‘Market failures common; firms should start afresh’

After submitting the Bankruptcy Law Reform report to Finance Minister Arun Jaitley on November 5, the head of the committee, TK Viswanathan, is busy finetuning the draft code that will get the country its new Recovery of Debts and Bankruptcy legislation.

“By the time a company comes to the stage of reference to BIFR — net worth erosion of 51 per cent — it is already sick… There is no question of reviving it. The message we want to give (through the report) is that market failures are common. There should not be a view held against failures,” said Viswanathan, a former Law Secretary.

In an interaction with BusinessLine, he shared his views on the existing laws, time taken to correct the situation, and amendments required to ensure that default doesn’t result in a company or an individual being black-listed by creditors. Excerpts:

How much of the US Chapter 11 Bankruptcy code is in your report?

We have tried to adopt it to our conditions. It is not a blind following because we have our own statute book which is vast and varied. We have also taken care to see that judicial delays will not be repeated. The timeline we have prescribed will help credit to flow into the market.

We are also trying to give weightage to some unsecured creditors, because people excessively depend on banks for credit. They are not able to raise credit in the market because it is not freely available. Once these assurances are available, people will be able to raise funds in the debt/bond market. The message is that market failures are common. There should not be a view held against failures. They should be able to start afresh.

Our idea is not to get everything liquidated and assets be taken. Our idea is to see it as a going concern so that labour and economy are not affected.

The issue of an insolvency law has been pending for over a decade. Your committee proposes mandating two entities, governed by different laws, to deal with bankruptcy. How reasonable is it?

Ideally, we would like to have separate tribunals. But that won’t take off in the present scenario where we already have too many of them. The thinking of the Centre is to streamline and unify them. We thought that by suggesting a separate tribunal, our bankruptcy reform will not take off immediately. Even the National Company Law Tribunal (NCLT) has been delayed by over a decade. So, it was felt that we should make use of the existing infrastructure.

For corporate insolvency, we decided to use NCLT. At present, individual insolvency is dealt by old laws — the Presidency Towns Insolvency Act and the Provincial Insolvency Act — which are over 100 years old. We thought we should take out their jurisdiction and give it to some other tribunal. We could only find Debt Recovery Tribunals, which are doing recovery for banks. The DRTs will have to expand because they will subsume the jurisdiction of district courts for individual insolvencies.

How will both the tribunals co-exist?

The common feature is that the whole process will be conducted by insolvency resolution professionals. Right now, we only have liquidators under the Companies Act. The liquidators are part of the court system and they come into play when the whole process has ended and assets have to be liquidated. It takes at least 10-12 years by when asset stripping takes place.

We wanted to avoid this and tried to detect insolvency or bankruptcy in its initial stage. Therefore, we have proposed that when a default occurs, immediately a petition can be filed. A debtor himself can file a petition, the creditor can file… the financial creditors, operational creditors, workmen or anyone.

The ‘Insolvency and Bankruptcy Board’ will regulate the insolvency resolution professionals. The board will be concerned with how to manage the whole resolution process, timelines and conduct of resolution professionals. However, till these professionals are in place, the Centre has the power to designate people. This is to ensure that from Day 1 we can function.

Is there any figure to the percentage of such defaulters?

We do not have any such percentage…But, what we have proposed is the resolution professionals will come into play immediately. They will try to assess the whole situation and, if necessary, the tribunal can order taking over of the management, which will be substituted by a committee of creditors. This committee will oversee the whole process of rehabilitation. The process has to be completed within 180 days and at the most there can be a 90-day extension. If the resolution plan is not approved by the specified time, the tribunal will order liquidation.

How do you define individual bankruptcy?

There is a provision for a fresh-start process for those below the poverty line, as per the Planning Commission (erstwhile). As a process, their insolvency can be written off. But then, this will affect their future credit-worthiness. Second, there are certain excluded debts, which will not trigger insolvency.

Under the present Act, even a ₹500 default can trigger an insolvency petition. Now individual insolvency will have excluded debt.

If you are an individual and you are bankrupt, you will fall under the individual insolvent category and can file for bankruptcy. There is a ‘calm period’ of 180 days when even secured creditors cannot enforce their claim. So, within the 180 days you have to see how you can resolve it. Under the BIFR, there is an automatic stay. Here, in the 180-day calm period, the resolution professionals will work out a scheme. But, if before that, a plan is approved, then that plan will take effect.

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