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Insolvency Code and Bankruptcy, 2016

Published on 18 May 2016 by Team

As a silver lining in the dark sky of debt evasion, comes the Bankruptcy and Insolvency Code, 2016, which has focused on the basics i.e. debt and equity ratio which defines the total value of the firm, the ratio reveals the relative proportions of debt and equity financing that a business employs. It is closely monitored by lenders and creditors since it can provide an early warning that an organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a funding issue, whatever the reason for debt usage, the outcome can be catastrophic if corporate cash flows are not sufficient to make ongoing debt payments. This is a concern to lenders, whose loans may not be paid back.

Suppliers are concerned about the ratio for the same reason. A lender can protect its interests by imposing collateral requirements or restrictive covenants; suppliers usually offer credit with less restrictive terms, and so can suffer more if a company is unable to meet its payment obligations to them. The present enactment has thus mainly focussed on the credit defaulters on which the Hon’ble Supreme Court also expressed its concern by demanding the Reserve Bank of India (RBI) for a list of companies that are in default of bank loans of more than Rs 500 crores, or whose loans have been restructured under corporate debt restructuring schemes.

The Need for The Insolvency Code

The prior laws such as the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 stands repealed. In addition to it, the Code makes amendments in eleven laws, more importantly, Companies Act 2013. There are various cravings why this law is required,

  • Mainly to wind up companies faster if the resolution isn't feasible,
  • Indian banks have piled up huge bad debts with a total Rs 4 lakh crore gross NPAs and an equal amount of restructured loans. Majority of the stressed assets, which constitute 11 percent of the total loans given by banks, are from loans given to large corporations.
  • Impose debt deadlines on failed firms
  • The pendency and disposal rate of DRTs(Debt Recovery Tribunals)
  • To boost up the start-up businesses by increasing the ease of doing business

Authorities involved

The Insolvency and Bankruptcy Code proposes two authorities to deal with insolvency

  • The National Company Law Tribunal will adjudicate cases for companies and limited liability partnerships

  • The Debt Recovery Tribunal will do the same for individual and partnership firms.

Benefits to Start-ups

The critical moot point which emerges from the passing of this Code, how it can boost the start-up businesses or entrepreneurs, it can do so as it includes the following:

  • The new law will give the banks "more confidence" to lend for long-term projects such as roads, ports and power plants and more specifically the start-up businesses.
  • It will cover individuals, companies, limited liability partnerships and partnership firms.
  • the code will also balance the interests of all stakeholders by consolidating and amending the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximisation of the value of assets.
  • Time-bound disposal As per the new law, when firm defaults on its debt, control shifts from the shareholders/promoters to a Committee of Creditors.The Committee would have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use
  • Fast Track disposal The bill prescribes the time limit for procedures at every stage to ensure a result in 180 days. It also has provisions for force majeure and one-time extension of 90 days in certain circumstances. There is also a fast-track option with a 90-day limit and a single extension of 45 days if needed.
  • Operational Creditors, Another unique feature of the bill is that it gives the right to the operational creditor to initiate procedure and the right is not limited to big creditors only who want their money back.
  • Cross-border insolvency 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.

However, the present enactment is just a small step as there are end number of problems associated with the present banking companies like that of a large number of NPA(Non- Performing Assets), the bill is silent with regard to the constitution of Insolvency Utility Boards, whose function is to support the banks in cases of insolvency of firms etc. and last but not the least the banks lack the expertise to deal with the changed provisions, thus it can be analysed that the implementation procedure and the expected consequences will take roughly around five to six years to yield fruits to the economy.

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