The Bankruptcy Code Bill, which was passed by both the Houses recently, has been hailed by the Finance Minister as the most significant reform after the proposed Goods and Services Tax. The Bill, which is now an Act, seeks to drastically bring down the process of winding up an insolvent company - from an average 4.3 years to six months. But how long will the government take to get the system off the ground? The most conservative estimate is that it would take at least a year.
For the bankruptcy law to start functioning, it requires insolvency professionals and an insolvency agency - to take over a company after it has applied for insolvency and facilitate its rescue or liquidation process; information utilities - which would collect, collate and disseminate financial information to facilitate insolvency resolution; the two adjudicating agencies - National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT); and a regulator (the Insolvency and Bankruptcy Board) to regulate them all.
"We only have the Act now. While the constitution of the Board may be over by the end of the year, the rules could be framed simultaneously," says Mamta Binani, President, Institute of Company Secretaries of India.
Only when the Board is constituted can the insolvency professionals seek licences from it. The (Insolvency and Bankruptcy) Board has to come out with the eligibility criteria for these professionals, too. Experts believe that existing accountancy firms, law firms, company secretaries, etc. would be eligible for these roles.
Amit Vyas, Founder-Partner, Vertices Partners, says, "Though the NCLT has been established and appointments are under way, one would need at least a year to put the infrastructure in place for NCLT to start working, considering that it would perform the function of a high court, Board of Industrial and Financial Reconstruction (BIFR), DRT and the Company Law Board."
Once the NCLT is in place, all the existing cases in different courts would be handled by the new adjudicating agencies. Insolvency related cases would no longer be heard in any other court, except the Supreme Court.
Vikram Babbar, Executive Director, Fraud Investigation & Dispute Services, EY India, says that the transition of these cases to NCLT and DRTs would be a challenge, given the level of pendency. "If I had my way, I would let one case go through the new law and see how the new system works."
While NCLT would resolve insolvency cases of companies and limited liability partnerships, DRT would handle cases of individual bankruptcy. Corporate and LLPs are governed by the Corporate Affairs Ministry, and individuals by Finance Ministry. "We have to see who would own what and what falls under whose jurisdiction," says Binani, citing lack of clarity.
However, T.K. Vishwanathan, who headed the committee that drafted the Bankruptcy Code, believes the system can start working in three months. "The government can augment the infrastructure even as the system starts working," he says.