Redefining bankruptcy

The right fix It’s all about saving enterprises BYEMO/SHUTTERSTOCK.COM

The new bankruptcy law can build an innovative ecosystem to fix bad debts, while creating a new stream of professionals



India is on the verge of enacting a landmark legislation which can completely change the way bankruptcy and insolvency have been dealt with in the country. The Insolvency and Bankruptcy Bill 2015, which has now been passed by both houses of the Parliament and shall become a law soon, could herald a new era as to how India’s economy resolves bad debts and establishes a completely new bankruptcy system with an institutional framework tested successfully by various overseas jurisdictions.

The bankruptcy law, the draft of which has been borrowed heavily from best practices in the US, Sweden, and the UK, intends to establish similar institutions in India which these countries have created to ensure an efficient working eco-system for bankruptcy. We intend to focus on the human element behind these laws, legal framework and institutions which are proposed to be established once the law comes into effect.

We believe that it’s not only the laws, legal framework and institutions that create the ecosystem that is required for the successful implementation of this law, which we can refer to as the body, but the human element which give life and spirit to this legislation and ecosystem.

The gatekeepers

One of the salient features of the bankruptcy law is incorporation of authorities and agencies such as the Insolvency and Bankruptcy Board of India, insolvency professional agencies.

Keeping in mind the obvious similarity in UK and Indian Judiciary and it’s functioning and going by the prevalent practice in the UK, there is a high probability that these authorities will be registering professionals such as chartered accountants, lawyers and other professionals who desire to practice insolvency law and are meeting the criteria set by these agencies.

Insolvency practitioners in UK are monitored by their individual recognised professional bodies (RPB) or by the insolvency service. Each RPB has specific committees dealing with insolvency licensing, complaints and disciplinary matters. Insolvency is a very highly regulated profession in the UK.

In addition, Insolvency practitioners are required to comply with statements of insolvency practice (SIPs) — a series of documents setting out standards of professional conduct with which insolvency practitioners are required to comply. If an insolvency practitioner departs from any of these standards, he or she can face disciplinary action from their regulator.

In UK, only individuals and not firms or companies may act as insolvency practitioners. The insolvency practitioner is answerable to the creditors. In receivership his primary duty is to the creditor who has appointed him, but in other procedures his duty is to all creditors.

In some proceedings such as administration, compulsory liquidation and bankruptcy he also acts as an officer of the court and is obliged to serve high standards of fairness to all parties, If he acts negligently or in breach of his duties the insolvency practitioners can be held personally liable and can be sued. The UK has multiple IPAs for insolvency practitioners, differentiated by the quality of their codes of conduct, their entry barriers, and consequently the quality of their members.

Best practices

With respect to new Indian bankruptcy law, the constitution of the Insolvency and Bankruptcy Board of India, a quasi-judicial body which will entertain applications to verify the insolvency of a company, shall be set up. The application can be submitted by the debtor company itself, as well as a creditor of the debtor company.

The board as per Chapter III of the Bankruptcy Law will register agencies and register professionals specify the minimum eligibility requirements for registration of insolvency professionals will specify by regulations and the standards for functioning and will also monitor the performance of such agencies. The agencies will have to follow these broad guidelines made by the board in order to be registered with it.

Finally, the agencies will have a set of bye-laws, code of ethics and standards of conduct derived from the guidelines of the board. The bankruptcy law further proposes registration of the insolvency professional by the bankruptcy regulator and enrolled with an insolvency professional agency.

The board in a particular case shall appoint an agency and also approve an Insolvency Professional who shall act as an administrator, receiver or an authority to lead and supervise the investigation on the matter and submit a report to the board. The board on the basis of the report will decide whether the company is viable and should be rehabilitated or should be liquidated.

In other words, a complex delegated structure is being created to make the process more efficient and at par with leading international practices in the field. A similar institutional framework is prevalent in the UK and it shall be interesting to see how the same system (with certain other features) works in our country with a difference human element and circumstances.

A new era

The proposed law could herald a new era in how India’s economy resolves bad debts. Currently, there are massive bottlenecks in India’s bankruptcy system, and inconsistent treatment in resolving cases. Law reform alone will not entirely address the problems.

The need to build capacity and expertise in this area is huge. In addition to legal reforms, the government should recognise the need to build professional expertise in the area of bankruptcy law.

The new bankruptcy code is expected to improve the ease of doing business in India. It may not be possible to go upwards the rank from 130 (as per the recent Doing Business Report by the World Bank) just by legislating the new bankruptcy law, but India and its government will have to do a lot more than implementing the bankruptcy code.

It shall also depend on these professionals (CA’s, lawyers and other professionals who shall be qualified as insolvency professionals) to ensure the smooth and successful implementation of the new bankruptcy law, in both letter and spirit, so that this legislation does not meet the same fate as many other legislations which have failed for lack of proper implementation.

The bankruptcy law shall open a new vertical of business activity for professionals such as lawyers and chartered accountants and may become another revenue stream for such professionals. If appropriately developed as a practice area, the bankruptcy law can become a bonanza for such professionals.

The writer is partner at Rajani Associates

Published on May 25, 2016

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