The Modi-led government has taken a big step towards putting in place an effective legal framework for insolvency resolution in a time-bound manner.

A Bill to consolidate and amend all laws relating to insolvency resolution so as to tackle the issue of undue delays was introduced in the Lok Sabha by Finance Minister Arun Jaitley on Monday.

Significantly, this Bill has been introduced as a money Bill, which means Rajya Sabha cannot reject or amend it once it is passed by the Lower House.

The proposed legislation — the Insolvency and Bankruptcy Code 2015 — fixes a time limit of 180 days, extendable by a further 90 days, for completion of the corporate insolvency-resolution process.

The current system is delay-ridden and it takes anywhere between five and 15 years for lenders to recover money in the event of corporate default.

The proposed revamp of the insolvency system is expected to encourage entrepreneurship, improve India’s ease of doing business ranking, and facilitate more investments.

As on date, there is no single law in India that deals with insolvency and bankruptcy.

For consolidation, the Bill seeks to amend as many as 12 existing laws, including the Companies Act 2013, the Income-Tax Act, and the Payment and Settlement Systems Act 2007.

Starting trouble

Member of Parliament NK Premachandran (Revolutionary Socialist Party) raised objections to the introduction of the Bill, claiming it as “incomplete, inadequate and defective”. He also maintained that sufficient time was not given to members to go through the Bill.

Lok Sabha Speaker Sumitra Mahajan, however, rejected his objection and did not entertain Premachandran’s request to put off the introduction of the Bill to some other date. The Insolvency and Bankruptcy Code 2015 also provides for the setting up of ‘Insolvency and Bankruptcy Board of India’ (IBBI) to regulate professionals/agencies dealing with insolvency and informational utilities.

Insolvency professionals will assist in the resolution, liquidation and bankruptcy proceedings envisaged in the code.

New elements

The other interesting aspect is that the code allows the corporate debtor itself to initiate the insolvency-resolution process once it has defaulted on a debt.

Also, operational creditors (including the Centre, State governments and local authorities) are permitted to initiate the resolution process.

This will bring the law in line with international practices, which permit unsecured creditors to file for the initiation of insolvency-resolution proceedings.