Bankruptcy Law Reform: Whooshing The Weasel

Bankruptcy Law Reform: Whooshing The Weasel

India’s bankruptcy laws may soon be legislatively overhauled to render ‘insolvency resolution’ in months - 180 days, extending to a further 90 days maximum.

This will replace the grim ponderousness of the court appointed ‘official liquidator’, the ineffective Debt Recovery Tribunal (DRT), and the byzantine Board Of Industrial And Financial Reconstruction (BIFR), not to mention the vagaries of the Sick Industrial Companies Act 1985.

The new process will use ‘resolution professionals’ or registered insolvency practitioners, working via a regulatory body, and reporting to a Company Law Tribunal.

The new mechanism also proposes to obviate the need for the endless court sanctioned appeals that can eat away at generations of litigants.

Unlike in the past, when every bankrupt company was a tangled web of sparring between creditors and debtors, with the latter trying to wiggle out of their obligations; the new legislation proposes to give creditors an independent say on when to blow the whistle on viability for the first time.

Simultaneously, the Reserve Bank of India (RBI), under governor Raghuram Rajan, has also been chipping away at regulatory mechanisms to allow creditors, quite often the public sector banks, with their massive non-performing asset burdens(NPAs), to convert their loans into equity, and take over management from the failed promoters and ‘wilful defaulters’ before it is too late.

So a maximum of eight months to resolution is on the anvil, instead of the minimum 4.3 years on average, according to the World Bank. But many proceedings have even stretched into decades, using the courts to block progress.

A new bankruptcy code was promised by finance minister Jaitley in his  maiden budget presentation in 2014, aimed particularly to help small and medium sector companies (SMEs). An interim report from the appointed Bankruptcy Law Reform Committee (BLRC), headed by former law secretary TK Vishwanathan was released for suggestions and comments in February 2015; and a final version is now ready for execution.

It involves several changes in the Companies Act, itself recently updated in 2013, and in other taxation and stock market related legislation as well.

Combined with reforms also being undertaken in the mergers and acquisitions (M&A) space, which has been growing exponentially in India of late; the cumulative impact on business prospects going forward can be significant.

Early triggering of bankruptcy procedures by external creditors is expected to salvage a greater proportion of residual value, before it all vanishes, or turns into junk. The objective is to improve the recovery rate of just 25.7 cents on the US dollar per the World Bank, amongst the shabbiest in the world.

India ranks 130 out of 189 in the World Bank’s ‘Ease of Doing Business’ rankings at present, coming in after Lesotho and Cameroon, but it is up 12 places from the year before. And most of this improvement has come from multiple administrative, and executive, rather than legislative actions, on the part of the Indian government.

A fast dispute and insolvency resolution procedure, eased labour laws, further tax reform, pending legislation on GST and land acquisition implemented, could collectively improve the country’s banking sector, industrial development, rate of growth, and sovereign rankings too.

Foreign direct investors (FDIs), have been worried about coming into a country where it is difficult to get out of, and where almost every law and process is an insurmountable hurdle.

 As things stand, there is often nothing left to recover from a loss making unit unless it happens to own the real estate it sits upon.

At the height of our socialist past, it was thought of as only right that a closed and unviable factory, beyond any hope of revival, with zero and minus net worth, should keep paying salaries to its workers irrespective.

The public sector, then, as now, almost never made a profit at anything it undertook, unless it was administering a monopoly.  

And private industry lived on the arcane mercies of the licence-permit raj, the vagaries of changes in raw material and input prices, tax treatments and changes in quotas and other regulations.

It is no wonder that most company ‘promoters’ in India, even after the reforms of 1991,  have made a practice of siphoning off all the borrowed money into their personal coffers at the earliest. This often drives the companies into sickness and bankruptcy, while the promoters hold their creditors to ransom.

They have been able to do so because of loop holes in the personal liability laws, and lack of structured oversight from the lenders. This, above all, is about to change.

For: The Quint

(750 words)

November 5^th, 2015

Gautam Mukherjee