‘Insolvency And Bankruptcy Code’ To Put Company Promoters On Guard

parliament nods for insolvency and bankruptcy code bill

Tackling the toughest terrain of financial irregularities, a new law marked its inception as the Rajya Sabha passed a new bill on Wednesday. Known to be ‘The Insolvency and Bankruptcy Code Bill’, Rajya Sabha approved the code through voice vote after a brief debate. The law had already been passed in Lok Sabha and aims to empower lenders against the increasing cases of bad payments and loan defaults. The bill creates time-bound processes for insolvency resolution of companies and individuals. These processes will be completed within 180 days. The Code also mentions that if insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors. The bankers would be able to initiate provisions of Code in ongoing default cases once all the required institutions set up.

The Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of insolvency professionals (IPs), insolvency professional agencies (IPAs) and information utilities (IUs).

As of now, there are at least 12 different legislation dealing with bankruptcy. The new Code would do away with these old laws and become only law to be taken up in such matters. Indian banks are to recover over Rs 4 lakh crore in troubled loans and over 70,000 liquidation cases are pending in debt recovery tribunals and courts. The recovery process is late owing to the reluctance of courts to wind up a company as an attempt to safeguard jobs.

Official document of the Insolvency and Bankruptcy Code Bill mentions, “The bill is aimed to promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of the asset of such persons and matters.”

The Code also mentions that a defaulter (individual or company) could face imprisonment for up to 5 years or a fine of up to Rs 1 crore, or both, for concealing property or defrauding creditors. For offences committed under individual insolvency (such as providing false information), the penalty could be imprisonment of up to 6 months or a fine of up to Rs 5 lakh, or both.

The World Bank had ranked India at 136 position among 189 countries at its ‘ease of doing business index’ and the credit goes the cumbersome process that companies and bankers are required to go through. Hopefully, the new Code would help the country improve its ranking.

As per a report by the World Bank, it normally takes up to 4 years in winding up an ailing company in India, while in China and Russia, it can be done in half or less this time. Also the recovery ratio is quite less in India which stands at 25.7 cents per dollar which means if a company had taken Rs 100 as loan, the lenders could only manage to recover Rs 25.7 and that too after a hectic process.

In the words of M R Umarji – advisor to the Indian Banks’ Association, the Code would put company promoters on guard and they will think twice before committing a default.

The major change in current practices lies with the effective implementation of the Code and not become another DRT (Debt Recovery Tribunal).

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