Point of view on the draft Bankruptcy Code

Background of the recent developments in the bankruptcy laws

On November 4, 2015 the Bankruptcy Law Reform Committee (BLRC), constituted pursuant to the budget speech (2014-15) of the Finance Minister, submitted its report, along with the proposed draft Insolvency and Bankruptcy Bill (Bankruptcy Code) to the Government. Bankruptcy Code is proposed to be tabled in the winter session of the Parliament.

Reforms proposed under Bankruptcy Code hope to quicken the winding up process for defunct companies and provide easier exit routes for investors. As per the 2015 Doing Business report by the World Bank, India ranks 136 out of 189 countries in terms of the ease of resolving insolvency.

Salient features of the draft Bankruptcy Code

BLRC has suggested some radical changes to the present legal regime on insolvencies and bankruptcies. Among the proposed changes by the BLRC, the BLRC has consolidated existing laws on insolvency into one piece of legislation. The BLRC has proposed that applications for insolvency resolution will be processed over a timeline of 180 days, which can be extended by 90 days in exceptional cases. The BLRC advises for the creation of an industry of insolvency professionals and insolvency agencies as well as information utilities, which will be regulated by an insolvency regulator.

During the insolvency resolution period, management control would be passed to a resolution professional supervised by a new regulator. This plan would require the approval from 75 percent of the voting share of creditors. Subject to the approval status, the plan will either be sanctioned or the firm will be liquidated by the adjudicating authority.

Some of the important features are discussed in brief below:

1. The Bankruptcy Code has consolidated the existing laws relating to insolvency of companies, limited liability entities (including LLPs and other entities with limited liability), unlimited liability partnership and individuals which are presently scattered in a number of legislations, into a single legislation.

 Note: It is yet to been seen how all the laws (there are more than 40 Acts and the circulars) pertaining (indirectly and directly) to insolvency and bankruptcy are treated. Some laws would be required to be repealed and subsumed in the final bankruptcy code and for some respective amended would be required.

1. BLRC has proposed to establish an Insolvency Regulator to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities.

Note: In India, experiments with independent regulators have been very successful in various areas of administration for e.g., RBI, SEBI, CCI, IRDA etc., have proved to be successful regulators for their respective sectors. So, a system with an independent regulator for insolvency and bankruptcy regime is likely to be successful. However, in the interim till the independent regulator comes into existence, Government may take up the role and responsibilities of such independent regulator.

 Additionally, a system has been proposed for dealing with insolvencies and bankruptcy with the help of specialized professionals who will be the backbone of this industry.

1. Bankruptcy Code streamline the process of insolvency and have proposed time bound measures

Note: Under the present regime, it typically takes 11years to complete the bankruptcy proceedings and by that time a lot of value of the bankrupt company/ debtor is eroded leaving creditors with almost nothing. Additionally, there are various routes where the parties to corporate insolvency transaction may take the case such as proceedings under (i) debt recovery tribunal for recovery of debts, (ii) winding-up petition in the high court, (iii) enforcement action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2000 (SARFAESI); (iv) Corporate Debt Restructuring, Joint Lender Forum or Strategic Debt Restructuring mechanism proposed by Reserve Bank of India.

To stick with timelines Bankruptcy Code provides

• First Bankruptcy Code aims to do away with all parallel proceedings and complete the insolvency resolution process in 180 days (extendable to further 90 days). In case the parties do not come to any resolution within 180 days, the adjudicating authority (DRT of NCLT) will order for liquidation;
• Second, the principal business decisions such as the economic viability of the debtor, will be determined through negotiations between the debtor and creditors - an exercise that will be facilitated by insolvency professionals and not courts;
• Third, Bankruptcy Code also abolishes the institution of the official liquidator. Instead, the functions of the official liquidator are to be performed by insolvency professionals.

1. In addition to the above, the Bankruptcy Code also provides for fast track resolution process, intended to be complete in 90 days (essentially, this will be applicable to small and medium enterprises). Further, the Bankruptcy Code also envisages a voluntary liquidation process where a health and solvent company (with the support of atleast 2/3 of the creditors in value) may take steps for voluntary winding up.