Bankruptcy and after

With the Rajya Sabha endorsing the new bankruptcy law, it is now a matter of time before it turns into an Act with the assent of the President. The Act is long awaited to enable the banks and financial institutions to realise quickly the residual value of assets charged to them. The proposed Law will remain as one in the recent history that has generated lot of discussion including meaningful scrutiny by JPC and above all, consensus among various rival political parties. With its enactment, India can look forward to more such laws being cleared, a major one being the Goods and Services Tax Bill.

Welcome changes The role of JPC has been commendable in the case of the bankruptcy Bill. It has led to the addition of two important aspects i.e. realisation of assets situated cross border and protecting workers dues in the ‘waterfall mechanism’. Further, government dues have been relegated to the back seat. At present, unless the companies are referred to the Board for Industrial and Financial Reconstruction and an order is passed under Sick Industrial Companies Act, taxes take priority over dues to secured creditors.

The timeframes that are suggested are in tune with international practice. However, a decision related to ‘viability’ will play a major role in taking the process either way. ‘Viability’ has always remained a million dollar question, even while carrying out restructuring exercises by banks.

Banks, having nurtured and believed in the enterprise concerned, are inclined to treat it as ‘viable’. This aspect gets addressed suitably in the upcoming Act with the increased involvement of insolvency professionals.

In the US, companies opt for bankruptcy mainly under two routes i.e. Chapter 7 and Chapter 11. Chapter 7 is meant for liquidation when the viability is not established and a trustee gets appointed to realise the charged assets, whereas the Chapter 11 route is adopted mainly to execute a reorganisation plan for viable entities.

Interestingly, many companies in US voluntarily opt for Chapter 11 to execute the reorganisation process under the ambit of courts which would lend authenticity to the whole process without any loss to creditors (secured or unsecured), the government in the form of taxes and the employees.

Positive approach To quote a few instances, the reasons for companies opting for Chapter 11 could vary from settlement of a number of relatively small asbestos claims to closing a few un-remunerative shops in the case of retail outlets. Similarly, the proposed Act in India should provide for enough room for corporates to leverage some benefits.

Further, in the US, restructured companies are treated on par with other companies without any ‘taboo’ attached to them.

Rating agencies assign fresh ratings based on their renewed scale of operations, debt levels and various such other aspects. Banks and institutional investors would be willing to invest. However, in case of India, we need to wait and watch whether any stigma gets attached once companies are out of bankruptcy.

Nevertheless, the Act in the offing is better than the existing laws from the recovery point of view. Indian entrepreneurs, mainly startups, can test the waters with all their skill sets. Banks should be more willing to encourage such newcomers.

The author is vice-president of syndications at SBI, New York. The views are personal

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