Bankruptcy Code: Will it be any different?

Soon after taking the oath of office, the Prime Minister asked the bureaucracy to improve India's ranking the in the annual World bank Ease of Doing Business Index. A nation's ranking on the index is based on the average of 10 sub indices of which the 3 sub indices that India fared poorly were: Resolving Insolvency,Enforcing Contracts and Trading Across Borders.Taking these 3 broad points, the government has worked out the GST Bill to boost trade,Insolvency and Bankruptcy Code for faster and efficient bankruptcy process and the National Judicial Accountability Commission (NJAC) to reform the judiciary for better enforcement of contracts. With the GST Bill caught in political quagmire and the NJAC in the hands of judicial review, the government decided to proceed with the Insolvency and Bankruptcy Code.

With the passage of the bill in Lok Sabha it now moves to Rajya Sabha for its approval. This is one such bill that enjoys support across the political spectrum and the government had rightly referred it to the joint committee in late December 2015 to prevent any political fireworks later. So there is consensus on this bill and it is most likely to get passed before the end of this budget session.

The new code will replace the existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms.It will amend laws, including The Companies Act, to become the overarching legislation to deal with corporate insolvency.  Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.The code has some landmark provisions like  disqualify  anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt. The bill has provision for shorter time frames at every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals (DRTs), National Company Law Tribunals (NCLTs) and courts.Bankruptcy applications will now have to be filed within three months rather than the earlier six months.

All said and done my concern is how quick,strong and effective are DRTs and NCLTs?  After all, Vijay Mallya fled the country when SBI's plea was still being heard in DRT at Bengaluru. Also High Courts and Supreme Court can overrule these Tribunals. So the company can still file appeals in the High Court and the Supreme Court and keep getting adjournments to delay the entire bankruptcy process.The Code provides for the creation of multiple Information Utilities (IUs). However, it does not specify that full information about a company will be accessible through a single query from any IU.  This may lead to financial information being scattered across these IUs.The Code creates an Insolvency and Bankruptcy Fund.  However, it does not specify the manner in which the Fund will be used.

The code calls for the creation and establishment of new entities and regulators. It will take time for the process to kick in and to run as expected. SEBI created in 1988 and given statutory backing in 1992 took its time to establish itself as the real regulator of Indian market. So we need to be patient and give some time, only then can we judge the efficacy of this code.

Input Credits:

1) Economic Times,Livemint and Business Standard

2) www.prsindia.org/billtrack/the-insolvency-and-bankruptcy-bill-2015-4100/