Indian Legal System has made multiple legal avenues (thorough various acts & legal provisions) to handle events of failure of businesses or insolvency or voluntary winding up, which directly & indirectly impacts employees, shareholders, lenders, small & large creditors and the broader economy.
Indian business environment which is always full of conservative old school strategy, backed up by Social & Creditors pressure, on top of that “Overprotective & Overthinking” approach which mostly leads to miscalculation in understanding the business assumption & ground reality, and ultimately results into failure in taking timely business decisions. Thereafter business house which is already not able to perform or sustain, need to go through Social & Creditors pressure under which Promoters Group drag & delay reorganization or debt restructuring or any changes of management, or new business unit or sale of investment etc. which goes on and on for long time with lenders.
Till the time when Insolvency is actually established either it’s too late or matter is stuck into the layers of Indian legal provisions such as Securitisation and Enforcement of Security or SARFAESI Act, Corporate Debt Restructuring, Sick Industrial Companies Act or SICA , Debt Recovery Tribunal or DRT. Due to involvement of multiple level of regulatory authorities at State & Central Level it becomes difficult to get any timely decision from the legal court systems to revive or to support or to actual recover and protect the interest of the parties involved. So it is important in all such cases that there is speedy closure which will help the cases which can be either restructured or sold off with less pain for all involved.
To simplify all the above difficult & tricky situation, Indian Government has decided to form a modern law which can bring speedy efficiency & clarity into the insolvency matter and same will be inspired from International Experiences like USA , UK , Germany and similar countries with efficient legal system to handle insolvency cases.
The US has a Bankruptcy Code that provides for fairly quick liquidation or re-organisation of business with what is popularly known as Chapter 7, with cases being filed in bankruptcy courts; Chapter 11, which deals with reorganisation of businesses; and Chapter 15, on cross-border insolvencies. Individual bankruptcies are dealt with separately. In the UK, once cases are filed for bankruptcies, after 12 months, there is either discharge with part of the assets being used to pay off debts, or, in situations where companies can be turned around, court-appointed administrators handle cases. The German insolvency law is applicable to both individuals and firms, with independent court-appointed insolvency practitioners helping in realising assets or re-organising the business.
RiSiKo has participated in Bankruptcy case filed under Chapter 11 with USA Delaware Bankruptcy Court as Strategic & Financial Advisor and our experiences has been amazing to see the way court proceedings are formulated in timely manners to protect the interest of Unsecured Creditors Committee (UCC), to protect the value of the assets , to reduce or to limit the pain of the person filing bankruptcy.
In India, The Bankruptcy Law Reform Committee (“BLRC” or the “Committee”) was set up by the Department of Economic Affairs, Ministry of Finance, by an office order dated August 22, 2014 to study the “corporate bankruptcy legal framework in India” and submitted a report to the Government for reforming the system. During the course of its deliberations, the Committee decided to divide the project into two parts:
- to examine the present legal framework for corporate insolvency and suggest immediate reforms, and
- to develop an ‘Insolvency Code’ for India covering all aspects of personal and business insolvency.
BLRC committee has recently submitted its draft of “The Insolvency & Bankruptcy Bill 2015” (submitted on Feb 2015) along with its recommendation report (submitted on Nov 2015).This new bill has suggested numerous changes into the legal system such as
- Changes in the Power of Secured & Unsecured Creditors providing incentives for creditors to join the collective insolvency resolution process rather than initiate individual actions
- Provision of a timeline of 180 days — extendable by 90 days — to deal with applications for resolving cases of insolvency or bankruptcy.
- During this period, the management of the distressed firm or debtor could be placed in the hands of a resolution professional — a new class of professionals equipped to deal with such cases, who would be supervised by a proposed new regulator.
- The proposal also envisages them getting into talks to revive firms, and work out a repayment plan.
- Decisions such as the economic viability of the debtor, will be determined through negotiations between the debtor and creditors – an exercise that will be facilitated by insolvency professionals.
- Draft Bill also abolishes the institution of the official liquidator, which by all accounts has been a failure in non-viable businesses.
- A Debt Recovery Tribunal will be the adjudicating authority over both individuals and unlimited liability partnership firms.
- The National Company Law Tribunal will be the adjudicating authority with jurisdiction over companies with limited liability.
- The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the creation of a resolution corporation to monitor financial firms, and intervene before they go bust. The aim is to either close firms that can’t be revived, or change their management to protect investors or depositors.
The law will still need to be approved by Parliament. This is only a starting point for easing exits for debtors in distress, preserving value and providing creditors with greater certainty in outcomes.
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