in Parliament
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New Delhi: The government on Monday introduced a bill in Parliament that will make it easier for sick companies to either wind up their businesses or engineer a turnaround.
The Insolvency and Bankruptcy Code, 2015, will replace the existing bankruptcy laws to make it easy for investors to exit within a fixed time frame, in an effort to improve the ease of doing business in India.
The proposed bankruptcy code will cover individuals, companies, limited liability partnerships and partnership firms, and proposes a time-bound framework.
It will also amend laws including the Companies Act to become the overarching legislation to deal with corporate insolvency.
The bill was tabled in Lok Sabha by finance minister Arun Jaitley as the government moves ahead with its reform agenda despite a setback in its efforts to pass the constitutional amendment required to implement the goods and services tax (GST) by 1 April.
Once enacted, not only will it improve the ease of doing business in India, it will also ensure better debt recovery for creditors.
The bill will “consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund”, the government said.
With GST set to miss its 1 April deadline, the government is hoping that the bankruptcy bill will provide a boost to its reform agenda. It wants to enact the bill at the earliest so that it gets reflected in the World Bank’s ease of doing business rankings for next year, the cut-off for which is 31 May.
India is ranked 136 among 189 countries in the World Bank’s ease of doing business index in the category of resolving insolvency. India’s overall raking is 130.
Currently it takes, on an average, more than four years to resolve insolvency in India, according to the World Bank’s Ease of Doing Business report. The new code seeks to cut down the time to less than a year.
According to the provisions of the bill, corporate insolvency applications will have to be decided on within 180 days, with an option of extending it by an additional 90 days.
It also has a clause to provide for insolvency professionals who will specialize in helping sick companies. It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system.
The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
Nikhil Shah, managing director of Alvarez and Marsal in India, said the timeline of 180 days will provide certainty to the process.
“If 75% of the secured creditors cannot come to a consensus within the stipulated time frame, then the company will have to be liquidated. This provides an incentive to the creditors to explore ways of restructuring the company,” he said. “Going ahead, the challenge will be to get the bill passed in Parliament and putting in place the infrastructure required as mentioned in the bill.”
Companies welcomed the move. Chandrajit Banerjee, director general of lobby group Confederation of Indian Industry, said in a note that the bill will streamline the process of the revival of firms facing financial stress.
“Once enacted, the Bankruptcy Bill will not only improve the ease of doing business in India, it will also ensure a better and faster debt recovery mechanism in the country,” he said.