SLATE. All you wanted to know about...The Bankruptcy Code

During Christmas week, the Finance Minister moved the Insolvency and Bankruptcy Bill 2015, known commonly as the Bankruptcy Code, in the Lok Sabha. And like other Bills in this winter session, it has now gone into deep freeze and has been referred for further scrutiny to a joint parliamentary committee.

Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt obligations. India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation.

The Bill envisages a new regulator — the Insolvency and Bankruptcy Board of India.

So who can initiate the IRP? One, a business or debtor who has defaulted on dues can initiate the IRP. Two, lenders and creditors to a firm, including employees — either secured or unsecured — can do it too.

When the IRP is on, creditors’ claims are frozen for 180 days, during which they will hear proposals for revival and decide on their future course of action. Within those 180 days, 75 per cent of the creditors must agree to a revival plan. If this minimum threshold is not met, the firm automatically goes into liquidation.

If three-fourths of the creditors decide that the case is complex and cannot be addressed within 180 days, the adjudicator can grant a one-time extension of up to 90 days on the process.

The Bill vests the insolvency professionals tasked with the job, with substantial powers. Criminal charges will apply if they notice any asset stripping by the promoters or responsible parties.

India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.

Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.

The new Code streamlines and consolidates all these laws to make the process simpler. Industry anticipates that the change will provide an easy exit option for insolvent and sick firms. The passage of this bill will enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the recovery amount. The creditors will not be stymied by red-tape and promoters will directly become accountable for any financial lapses.

The Code, if passed into law, can ensure quicker resolution of the bad loan problems dogging PSU banks. Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to get a fresh start.

The new code will matter to private sector employees too. The Bill, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market too.

Cynics think that the Bill will promote hire-and-fire policies. The optimists say that as long as employees are adding value, they will continue to be sought-after.

Don’t dwell on the past. Move on. This advice applies to businesses too.

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