With the slowdown of the Indian economy, a number of companies/ projects are under stress. As a result, the Indian banking system has seen increase in Non-Performing Assets (NPAs) and restructured accounts during the recent years as never before including a lot of projects in the core infrastructure sector. Considering that the NPA’s cause economic stress in the system and strain in the functioning of the banking industry, there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors. NPA’s are a key concern to the banks and also an indicator of the health of the banking industry. Liquidity of banks and profitability gets hit due to high credit defaults. It also indicates the level of provisioning made by these banks. Growth of the banking industry and economic development is internally relative and their growth and progress thrive on certainty of realistic policy frameworks.
The gross and net NPAs in the banking system had hit an alarming 4 .2 per cent and 2.2 per cent, respectively, by September 2013 against an average of 2.6 per cent and 1.2 per cent, respectively, between 2009 and 20131. This has led to RBI also announcing a host of measures for assets that are undergoing stress which have tried to ease the pressure off the banks and have paved a direction towards a resolution to the assets under stress.
One of the key problems of the present environment is also the presence of multiple frameworks such as DRT, CDR, JLF, SDR etc. This creates forum shopping and increases delays. Multiplicity of forums and interdependency and non availability of clear legislative backing to support a defined framework have thereby also bought about tremendous delay in resolution and recovery processes. This has resulted in deterioration of assets in the meanwhile and brought about multiplicity of proceedings in court which just tends to confuse the process thereby causing an abuse of the system.
The government moved the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha, which provides a framework for time bound resolution of corporate bankruptcy, ensuring that stakeholder interest are protected and the assets are put to use quickly. The bill seeks to consolidate and amend the laws relating to reorganization and insolvency resolution and will also apply to partnership firms and individuals.
The code delivers a one piece legislation and framework for companies, LLP’s , Partnerships, individuals and partnerships any other body specified by the central government. The Code also stipulates the resultant amendments required in the existing acts that would assist in implementation and operation of the current code. It therefore is a well thought of legislation governing the insolvency and bankruptcy proceedings. Under the existing laws and enactments that are taking more than 3-4 years to resolve an insolvency, the current Bill seeks to cut down the time to less than a year
Corporate Insolvency: Insolvency resolution process for companies and LLPs must be completed within 180 days of submission. This deadline can be extended by 90 days if more than 75% of the creditors agree.
The National Company Law Tribunal, is the adjudicating authority for corporate persons such as companies and LLPs. As the tribunal is not yet in force, insolvency proceedings against companies are presently handled by company court benches in various high courts across India.
The Code seeks to appoint an insolvency resolution professional by the adjudicating authority and subsequently confirmed by the committee of creditors. This individual acts as an intermediary between the creditors and adjudicating authority during the determination of the debtor’s assets, affairs and financial position.
The debtor must submit a resolution plan to the insolvency resolution professional with details of how it will pay for the resolution process and repay operational creditors. The adjudicating authority will then pass an order accepting or rejecting the resolution plan.
Liquidation; Distribution: If the adjudicating authority rejects the debtor’s resolution plan as part of the corporate insolvency resolution process, it will order the liquidation of the debtor and appoint a liquidator to take charge of the debtor’s assets and affairs. The liquidator will form a liquidation trust comprising of all of the debtor’s assets and act as the fiduciary trustee of the trust for the benefit of the creditors.
After an extensive valuation process adopted for all the claims against the debtor, the code calls for the distribution of the debtor’s assets in the manner as set out thereunder
Insolvency: On admission by the adjudicating authority of the insolvency resolution application, it will appoint an insolvency resolution professional. This individual must submit a report to the adjudicating authority recommending the acceptance or rejection of the debtor’s application. The debtor must also prepare a repayment plan containing a proposal to the creditors for the restructuring of its debts or affairs and submit it to the adjudicating authority.
Thereafter, the insolvency resolution professional will request that the creditors to vote on various the repayment plan. The insolvency resolution professional shall pursuant thereto prepare and submit a report to the adjudicating authority, on the basis of which the adjudicating authority will implement the repayment plan as approved by the creditors. On the basis of the repayment plan, the adjudicating authority may choose to pass an order for early discharge of the debtor from the proceedings or for discharge on complete implementation of the repayment plan.
The Code seeks to register information utilities, insolvency professionals and insolvency professional agencies under it, and regulate their functioning. The Bill proposes for Information Utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.
The Code creates an Insolvency and Bankruptcy Fund.
Adjudicators: The Code proposes two separate tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law: (i) the National Company Law Tribunal will have jurisdiction over companies and limited liability partnerships, and (ii) the Debt Recovery Tribunal will have jurisdiction over individuals and partnership firms. Appeals against orders of these tribunals may be challenged before their respective Appellate Tribunals, and further before the Supreme Court.
Offences and penalties: The Bill specifies that for most offences committed by a debtor under corporate insolvency (like concealing property, defrauding creditors, etc.), the penalty will be imprisonment of up to five years, with a fine of up to one crore rupees. For offences committed by an individual (like providing false information), the imprisonment will vary based on the offence. For most of these offences, the fine will not exceed five lakh rupees.
This Bill is a serious attempt to ward off all the insufficiencies in the existing insolvency legislations. The effective implementation of the draft insolvency bill shall be dependent on the institutional pillars i.e. a competitive industry of private information utilities, private insolvency professionals, Adjudication infrastructure and wel lfunctioning regulator. This Bill has been devised after serious deliberations and after taking a holistic view of insolvency regulations around the world .While the Bill may see the light of the day in the session in India awaits the implementation of this Bill eagerly.
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