The Rajya Sabha on Wednesday passed the Insolvency and Bankruptcy Code 2016 , a vital reform that will make it much easier to do business in India. The Code is aimed to enable failed businesses to wind up faster, aid quicker dispute resolution, and hasten debt recovery by banks that have been snowed under bad loans worth over Rs 4 lakh crore.
This code will give a legal framework to deal with sick companies, which become insolvent due to genuine reasons. The move, first announced by finance minister Arun Jaitley in Budget 2014, is aimed at modernising the country’s century-old bankruptcy rules.
The code will bolster banks’ efforts to recover bad loans from wilful defaulters—borrowers who default despite having the capacity to repay. A consortium of 17 banks are currently locked in a legal battle to recover loans worth more than `9,000 crore for funds given to Vijay Mallya-promoted Kingfisher Airlines.
Here are the main aspects of the Code:
Code to help deal with insolvency:
The new code will replace 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. It will also help creditors recover loans faster.
Code to help wind up sick businesses
On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.
Track serial defaulters
The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.
Punishing a defaulter
A debtor could face a jail term of up to five years if found to have hidden property or defrauding lenders. Besides, bankrupt individuals could be barred from contesting elections or hold public office.
The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for 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, National Company Law Tribunals and courts.
Protect workers of a bankrupt company
To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.
The code stipulates a 180-day deadline for an ailing or defaulting company to decide on a revival plan. If 75% of creditors agree on a revival plan, that term can be extended by 90 days. Otherwise, a firm would be automatically liquidated.